State of Bavaria U.S. Office for Economic Development / West Coast Division, Palo Alto

Ukraine on the Rise

By Bob Edgren

I just returned from my 16th trip since 2001. This tour I was there for five months. Compared to seven years ago, Ukraine has taken quantum economic leaps, and is still on an accelerated growth pace.

As I walked down the main street Kreshcatyk, there it was right above one of the world’s largest McDonalds, a large maybe 50 foot wide sign, Ernst and Young. This prime location, a former store is now bustling with blue suits and briefcases in a plush atmosphere. It looks quite different. Yet another signal that global investors are discovering the opportunities and high consumer demands of Ukraine.

Independence Square, Kiev

Okay, how did this boom happen? After the Soviet collapse, like in Russia, smart, clever, and often unscrupulous people in the right place at the right time grabbed many of the country’s valuable assets, be it steel plants, pipelines, TV stations, factories, food, real estate, whatever. All the formerly state owned assets had to find a home and they did. So now, there is a small army of oligarchs, just like in Russia, who made millions acquiring assets a nickel on the dollar.

In light all this, the reaction has been fueling a free enterprise and booming economy and most important, a middle class. The influence of Russian oil wealth also is contributing much to this scenario as wealthy Russians are coming down and buying, building, and manipulating whatever they can.

Kiev

The politics are still ugly and a mess. It is almost a 50-50 split among the pro West and pro Russia constituents, and this can also be geographically defined. The western part of Ukraine is pro West and the Eastern half favors Russia. So why take a risk? The same reason investors and international corporations have with Russia and China that the return on investment can be enormous.

What’s more and just off the press, Ukraine just cleared a major hurdle towards joining the WTO which will change the playing field dramatically.

Ukraine, I was told by one salesperson in telecommunications, is the 2nd fastest consumer of cell phones in the world. The capital of Kiev six years ago used to be slow paced with streets filled with beat up old Soviet cars, diesel spewing trucks and run down buses. Now there are daily traffic jams everywhere. The autos are an array of flashy new SUV’s BMW’s, Lexus’, Ferraris, Porsches and Bentleys in a sea of new autos from Nissan, Toyota, Mitsubishi, Subaru, Honda and Chevrolet. As one gazes over Kiev and other Ukraine main cities, there are dozens of tall construction cranes working away on high rises, new glitzy apartments buildings, shiny glass office towers, trendy shopping centers, and  new hotels including the Radisson and Hyatt Regency..

From the Ukrainian Observer,” The banking sector has been one of the fastest growing sectors of Ukraine economy of late. Its assets grew by 11.25% in the first quarter of 2007 and by 56.2% in 2006. However, recently the National Bank of Ukraine has been tightening up their lending policies and are more prudent on regulations. Whether any financial crisis will occur is unknown and in my opinion, if the booming real estate prices start to fall, oil wealthy Russians would love to step in and gobble up whatever they can.

Oddly, the one neglected main industry that most expatriates shake their head in wonderment about is tourism. Why so many ask, is not this beautiful country and culture not on the top of places to visit? In actuality, I think many of them would prefer it that way and watch newcomers jaws drop as they cruise through the city and countryside. I think there is a general feeling, well I know there is of “Tell everyone back home it is terrible here.”

For Investment opportunities in Ukraine, email Bob Edgren at Kyivkiss@yahoo.com

From a federal perspective, claiming tax benefits for exporting can be fairly straightforward as most items “manufactured, raised or grown” in the USA can qualify. Incentives are available for manufacturers, wholesalers and retailers, relative to their respective level of net sales receipts. If your company has direct or indirect export sales in excess of $2 million per year then you may want to investigate taking advantage of either the EIE or the IC-DISC tax benefit programs summarized below.

The EIE or “Extraterritorial Income Exclusion” program was created in late 2000 but due to complaints from the World Trade Organization, which evidently considered it too generous, is in the process of being phased out. The EIE works by excluding a portion of the profits on qualifying export business from your federal taxable income. Since an eligible exporter can go back and re-file for the benefits they could have received over the last three or four tax years, however, it is still worth pursuing for any firm that had significant exports during this period.

For this and future tax years, setting up an IC-DISC or “Interest Charge – Domestic International Sales Corporation” should be considered. Done properly, an IC-DISC moves the profit on exports into a business entity that pays taxes at the 15% long-term capital gains rate, rather than the 35% corporate rate, thereby providing a permanent 20% tax savings.

If your firm wishes to pursue tax benefits available under the EIE or IC-DISC programs, then time is of the essence. Under the EIE, claims can only be made for “open tax years” which generally means those where the tax return was filed less than three years ago. As the years pass, the option to reach back and recover back taxes (plus interest) is reduced. Under the IC-DISC, the first year’s tax benefits are usually prorated based upon how long the tax saving entity was in place. The sooner it is set up, therefore, the greater the first year’s tax savings will be.

Rob Aldridge is a tax specialist at FortisTCS and can be reached at Robert.Aldridge@FortisTCS.com