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The Planned Cancellation of VAT Special Treatment for Agrarians and European Experience – Is the Game Worth the Candle?


Iryna Kuzina, attorney, Head of Kharkiv office at Ilyashev & Partners Law Firm
Source: Ukrainian News

As you know, the essence of VAT special treatment until 2015 was that the agricultural enterprises transferred to the special bank account the amount of tax that other companies would pay to the budget. The funds were used for designated purpose and could be used for production purposes.

The Law “On Amendments to the Tax Code of Ukraine and Some Other Legislative Acts of Ukraine Regarding Balance of Fiscal Revenues in 2016”, of December 25, 2015, No. 909-VIII, the special treatment was restricted. Since the beginning of 2016, 50-85% rather than 100% of the obligations to pay VAT of the agricultural enterprises are allocated to the special accounts. The remaining amount is paid to the budget. It means that tax burden on the agricultural enterprises has already increased since the beginning of the current year.

However, the International Monetary Fund insists on the complete cancellation of the VAT special treatment, and beginning with January 01, 2017 the preferential treatment should be fully cancelled – Article 209 becomes ineffective under subparagraph 4, paragraph 2, Section XIX “Final Provisions”.

The draft law “On Amendments to the Tax Code of Ukraine”, presented by the Ministry of Finance of Ukraine for discussion on August 09, 2016, envisages no amendments regarding the VAT special treatment for agricultural enterprises.

The initiative of the Ministry of Economic Development and Trade of Ukraine on return of VAT special treatment is discussed in the media. However, there is no such statement on the official website of the Ministry.

Cancellation of the special treatment will withdraw from circulation of the agricultural enterprise the amount of money equal to the amount of VAT liability, which cannot but affect the profitability.

Taking into account the strategic importance of agribusiness and the specific factors of development and risks, the agricultural enterprises are in need of state support.

You can not cancel the preferences without giving anything in return. However, what else would help the agricultural enterprises?

Thus, in the European Union, where business environment is generally better than in Ukraine, the agricultural enterprises receive direct subsidies.

It is envisaged in the Common Agricultural Policy (CAP) introduced in 1962.

To support the agricultural sector, the European Union spends more than a third of its annual budget.

In France, e.g. the amount of direct subsidy is EUR 405 per hectare per year. In addition, in case of adverse weather conditions, losses of the agricultural enterprise are covered.

However, to receive subsidies the farming enterprises are obliged to keep land in good agricultural and environmental condition, comply with all phytosanitary and veterinary rules – otherwise the subsidies will be canceled.

In addition to subsidies, the following instruments of supporting domestic agricultural producers are used:

– import duties to level the prices for imported products with the prices for products made in the EU;

– quotas for import of products into the European Union;

– reserve fund of products to intervene for price equalization;

– specific direct subsidies to farmers in the regions of cultivation of targeted products;

– production quotas and subsidies for “fallow land” to prevent overproduction.

At the same time, in April 2016 a trade representative of Ukraine Natalia Mykolska stated that the VAT special treatment for our foreign partners is an inconsistent privilege.

Therefore, the European agricultural producers have large subsidies and privileges that are not even considered in Ukraine in the foreseeable future.

So it is expedient or not to cancel the last privileges for agricultural enterprises and to preserve them not only for the economy as a whole, but also for the food security of our country, which is in the military confrontation? The answer rests with the government.

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