A lawyer's view: What should be changed in the legislation to pay off debt in the electricity market

On September 17, 2020, the deputies of the Verkhovna Rada of Ukraine did not support draft law No.2389 "On Amendments to the Tax Code of Ukraine regarding measures aimed at repayment of arrears accumulated on the wholesale electricity market" ("Draft Law No.2389") in the first reading. The situation was analyzed in the column by the advisor to Sayenko Kharenko, Chairman of the Committee on Energy, Oil and Gas of the Ukrainian Bar Association Maryna Hrytsyshyna for Kosatka.Media.

According to the results of the voting, Draft Law No.2389 has been sent for preparation for a repeated process of the first reading to the Committee of the Verkhovna Rada of Ukraine on Finance, Tax and Customs Policy.

What is the purpose of Draft Law No.2389?

The draft law was developed and registered on November 6, 2019, along with the following draft laws on debt repayment:

All these draft laws concern the repayment of debts that had been accumulated on the wholesale electricity market before the current electricity market was launched on July 1, 2019.
What kind of debts? All these draft laws are aimed at resolving the issue of the subsequent debt of SE Energorynok as of August 31, 2019:

- UAH 30.9 billion – receivables;
- UAH 28.1 billion – accounts payable.
The debt of SE Energorynok refers to a large extent to the following state-owned enterprises:
- SE NNEGC Energoatom;
- SE Regional Electric Networks, which supplied electricity to state coal mining enterprises.

The point is that there is a lack of full coverage of the cost of coal by coal mining enterprises from the state budget and a low level of payment discipline of certain electricity consumers among the causes of debt.
Draft law No.2386 was adopted by the Verkhovna Rada on June 17, 2020, and this Law "On Measures Aimed at Paying off the Debts Accumulated on the Wholesale Electricity Market" ("Law No.719") provides for debt repayment using settlement mechanisms, transfer of debt, assignment of rights claims and debt relief. However, except for the mechanisms provided by Law No.719, changes to the Tax Code of Ukraine, the State Budget of Ukraine, and the Budget Code of Ukraine are also needed to pay off the debts. That is why the Verkhovna Rada of Ukraine considered Draft Law No.2389 on September 17, 2020.

What changes to the Tax Code are stipulated by the Draft Law No.2389?

Draft Law No.2389 provides for the addition of the Tax Code of Ukraine with a separate subsection on the specifics of taxation of participants in the debt repayment procedure on the wholesale electricity market. Under this subsection, it is proposed to establish special conditions for the participants in the debt settlement procedure for these operations. Also, the Draft Law No.2389 offers to temporarily provide the conditions for not charging penalties and writing off the tax debt, for the period of validity of the Law of Ukraine "On Measures Aimed at Paying off the Debts Accumulated on the Wholesale Electricity Market".

A number of comments were submitted from the Committees, which most likely were not taken into account before the consideration of Draft Law No.2389 in the first reading.

What were the comments to the Draft Law No.2389?

The main remarks to the Draft Law No.2389 include the absence of specific entities that will take part in the debt repayment procedure. At the same time, the provisions of the Draft Law No.2389 regarding value-added tax and excise tax have already been taken into account in the adopted law at the beginning of 2020. Therefore, Draft Law No.2389 is subject to clarification in this part.

At the same time, according to the conclusion of the Committee on the Integration of Ukraine with the European Union, the changes proposed by the Draft Law No.2389 do not correspond to the international legal obligations of Ukraine. In particular, debt repayment may distort competition, does not comply with the Association Agreement. However, the comments can still be discussed when finalizing the draft law.

Why is it necessary to adopt the Draft Law No.2389?

The Draft Law is needed to settle taxation issues on debt repayment arising on the wholesale electricity market. At the same time, since the Draft Law No.2389 was registered almost a year ago, many of the provisions of the Draft Law No.2389 need to be finalized taking into account the latest changes to the Tax Code of Ukraine.

Without establishing special conditions for taxation of debt repayment, the issue about the possibility of implementing the Law of Ukraine "On Measures Aimed at Repayment of Debt Accumulated on the Wholesale Electricity Market" arises. In addition to the Draft Law No.2389, to implement the Law No.719 on debt repayment, all other draft laws must be adopted, namely the Draft Law No.2387, the Draft Law No.2388, and the Draft Law No.2390. In general, in order to pay off debts, the adoption of these draft laws should be a package, and not separate. Since consideration of individual bills has been going on for almost a year and the issue of debt repayment has not been resolved.

Thus, debt repayment is important for improving the financial condition of state-owned enterprises and improving settlements already in the new electricity market. But the Draft Law No.2389 needs to be further revised taking into account all the comments and considered together with other draft laws.

Tags: The Cabinet of Ministers, contracts, court, NNEGC "Energoatom", electricity, EU, energy market, Ukrenergo, ETL, electricity market, SOE Enerhorynok, The Verkhovna Rada, law, draft law, negotiations, investors, price, agreement, power system balance, infrastructure, electricity transmission, Shmyhal, nuclear power plant, Buslavets, The Ministry of Energy, economy, power grid

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