The new tax code may destroy the market of collective investment

Photo: Ukrainian foto

The draft of the new Tax Code, which the Verkhovna Rada should consider next week, envisages changes directly related to the stock market. Among the positive innovations is the cancellation of the excise duty on transactions with corporate securities. Among the controversial novelties are changes in the taxation of collective investment institutions.

Ill-advised move

On January 1, 2013, a 1.5% excise duty on the sale of corporate securities was introduced. In 2012 one of the arguments of the tax authorities for the introduction of the excise duty was that it would bring in proceeds of UAH 600 mn to the national budget in 2013 alone. As a result, only UAH 110 mn was provided for the national budget. To evade this duty traders moved their operations to the stock exchange, where no excise duty is demanded. Experts have repeatedly pointed that the excise duty has not brought in the desired amounts of revenues, though it reduced the attractiveness of the low liquidity domestic stock market. “The cancellation of the excise duty on transactions with securities is quite logical and justified. We will eliminate the tax on investment, which the excise duty was per se,” said member of the National Securities and Stock Market Commission (NSSMC) Anatoliy Amelin.

The draft Tax Code provides several changes that will have an impact on stock market professionals. “Among the most important novelties is the convergence of tax accounting of financial results of operations with securities together with the accounting of such results and introduction of the practice of adjusting financial results for securities transactions through tax differences,” says Vice President of the Kinto Asset Management Company (AMC) Anatoliy Fedorenko. In simple terms, this means that first accounting income is taken for tax purposes and then untaxable profits are deducted from the income. For example, they are exchange gains or incomes from revaluation of securities. Also, one of the most important changes, according to Fedorenko, is that the interest rates on bonds will no longer be included in costs, meaning the tax base will grow.

Contrary to logic

Most criticism was addressed to the changes in taxation of collective investment institutions (CII). Suggestions have been made to apply a general taxation procedure for collective investment funds. This, according to professional participants, will result in a double fiscal burden on incomes of CII participants: the first time at the level of investment funds, the second time at the level of market players.

“The advance payment of income tax during the distribution of dividends is being introduced, which once again (along with the tax) reduces the net value of the CII assets and thus reduces the estimated price of CII securities for which they are bought or sold. The new code introduces taxation of mutual funds that do not pay income taxes because they do not have the status of legal entities, which is contrary to the methodology of the rule of law and logic,” Fedorenko stressed.

The use of the CII becomes even more disadvantageous due to the fact that now the interest on loans issued by the CII to other legal entities will generate the profit part for the funds, but will not be included in the costs of credited business entities, says Director of Finex-Audity Oleksiy Serik after analyzing innovations in the Tax Code. He says the proposed changes will destroy the very concept of the CII. “There will be no point for the CII after adoption of such amendments,” he added.

As of October 1 there were 1,586 CIIs registered in Ukraine with a total amount of UAH 205 bn in assets. Their popularity is easily explained by the fact that business entities often use the CII for distribution of financial flows between various companies in the groups. Venture funds issue loans to businesses and enterprises may pay dividends to venture funds. Thus, venture CII is a convenient “moneybag”, which if necessary can be used for crediting and withdrawal of money. Many business owners create such structures for their own needs. One of the most famous funds is Prime Assets Capital with assets of UAH 1 bn, owned by President Petro Poroshenko.

General Director of OTP Capital AMC Hryhoriy Ovcharenko makes negative predictions about the prospects for the market after the adoption of the new tax code in its current edition. “In European practice there is no income tax on transactions with the assets of funds. On the one hand, we want to attract investors to finance business. On the other hand, in an attempt to increase tax revenues we risk losing those few investors who have already started up business in our country,” said Ovcharenko.

At the same time, experts note that the introduction of taxes on CII activities does not actually affect the pumping of the budget. “It is immediately clear that the draft tax code was written by amateurs, who do not understand the consequences of such changes. People take a calculator, multiply the numbers they have by tax rates and fill the budget line with different figures of proceeds. However, there will be no revenues. The market will shrink and investors will flee and not return to the market. Where will they collect their taxes then?” complains Amelin. “We have already seen the experiment when smart alecks predicted hundreds of millions from excise duties. As a result, they collected less than nothing, while the damage to the economy is estimated at billions of dollars…”, he concluded.