April tax incentives for enterprises could support business and retain tax liabilities in the short term
Alona Lebedieva, owner of Aurum Group
Even today we can say that two main waves should be expected over coming coronavirus crisis.
The first, related to domestic consumption, has already begun. By various estimates, at least 80% of all businesses in the country felt a decrease in demand for their goods or services, with a drop in income from 10-15% for a number of large companies, to 100% for whole industries, mainly in the service sector. All this led to a significant decline in incomes of the population, full or partial loss of salaries among millions of Ukrainians. The peak of the negative consequences of this stage can be expected in May-June, when the consumption of those, who lost their jobs or part of their income in March-April, will begin to decline more. If quarantine measures are relaxed in the next month or two, it is hoped that in the fall the situation will begin to recover gradually.
However, by that time, it is highly likely that Ukraine will face a second wave – a fall in external demand, formed by the deceleration of large economies in the world, for which Ukraine is a supplier of mainly raw materials, but the country’s export-oriented industries form the bulk of GDP. This period can run over for several years, depending on how much it will take to overcome the issues related to the development of a vaccine or drugs for coronavirus and the complete removal of quarantine measures, including international traffic. I agree with the assessment of many experts that the way out of the current crisis is likely to be U-shaped, that is, recovery will come after a long period of low or zero growth, which is associated with the specifics of overcoming the pandemic.
How shall business respond to the current situation?
The textbook rule for business in times of turbulence and uncertainty is to carry out deep reforms and optimizations to get rid of ballast in order to be able to survive difficult times and begin to grow with the recovery of demand. Cost cutting also includes the rejection or postponement of any non-critical projects for capital investments, minimizing debt burden, and so on. In the current situation, Aurum Group companies were no exception, depending on the industry, company revenues decreased by 20% -100% compared to February, which automatically required the rapid development and implementation of anti-crisis programs, budget revisions, and minimizing the expenditure component.
What can the state do to effectively support business in this situation?
We see many positive examples of Western countries introducing multi-billion dollar programs to support small and medium-sized businesses: loans “for half an hour”, direct monetary support to businesses and citizens, etc., but our government makes it clear that there are no funds for this in Ukraine today. Even the privilege on exemption from taxes on land and real estate in March, which was rather positively perceived by business, could not be extended to April due to the formation of severe deficits in local budgets. But here I want to draw a parallel with the mass exemption from paying rent of premises by entrepreneurs - is it fair if it is advisable for a tenant of a cafe or a store to free 80% -100% of his income from the lease for the period of quarantine? After the crisis, he will immediately resume his work and the landlord will not even lose time searching for a new counterparty. What if the tenant leaves now? And in general, what is the objective market rate for renting premises in a closed shopping center? I think - zero.
So why is the cost of renting state land under a closed-down (or almost closed-down) enterprise in April 2020 not zero?
In order to prove my point, here are just a couple of numbers of one of the plants of our group, which operates in the sector of heavy engineering. Since January 1 of this year, the land tax rate has doubled in the region, where the plant is located. For April alone, for example, the amount of tax on land and real estate will amount to 724,000 UAH. Whereas, the decline in industrial production, coupled with a decrease in business activity during quarantine, led to the fact that the company is not working even at 20% of its capacity now. Unfortunately, not one of our plants faced such situation, I think many manufacturers are experiencing the same problems. Temporary state tax incentives could really support business, keep jobs and would help preserve domestic enterprises and, of course, retain tax liabilities in the short term.
And the last: perhaps not very popular position, but hryvnia strengthening before the advent of the crisis did not strengthen, but rather weakened the country’s economic potential. A smooth devaluation of the national currency could restrain imports and protect domestic production, this would support and expand the export of products of both classic for Ukraine industries, and would contribute to the development of new directions. In addition, a smooth devaluation would facilitate the servicing of hryvnia-denominated debt under government bonds. Supposedly, this is one of the strategies that the government should consider.