One giant leap for business: VAT refunds

What single thing could the Ukrainian authorities do to show foreign and domestic businesses that they are serious about improving the business climate?

Ukraine faces a daunting list of reforms needed to create a business environment to stimulate foreign direct investment (FDI).  The authorities have announced welcome steps to tackle corruption, remove over-regulation and reform the civil service.  But there is one specific area of reform where it would be comparatively straightforward to achieve results – a “quick win”.  This is the area of VAT refunds.

VAT refunds are supposed to be paid automatically.  The problem is that a practice has grown up in Ukraine of VAT refunds being delayed.  The ostensible reason is that the budget is short of money.  In practice, however, once the non-automatic repayment of VAT refunds has become established, the decision on whether or when to pay refunds becomes, potentially, a powerful source of patronage and corruption.  The reintroduction of automatic refunds would therefore both tackle corruption and remove a major impediment to inward investment in Ukraine.

The government argues that the payment of VAT refunds has improved recently; and has promised, commendably, to introduce automatic repayment of VAT refunds from 1 March.  The problem is that this date already slipped several times; and there have been suggestions that the arrangements introduced on 1 March will not cover all VAT refunds.  Meanwhile, some companies  continue to receive VAT refunds quickly, while others do not.  This creates an uneven playing field and an unpredictable business environment: exactly what foreign investors hate most.

If the Ukrainian authorities can ensure that the 1 March deadline is adhered to, that will send a powerful signal that Ukraine is serious about improving the business environment and attracting FDI.  I hope that President Yanukovych and Prime Minister Azarov will accept no excuses from their officials and will ensure that this impediment to business activity in Ukraine is swept away definitively and comprehensively on 1 March.

Stop press on 3 March: I see that the State Tax Service has now announced that the automatic reimbursement of VAT will start only on 21 March.  I hope, for the sake of Ukraine’s business climate, that the new deadline will be kept.