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General Manager, Lawyer, L.L.M., Amber Law Company
The Ukrainian Banking and Financial System: What Can be Expected and What Can be Hoped For
At the end of 2018, the International Monetary Fund decided to open a stand-by economic policy support program (SBA) for Ukraine. The total value of the program is USD 3.9 billion.
The stand-by program will help Ukraine to maintain its macro-stability in coming years, when it will be forced to overcome a number of challenges, hold presidential and parliamentary elections in 2019 and secure peak payments on foreign debt.
Without doubt, the banking and financial system of Ukraine is currently in a state of economic recovery, a prerequisite for which is created by a variety of different social and economic phenomena. We will not ponderthem all but definitely focus only on the key root causes of the current situation.
On 21 June 2018, the Verkhovna Rada (Parliament)) adopted the Law On Currency and Currency Operations in its final reading, which would replace the outdated Decree of the Cabinet of Ministers On the System of Currency Regulation and Currency Control, 1993, and would establish the principle “everything that is not directly prohibited by the law is allowed”.
The Law On Currency has been adopted within the framework of Ukrainian obligations to implement the principles of EU capital flow regulation included in EEC Council Directive No. 88/361/EEC of 24 June 1988, into national legislation.
The National Bank of Ukraine informed the public of a package of seven draft resolutions on the new currency regulation system, which would come into force on 7 February 2019.
Statutory provisions of the published draft Regulation on application of protective measures are aimed at countering the crisis phenomena. The document will be temporary by its nature — until the final transition to complete freedom of foreign exchange transactions.
It is assumed that this Regulation does not introduce any new currency restrictions but, at the same time, expands the possibilities for conducting individual currency transactions.
These protective measures will be canceled along with improvement of the macroeconomic conditions in Ukraine, as specified in the liberalization roadmap developed in cooperation with the IMF. The NBU’s ultimate goal is still removal of all restrictions on the foreign exchange market and transition to the free capital flow mode.
Against the background of the Law’s adoption, the role of banks as agents of primary financial monitoring increases and imposes requirements on them which may result in refusal to conduct clients’ transactions.
The main thing that our citizens can expect is the development and submission to the Verkhovna Rada (Parliament) of laws related to one-time asset declaration for individuals.
The Cabinet of Ministers should prepare its part of by-laws so that the new Law On Currency takes effect. In particular, the list of goods and sectors of economy, subject to currency restrictions application so as to protect domestic producers, should be approved and submitted to the NBU.
Ukraine joined the expanded cooperation program within the framework of the Organization for Economic Cooperation and Development (OECD) from 1 January 2017, and undertook commitments for implementation of the so-called BEPS Plan Minimum Standard.
According to OECD representatives, the current priority for Ukraine is the establishment of rules related to controlled foreign companies and to countering tax base erosion through interest payments.
Ukraine signed the convention on implementation of measures related to taxation agreements to counter tax base erosion and profit shifting (multilateral convention MLI).
By signing and ratifying the MLI Convention, Ukraine is given the opportunity to simultaneously amend all or at least some of the current conventions on avoidance of double taxation. The Convention will enable a reduction in shifting Ukrainian capital to low-tax jurisdictions so as to minimize tax liabilities which, in its turn, will contribute to increasing budget income.
The program will help Ukraine to introduce new international tax standards by focusing attention on country reports and other BEPS minimum standards, as well as on standards related to on-demand information exchange and automatic information exchange on financial accounts (the “Common Reporting Standard”).
Starting from 2020, automatic information exchange on financial accounts of non-residents under international standard (Common Reporting Standard), which was developed by the OECD and approved by G20, will be introduced. The first exchange of tax information will be based on the results of 2019. The Ministry of Finance considers this date to be feasible, but notes that this requires doing a great deal of legislative work and ensuring high standards of confidentiality and data security.
According to the experience of other countries, implementation of BEPS Action Plan in Ukraine requires major changes to legislation. Many countries with a strong legislative base related to countering tax violations are still in the process of implementing certain provisions of the plan.
Reform of the State Fiscal Service should be conducted, a draft law on international cooperation of Ukraine in the field of taxation, setting rules of taxation, reporting and restriction of expenses for foreign companies, should be developed, international standards for automatic exchange of financial information should be introduced. However, what is most important is that dialogue between the state and business regarding future tax innovations should be established.
The situation described is multifaceted both in theory and in its practical implementation. On the one hand, any action generates certain risks, which are related both to peculiar characteristics of the banking system and to peculiar characteristics of its clients, and it is certainly not free from certain terms and conditions within which such action takes place.
It is worth taking into account that the Central Bank is a public authority for the banking system, and the aim of its management is the process of achieving goals set for the banking system. A peculiar feature of this process is the fact that all citizens and the state itself are consumers of the results of such management.
Setting requirements of the system to perform functions not included during establishment of the latter results in its destruction.
This implies one more important task — to prevent transition of risks to challenges, and all the more to threats.
There is a positive solution to this task subject to the clear systemic interaction of all participants of the process, involving professionals.