On Ukrainian PEPs and recent progress in the agreement with the IMF

Last week the Parliament made its final step toward the fulfilment of one of the most controversial benchmarks in the memorandum with the IMF. The Verkhovna Rada adopted the draft law on the financial monitoring of politically exposed persons (PEPs). Despite all the buzz and critics in media and social networks, frankly speaking, there wasn't another choice except to support the bill.

This decision is crucial for the progress in cooperation with the IMF and for the progress for Ukrainian membership in the EU. Moreover, regarding the obligations under the Memorandum with the IMF, in last two weeks we made significant progress in delivering the GTSO corporate governance reform. When all the necessary steps will be finished, Ukraine would be able to mark as done another two benchmarks.

This issue covers the progress in agreements between Ukraine and the IMF and other international partners made on 16-22 October 2023.

The Parliament adopted the DL on the financial monitoring of politically exposed persons (PEPs). The main provision of the DL No.9269-d suggests the person is considered as PEP on lifelong term, not only for three years after resignation. On October 15 the Committee on Finance, Tax and Customs Policy rejected an amendment which allows the law to come into force only after Ukraine joins the EU. That means the adopted version of the DL is in line with AML/CFT standards and meets the requirements under the EU-Ukraine agreement and the Structural Benchmark #14 in the Memorandum with the IMF.

The DL is the last step to start negotiations on Ukraine's membership in the EU. The revised DL on restoring tax inspections was adopted in the first reading. The Parliament also approved shortened term to prepare the DL No.10016-d for the second reading. The revised text is a compromise agreed with the IMF.

It suggests tax inspections may be restored for tax payers that by the end of 2021:

had two times more AR than AP;
paid corporate tax and VAT in amount of 50% lower than the average industry rate;
had more than 10 million hryvnas annual revenue and expenses reached 75% of this sum.

Tax inspections won't be restored for individual entrepreneurs on the 1st and 2nd groups and for enterprises located on the temporary occupied territories and territories where hostilities are taking place. Tax inspections of businesses in the industries with the highest risk, such as tobacco, alcohol, gambling and financial services, remain a priority. The DL will finally allow to fulfill the obligation under the structural benchmark #6.

As we emphasized in Issue 21, proposals on tax inspections restoration which were previously agreed with the IMF team in the DL No.8401 were eliminated from it under pressure of Rostyslav Shurma, Deputy Head of the Office of the President of Ukraine. The Verkhovna Rada adopted the 2024 State Budget in the first reading. The draft after the first reading expects state budget revenues of 1,75 trillion hryvnas, budget expenses of 3,31 trillion hryvnas and state budget deficit of 1,59 trillion hryvnas.

Approved amendments suggest to increase the expected state budget revenues by 9.9 billion hryvnas if the DL on additional tax for excess profits of banks will be approved (more details on the DL is in Issue 24). So far, on 19 October the Parliament approved in the first reading the DL #9656-d to increase the corporate tax rate for banks from 18% to 36%. Among 1600 submitted amendments the most of approved ones suggest to decrease budget expenditures.

Among those the Committee approved the amendment to reduce expenditures on the Economic Security Bureau by 409 million hryvnas and redirect it for purchasing scanners for customs. Another approved amendment limits the number of the ESBU employees by 1400 as opposed to current limitation of 4000 persons. On the next step of the budget process the Cabinet of Ministers will review and finalize the voted text and the Parliament will vote for 2024 State Budget by November 20.

The Parliament will adopt the decision to provide state budget with additional 200 billion hryvnas. The DL #10037 on "military" personal income tax redistribution couldn't receive enough votes due to MPs elected in single-member constituencies, who are opposed to the DL. The DL will be re-considered in the second reading. According to the DL, revenues from the personal income tax paid by military servants at the deployment locations will go to the state budget to fund military needs.

The Verkhovna Rada hasn't considered the draft law to restart the Economic Security Bureau, MPs left the meeting hall after voting to ban the russian church. The Committee on Finance, Tax and Customs Policy pre-approved the DL #10088-1 in the first reading. The DL to restart the ESBU was prepared in cooperation with international partners and supported by the partners from the US, EU, IMF and World Bank.

During the last week the DL received numerous letters of support from Ukrainian and international business association such as American Chamber of Commerce, European Business Association, Union of Ukraine Entrepreneurs and others, as well as from respected think tanks such as Centre for Economic Strategy, Institute for Economic Research and Policy Consulting, DiXi Group etc. We expect the DL to be considered during the next parliamentary meetings in two weeks. Among key Innovations of the DL No. 10088-1 are the following:

new competition procedure for the appointment of the ESBU Director, featuring a majority of international members in the Election Commission (according to the best practices in SAP, NABU, and NACP);
provisions to ensure political independence of the state body;
re-certification for all ESBU employees, excluding service staff.

Interviews with the potential candidates to the GTSO Supervisory Board are about to start. The submission of the candidates' application ended on October 10.

Currently the selection commission prepares a short list of candidates to start the interviews. As we numerously pointed out, an appointment of the GTSO Supervisory Board is the obligation under the Structural Benchmark #18 pf the Memorandum with the IMF. Moreover, Artur Lorkowski, Director of the Energy Community Secretariat, informed in his recent interview for RBC Ukraine that the Energy Community approved the draft of the new GTSO charter.

With its adoption Ukraine will meet an obligation under the Structural Benchmark #8. The President signed the DL to increase the 2023 state budget by 322,6 billion hryvnas. The DL #10038 with such amendments was adopted on October 6. According to the adopted text, the Ministry of Defense received the biggest budget increase of 211 billion hryvnas.

Among other top recipients of additional funds are Ministry of internal affairs (UAH 79 bn), Ministry of Social Policy (UAH 16,5 bn), Ministry for Strategic Industries (UAH 4,3 bn), State Security Service (UAH 4,2 bn), Defence Intelligence (UAH 2,5 bn) and Ministry of Foreign Affairs (UAH 1,3 bn). The DL on SOE corporate governance reform is almost finalized. According to the members of the working group, there are several provisions left to agree with the Ukrainian government and international partners. The DL No.

5593-d is expected to be ready for consideration in the second reading soon. Members of the Ukrainian Chapter of the Parliamentary Network of the World Bank and the IMF will insist on the following key provisions to be included and adopted in the DL in the second reading:

exclusive right of Supervisory Boards to appoint/dismiss CEOs;
exclusive right of Supervisory Boards to approve strategic and financial plans;
protection of Supervisory Boards members from unreasonable dismissals (exclusive list of reasons);
real accountability of members of the Supervisory Boards (independent audit and evaluation of their performance)
solving problematic issues of consolidated dividends.

Let me remind that Ukraine stated an intention to adopt the DL No.

5593-d and strengthen corporate governance in SOEs in the Memorandum with the IMF and agreements with the World Bank.

Disclaimer: Articles reflect their author's point of view and do not claim to be objective or to explore every aspect of the issues they discuss. The Ukrainska Pravda editorial board does not bear any responsibility for the accuracy of the information provided, or its interpretation, and acts solely as a publisher.

The point of view of the Ukrainska Pravda editorial board may not coincide with the point of view of the article's author.