The Ukrainian Parliament’s recent failure to pass a tax reform bill concerning the taxation of international parcels may jeopardize future financial assistance from the International Monetary Fund (IMF) and the European Union (EU). This legislative setback occurred just before an IMF mission was set to review the country’s funding program.
On May 26, the Verkhovna Rada voted against Bill No. 12360, which aimed to amend the Customs Code by removing value-added tax (VAT) and customs duties on parcel shipments. The bill did not even advance to a second reading, signaling a lack of parliamentary support.
This decision is viewed as a significant gesture towards the IMF, reflecting a broader reluctance among lawmakers to accept increased tax burdens. President Volodymyr Zelensky has also expressed reservations about imposing additional tax pressures.
During a meeting with IMF Managing Director Kristalina Georgieva in January, Zelensky raised concerns regarding the tax provisions of the IMF program, resulting in a temporary postponement of the requirement for VAT on individual entrepreneurs.
The passage of the parcel tax law was deemed crucial for the ongoing review of the IMF program and the potential disbursement of a subsequent loan tranche of $686 million. If the law remains unpassed, it is likely to be classified as a ‘prior action’ in the memorandum, meaning it would be a mandatory condition for the release of further funds.
Government officials had anticipated the parliamentary rejection of the tax proposal. Finance Minister Serhiy Marchenko noted that should the vote fail, the government would intensify efforts to engage with lawmakers and the business community to foster support for the repeal of tax exemptions on parcels. Marchenko stated, “If we cannot pass the law, we have ample time to resolve this issue through concerted efforts.”
Currently, Ukraine faces external pressure to enact the parcel tax law as a condition set by its creditors. This requirement is also part of the EU’s macro-financial assistance program. According to the Finance Minister, abandoning or renegotiating this condition is virtually impossible.
In response to the parliamentary vote, the Ministry of Finance indicated that it would continue to collaborate with lawmakers, relevant committees, and the business sector to advance the legislation on parcel taxation. The ministry emphasized that the law is integral to maintaining trust with international partners and ensuring ongoing financial support.
While the government works to rally support for the legislation, funding from the IMF is expected to be suspended, and EU assistance may not commence. To receive the first tranche of macro-financial support from the EU, the Parliament must ratify the cooperation memorandum, which is still under negotiation and includes conditions related to parcel taxation and VAT for individual entrepreneurs.
Sources suggest that the likelihood of ratifying this memorandum under the current conditions is minimal. Without ratification, the flow of credit will be halted.
Two potential scenarios could unfold. The first involves the government successfully mobilizing support for the parcel tax law, which would expedite the arrival of external budget financing. The second scenario entails negotiations with IMF experts to modify the program’s conditions to prevent a disruption in fund disbursement. However, insiders indicate that the chances of the IMF making further concessions are slim.
The Ukrainian Parliament's rejection of a key tax reform bill poses risks to future financial support from the IMF and EU. The failure to pass the legislation may lead to a suspension of funding as the government navigates external pressures to comply with creditor conditions.