The Ukrainian parliament voted last week to end tax breaks for foreign direct investors. (AP, April 9) The legislation approved the revocation of a two-year tax holiday for foreign or joint ventures with more than $50,000 in foreign capital invested, and would require foreign investors to pay customs duties on imported equipment. If signed by President Leonid Kuchma, the legislation would become law on July 1.
Fiscal considerations, and the desire to protect Ukrainian firms, seemed to weigh heavily in the parliament’s decision. Finance Minister Igor Mityukov claims that the tax breaks have cost the budget $2.2 billion in lost revenue, a sum that exceeds the Ukrainian government’s wage and pension arrears for 1996; Prime Minister Pavlo Lazarenko himself made a similar claim earlier in the week. (Itar-Tass, April 8) Parliamentarians argued that the exemption for equipment imports constitutes unfair competition for Ukrainian equipment manufacturers. The parliament also called upon the government to submit a new bill that would reinstate the exemption for foreign investors actually producing (as opposed to assembling pre-fabricated products) in Ukraine.
While these arguments are not without merit, they clearly show why Ukraine has managed to attract only $1.4 billion in direct foreign investment since independence. (By contrast, neighboring Poland attracted four times this figure in 1996 alone.) The government’s inability to maintain a consistently friendly fiscal and regulatory regime for direct foreign investors was underscored most recently by Motorola’s well-publicized decision to cancel an ambitious, 10-year, $500 million cellular phone project in Ukraine. Combined with parliament’s continued unwillingness to approve the government’s 1997 budget and tax reform proposals — upon which IMF financing of Ukraine’s budget deficit depends — these latest developments constitute a self-inflicted injury that Ukraine would have done well to avoid. The current political turmoil involving conflicts between Kuchma, Lazarenko, and the parliament, suggests, moreover, that a break in this pattern of self-destructive policy decisions is unlikely.
Primakov Brokers Chisinau-Tiraspol Talks.