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Opinion: Increase in VAT-bonds to turn them into instrument for VAT settlements with state

Kyiv. September 14, 2010

”The government’s desire to continue issuing sovereign bonds (OVGZ) to redeem overdue payments on VAT refund (VAT-bonds) and impossibility to refund VAT by hard cash could lead to VAT settlements with the state through these securities, in particular, settlements on import operations”, believes Associate of Volkov Koziakov and Partners Ruslan Malinovskyi, commenting to Interfax-Ukraine on the issue related to another VAT-bonds issue being up for debate by the government. The latter was informed by First Deputy Head of Administration of the President Iryna Akimova.
"After having received VAT-bonds a number of companies decided to sell their VAT-bonds to accelerate replenishment of their working capital. At that, discount on such sales attained 19– 22 percent of bonds par value. At the meantime, other companies are willing to use VAT-bonds as a payment instrument, i.e. redemption of current VAT-liabilities", Mr. Malinovskyi said.
In his opinion, VAT-bonds could be best used without losses at discounted sales in case of VAT refunds on import operations. VAT-bonds may also be used as a financial instrument to repay current loans or as a pledge on long-term liabilities to banks and investors.
Moreover, Mr. Malinovskyi added that the moves taken by the government in relation to VAT-bonds issue do not fundamentally address the issue of cutting the amounts of outstanding VAT refunds.
"The offered mechanism has partially proved its value, and many companies agreed to get VAT-bonds. However, a monthly increase in current indebtedness on VAT refund would force the government to continue issuing them", suggests the Associate.
Iryna Akimova was reported as saying that the government is discussing with the business a possibility of another bond issue as the government’s indebtedness on VAT. The business raises no objection against this mechanism.
According to her, business believes the government that possible new issue will be the last one; otherwise it would not have agreed to use such mechanism to solve the issue.
At the end of August, the government issued VAT bonds in the amount of UAH16.4 billions as an indebtedness to refund this tax dated May 1, 2010. Maturity of the bond issue is five years, yield – 5.5 percent annually. Maturity of bond issue proportionally amortized each half year – five years.
Companies affirmed that the issue of timely VAT refund was not solved after May 1, therefore, resulting in formation of a new debt.
Pursuant to the Agreements between the government and International Monetary Fund, the state debt on VAT refund must be cut down to UAH3 billions until October 1, 2010, and to zero – until the end of the year.
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