VAT Rate Reduction Expected for Agricultural Products

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The Ministry of Finance of Ukraine raised the issue of the importance for the President of Ukraine to sign the draft law “On Amendments to the Tax Code of Ukraine concerning the value-added tax rate on transactions for supply of certain types of agricultural products” №3656.

The reduction of the VAT rate for agricultural products – from 20% to 14% – will decrease the economic efficiency of “twisting” (a reduction of the VAT duty accrued for one type of sold goods by tax credit obtained for buying another goods) and VAT avoidance schemes for agricultural transactions, that is expected to result in their winding down and reduce the VAT reimbursement paid to agricultural products exporters from the state budget, and therefore the strain on the state budget and risks of VAT fraudulent activity will decrease as well, as the Ministry’s website says. Also, according to the Ministry of Finance, such a decision will support agricultural producers, processors and exporters.

“This is one of the first cases when the reduction of the VAT rate is actively supported by both the Ministry of Finance and the State Tax Service. This is probably the reason why the adoption of this law is accompanied by strong resistance from the so-called experts of the agricultural sector, who spread fake news about another betrayal and frighten farmers and processors with a forthcoming catastrophe, – Svitlana Vorobey, the Deputy Finance Minister, points out in her comment. – In fact, in case of the entry into force of this law, the catastrophe would affect the dealers from the agricultural sector who try to profit from the farmer’s work, creating various schemes of retailing agricultural products, and the most popular scheme is “twisting” of VAT. They try to buy agricultural products from farmers for nothing, in order to set their price for processing enterprises then and at the same time to steal VAT from the budget, using fictitious subsidiary enterprises, as well as “twisting” VAT liabilities with their help. The VAT rate reduction on transactions with such agricultural products will hit these schemes hard, making them inefficient and null for “twisters”.

According to the website of the Ministry of Finance, in 2019 grain exports of Ukraine amounted UAH 246.4 billion, or 2.4% of total exports. Additionally, the ongoing VAT refunds application of grain traders amounted UAH 49.4 billion, or 32.3%, that indicates a high level of market interest in the use of agricultural goods in transactions, as a result of which entrepreneurs have a right to get VAT refunds from the state budget. According to updated data, in 2020 the proportion of grain traders’ applications for VAT refunds from the budget of the total amount of the application was already 34.3%, that is the demand for such operations is increasing.

“As for the enterprises processing agricultural products, which are most frightened by losses and catastrophe due to the VAT rate reduction on the raw products, I will explain: those 2-3 months of delay in VAT revenues are nothing else but the crediting period for processors by the budget. Why? Because processors when purchasing agricultural raw materials will divert 6% less of their own funds to pay VAT as part of the cost of raw products. Yes, they will pay 20% VAT on their own products, but only when they produce them, and – more importantly — sell them. Yes, the tax credit amount will decrease, but it is formed at the expense of the VAT amounts paid by processors to suppliers, including the purchase of agricultural raw products,” theDeputy Minister of Finance explains.

VAT schemes are considered one of the main risks to the fiscal security of Ukraine. Read more in our article “Unprecedented analysis: government lobbying interests of certain groups and VAT fraud – the main threats to the fiscal security of Ukraine”

Translated by Alla Sydorova

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