In light of the significant amount of outstanding VAT refunds, the Ukrainian Government has adopted the Resolution #368, dated 12 May 2010 (the "Resolution") to enable it to tackle this problem by issuing VAT bonds. This Resolution became effective on 01 June 2010.

According to the Resolution, all tax payers are allowed to convert the amounts of VAT refunds owed to them by the Government into VAT bonds. Such bonds will only apply to the non refunded VAT amounts that were declared prior to 01 May 2010, provided that these amounts have been validated by tax audits. With this in mind, the tax authorities intend to produce a special inventory showing what refunds are eligible for conversion into VAT bonds.

Given the criteria above, at best, only VAT amounts that have accumulated up to and including the February 2010 VAT return are likely to be eligible for conversion into VAT bonds.

The Government is offering VAT bonds in local currency for a duration of 5 years at an annual 5.5% interest rate. Also, the Resolution suggests that the debts shall be paid off bi-annually in instalments equalling 10% of the bonds' par value.

Those taxpayers who are interested in obtaining these VAT bonds should contact their local tax authority not later than 25 June 2010.

In practice, the terms and conditions of the bond issue do not appear to be very attractive for Ukrainian taxpayers. For example, the official inflation rate for 2009 was twice the proposed interest rate on the VAT bonds. Consequently, such conditions may influence taxpayers to sell VAT bonds at a significant discount.

Nevertheless, although VAT bonds may not be the solution for the VAT refund problem, it may serve as an alternative source of funds to ease the cash flow problems of Ukrainian tax payers with significant outstanding VAT refunds.

Law: Resolution of the Cabinet of Ministers # 368, dated 12 May 2010, effective as of 01 June 2010.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 14/06/2010.