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The Matter of Cancellation of VAT Preferential Rate for Supply of Pharmaceutical Products


Galyna Melnyk, Tax Lawyer at Ilyashev & Partners Law Firm
Source: The Apteka

At its web-site the International Monetary Fund Ukraine has published a report No. 16/25 (January 2016) related to Ukraine entitled “Technical Assistance Report-Reducing Social Security Contributions and Improving the Corporate and Small Business Tax System”. According to the report it is advised to decrease the rate of the unified contribution to universal compulsory state social insurance and compensate possible losses of the Ukrainian state budget related to such decrease, among other things, at the expense of increase of the VAT rate from 20% to 21% and cancellation of a number of privileges on such tax. Namely, the item 65 of the aforementioned Report actually proposes to cancel the VAT preferential rate established for pharmaceutical products thorough the increase of the current rate (in the amount of 7%) to the level of the rate proposed in the Report (21%).

It needs to be reminded that according to Article 193(1)(c) of the effective version of the Tax Code of Ukraine along with the general 20% VAT rate there is a social 7% rate stipulated for operations on supply at the customs territory of Ukraine and importing into Ukrainian customs territory of pharmaceutical products introduced into the State register of pharmaceutical products.

Based on the statements contained in the Report of the International Monetary Fund it is offered to delete the mentioned provision of the Tax Code of Ukraine, i.e. apply the general VAT rate in the amount of 21% both to the operations on import of pharmaceutical products to Ukraine and onto operations on supply of such products at the territory of Ukraine (regardless of the type of person to whom such supply will be carried out – companies or individual persons).

As soon as the VAT rate directly influences the price of products (pharmaceutical products, in this case) paid by the end consumer increasing the rate of this tax will, in general, result in substantial growth of the cost of pharmaceutical products throughout the whole chain of supply: from the importer to the distributor, from the distributor to the drug store, and from the drug store to the end consumer (ordinary citizens of Ukraine).

Moreover, increase of the VAT rate in relation to the import procedures will lay additional burden onto importing companies which, in execution of requirements of Article 206(1) of the Tax Code of Ukraine, are obliged to settle the VAT to the budget in the form of “real money” not later than the date of submitting an import customs declaration.

According to the various estimates made by the economists three-time increase of the VAT rate applied to the pharmaceutical products will increase the final cost of these products paid by the end consumer (ordinary Ukrainian citizen) from 30% to 50% (at the expense of application of extra charges at each link of the supply chain).

As soon as the aforementioned Report of the International Monetary Fund does not anyhow mention the possible preferences for certain categories of pharmaceutical products it is likely that in case of implementation of the recommendation mentioned in the Report, increase of prices to the pharmaceutical products will affect all social groups, as well as the pharmaceutical sphere in general.

With consideration for the financial situation in the country such legislative solution will not likely conform with provisions of Article 4(1)(6) of the Tax Code of Ukraine indicating social fairness (i.e. correspondence of taxes and dues to the levels of the paying capacity of tax payers) as one of the main principles of tax legislation.

There are also doubts whether the increase of the VAT rate applied to the pharmaceutical products will allow reaching the goal declared by the International Monetary Fund, i.e. to increase the amount of payments made to the state budget of Ukraine approximately by UAH 20 bln.

It is more evident that 1.5-fold increase of prices for the pharmaceutical products (caused by cancellation of VAT preferences) will make the vital and essential drugs very expensive for the patients.

In its turn, decrease of the demand for the pharmaceutical products will result in shrinking of the pharmaceutical market of Ukraine which will neutralize the positive effect for the budget (in the form of additional payments accrued at the expense of VAT applied to supply of pharmaceutical products) forecasted by the International Monetary Fund.

It needs to be noted that the idea of cancellation of the VAT preferences in relation to pharmaceutical products had been earlier proposed by the Ministry of Finances of Ukraine in its draft law on tax reform in 2015. However, also with consideration for argumentation of the society, the Law of Ukraine No. 909-VIII as of December 24, 2015 (which introduced amendments to the Tax Code of Ukraine within realization of the tax reform) has kept the mentioned preference unchanged.

The practice of provision of preferences in relation to supply of pharmaceutical products is quite widespread in the European Union. According to the public media as of 2016 the majority of European countries apply the VAT rate to the pharmaceutical products which is well below 21% recommended by the International Monetary Fund for Ukraine. Moreover, a number of European countries additionally apply a decreased tax rate towards certain types of pharmaceutical products.

It also needs to be mentioned that even in the countries where supply of pharmaceutical products is taxed with a general VAT rate (applied to supply of other products) certain categories of pharmaceutical products are taxed with considerably decreased tax rates.

For example, in Austria, Czech Republic, Finland and Slovakia apply the VAT rate in the amount of 10% to all pharmaceutical products, 9% – in Estonia, 8% – in Poland, 5% – in Croatia (for prescription drugs), in Cyprus, in Lithuania, in Hungary (for all medical drugs), 0% – in Great Britain (for all medical drugs), 2.1% – in France (for certain types of drugs), 4% – in Spain, and 6% in Portugal, Greece and the Netherlands.

It is also notable that most states in the USA (where there is no VAT, but a sales (turnover) tax) provide preferences regarding the supply of prescription drugs (supply of such products to final consumers is exempted from the mentioned sales tax).

A problem of access of the population living in the developed countries to pharmaceutical products is partly in the state system of reimbursement which is in its initial stage in Ukraine yet.

That is why we, as consumers of pharmaceutical products, may only voice our hope that, while approving recommendations of the International Monetary Fund on establishment of the VAT rate towards pharmaceutical products in the amount of 21%, our legislators will come to a balanced decision and, will stipulate the preferences for essential drugs (which totally corresponds to practices of the European Union and the USA).

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