In 2020, Ukrainian farmers attempted to create opportunities to increase the country's export potential. Towards this, a number of laws were adopted - in particular, on agricultural cooperation and the VAT rate reduction on raw materials in the agricultural sector. In addition, the resumption of the Ministry of Agrarian Policy was initiated. In an interview with “GolosUA”, the UAC Deputy Chairman Mykhailo Sokolov spoke about the results of 2020 and plans for 2021.
Mykhailo, in 2020, in my opinion, the conditions in the Ukrainian agricultural sector have significantly improved for those who want to develop their agricultural business and intend to take the first steps in this direction. In particular, the bill №3656 was adopted in the second reading; it provides for the VAT rate reduction on certain types of agricultural products from 20% to 14%. How will this affect the conditions for Ukrainian products export?
In Ukraine, large volumes of agricultural products are exported by traders. They first pay the agricultural suppliers VAT rate of 20% and then this VAT must be refunded from the budget. Accordingly, if previously 20% was reimbursed, now 14% will be reimbursed.
What price should a farmer receive in Ukraine for his products: international market prices minus logistic’s costs, minus a trader's margin of 1%. By the way, international trade is without VAT: it is charged on import, and refunded on export.
Unfortunately, in Ukraine, VAT is not always refunded on time, and sometimes it is not refunded at all. Now traders estimate the risk of non-reimbursement at around 10%. As a result, they include an additional discount in the price - about 10% of the VAT refundable amount, or 1,6% of the price of goods with VAT. Now they will pay the grain suppliers the VAT rate of 14%. Accordingly, they will be reimbursed 14%. This will lead to the fact that the additional discount to the price with VAT will fall from 1,6% to 1,12%. This is an economy about 0,5% of the price. With an average annual realization from 1000 hectares of UAH 24 million, 0,5% will be UAH 120 thousand.
In a preliminary conversation, you said that this law had opponents at the stage of consideration in the Verkhovna Rada. They are sure that some agribusiness’s sectors will lose because of this.
No. We have exactly what famers gained from this law; formally, the budget is at a disadvantage, because now farmers are lending it for a smaller amount. Businesses located in different parts of the agricultural production and supply chain have lost nothing. The only loss that is possible for the agricultural producers is in their own business, who export part of their products on their own, because now they will have an increase in the amount of compensation from the budget, which has to be waited for two or more months. That's all possible loss.
At the same time, the agricultural industry in Ukraine is export-oriented. We produce three times more industrial cereals than we use. Accordingly, the positive effect of the VAT rate reduction on raw materials, which I have mentioned above, will be greater here than in any other industry. Taking into account the role of farmers in GDP, the volume of production, raw materials sale and purchase, as well as the volume of foreign exchange earnings in the agricultural sector, the entire economy will benefit from a decrease of the amount of VAT on raw materials.
Therefore, we believe that the bill is generally positive. Another question is that the specific numbers that we have given above measures this positive. However, the whole discussion that I hear operates not on these real numbers, but on myths that the processors will lose something. That is not true.
The Tax Code states that all contracts must be executed at a price excluding VAT. If the VAT has decreased, then you, as before, buy at a price without VAT - it is fixed in the contract, plus a new VAT, respectively, the price with VAT is reduced.
Did the farmers' counterparties lose because of this law? No. Because their payment of VAT to the budget will increase by exactly the same amount by which the cost of the raw materials they buy with VAT will decrease. In fact, they will even win because they will pay the corresponding money not on buying raw materials, but on paying tax to the budget, i.e. later for 1-2 months.
It is possible that the discussion that accompanied the adoption of this bill arose because farmers worked within the framework of the special VAT regime for a long time - a state support program that allowed the part of the VAT paid to the farmers not to be transferred to the budget, but to keep for themselves. As a result, many of them still do not understand that VAT is not the money of an enterprise and not a tax on its activities, such as a property tax, single tax or income tax, but a consumer tax. The only problem is that the business pays it in advance when purchasing material and technical resources or part of the factors of production, and then compensates itself for what was paid on selling its products. Therefore, the VAT rate reduction on agricultural products allows processors and traders to lend to the budget for a smaller amount, as we have already discussed.
In general, VAT is a tax, the amount of which is determined solely by how much the ultimate buyer pays, and then this amount, which was already paid by the consumer, is only distributed along different links of the corresponding production and supply chain. Accordingly, if you do not try to steal it, then the business should be indifferent to how much and at what stage it is paid - this is not its money, but the state's one.
By the way, the bill on the VAT reduction on agricultural raw materials - it is not our initiative, we did not develop it or we submitted it. But after discussing this initiative at the general meeting of the UAC members and on the board of the UAC, it was decided to support it, because the majority of the UAC members, as well as the members of the board of the UAC, found this initiative reasonable and useful.
Mykhailo, how are the things going with the resumption of the Ministry of Agrarian Policy after the Verkhovna Rada voted for the appointment of Roman Leshchenko to the post of agrarian minister?
It is quite easy to make a decision to restore the ministry, but to restore its work - is not. Yes, the Verkhovna Rada has already voted, there is a minister, but there is no ministry yet, and it will not appear soon. To return the ministry, you need to restore everything that was destroyed before. It is not easy: to create departments again, to transfer specialists from the Ministry of Economy, to fire them and to accept here or transfer them to another vacation. Someone will be fired out, because not everyone is up to the job and now it is the moment when we have to fire him or her. This huge bureaucratic work will take a long time, I think, at least until this year’s summer.
And in this situation, we can only feel sorry for Roman, because many people do not understand what he has to do and in what position he is now. I think that in the coming months there will be questions of such a type as “the ministry has been created, why didn't you do this and that?”. However, the answer is simple: during the first few months, the Ministry of Agrarian Policy will be restored. Let me remind you that when the SFS reform was carried out in Ukraine, it took about one year. This is a real term.
How do you assess the potential of Roman Leshchenko in a position of the Minister of Agricultural Policy?
He is a good candidate; the person has really proven himself over one year and a half. I believe that the signal that he gave to the market, working as head of the State Geocadastre, that this structure is not for theft, but for work, and those who will steal will go to jail, is what the agrarians need and what are waiting for. As long as there is no will of officials in the country not to allow theft in the executive branch, nothing good will happen in the country. Those who come to public service and earn money from corruption should go to prison - and nothing else.
The advantage of Roman Leshchenko's candidacy is also that he is not a stranger to farmers: he is an agricultural producer. He has established contact with farmers; he always supported them and was not afraid to meet with people and talk. By the way, the UAC, even before the vote in the Verkhovna Rada, announced its support for the candidacy of Roman Leshchenko. Again, Roman is not the UAC candidate. But if we see that a person is working, we support him. The same thing is with Taras Vysotskyi. There war a time when he headed the UCAB. And when there were rumors that they were going to dismiss him from the position of Deputy Minister (the Ministry of Economy, Trade and Agriculture - author), we supported him, because he really does his job well.
Mykhailo, in 2020 the Verkhovna Rada adopted the law on agricultural cooperation and you are one of its authors. On November 15, the law came into effect. Tell us about how it changes the rules of work for farmers.
In simple terms, this law allows Ukrainian agrarians to create agricultural cooperatives and organize the work of cooperatives according to the model that operates in those countries of the world where from 40% to 60% of all agricultural products are sold through cooperatives, and not like we do - less 1%. However, for the full realization of the corresponding potential, we still need to adopt the same changes in the Tax Code, as well as we need time. For example, in Lithuania, after the adoption of a similar law, the turnover of agricultural cooperatives increased 10 times over 10 years. This is, of course, a lot. But even if we can ensure the same growth rates, we will reach only 10% of agricultural GDP in ten years. The reason is that we start with a very low base. However, agree, this is no reason to do nothing. In our opinion, this is a reason to do more than our foreign competitors do.
As you know, in the west small and very small agricultural producers produce the main volume of agricultural products. Our medium-sized farms are very large for them, and there are simply no analogues of our holdings either in the EU, or in the USA, or in Canada. Their place is taken by cooperatives that unite small and very small agricultural producers. Accordingly, we believe that the adoption of the new law on agricultural cooperation, and then the amendments to the Tax Code (that has already taken place) will allow us to give an additional impetus to the development and strengthening of the market positions of our small and medium-sized farmers.
Mykhailo, the UAC Chairman A. Dykun, during his conversation with journalists, mentioned that in the Ukrainian agricultural sector it is worth expanding the range of finished products for export. In your opinion, what is needed to develop European sales markets for Ukrainian finished products and what can be done in 2021?
In this issue, the needs of the agricultural sector are not much different from the needs of all other sectors. To develop processing and high value-added industries, we need a reform of the judicial system so that the courts quickly take up cases and make fair and legal decisions. Reform of the law enforcement system - so that law enforcement agencies catch thieves and criminals, and not extort money from entrepreneurs. Railway reform - so that goods are transported quickly, immediately and do not disappear along the way, while the tariff should be lower than competing countries have. Now we are getting closer and closer to the collapse of rail transport, when many farmers cannot ship their products for months. Reform of connection to electrical grids - to reduce the cost and simplify the connection, as well as to give an opportunity for electricity consumers to build the linear facilities that they need.
I have listed the minimum required set of steps, without which it is still not profitable to build a refinery in Ukraine. Now, for example, it is more profitable to invest in Poland and build an appropriate plant for processing Ukrainian raw materials there, because they have solved these problems. However, if we want to get ahead, we must not only catch up, but also surpass our competitors in terms of attractiveness for doing business. This means a reduction in the tax and administrative burden, for example, the adoption of a law on the replacement of income tax with a tax on withdrawn capital, the launch of a pension reform, an increase in citizens' savings and the involvement of these funds in financing business development in Ukraine. Reduced regulation across a range of industries. Zero or close to zero tax and administrative burden for businesses in the field of applied research and education.
Mykhailo, in a preliminary conversation you mentioned that most suppliers are not satisfied with the conditions for working with supermarkets that delay payment for the sold goods. Can you tell us what the situation is now and how can we fix it?
The situation is very simple. Large retail chains have a dominant market position. Their market power is significantly higher than the market power of the vast majority of Ukrainian suppliers. As a result, they impose unfavorable and unfair working conditions on them. For example, the timing of chains accounting for many groups of food products is several times longer than the actual timing of the sale of such goods. In fact, retail chains are credited for free at the expense of suppliers. According to our estimates, the amount of such a free loan, i.e. what the chains have already received from buyers, but have not yet paid their suppliers, for the whole market it is about $ 1 billion. And this is not the only problem. There is also the imposition of unnecessary marketing services, the sale of shelf space, while the chains do not take responsibility for the sale of goods. Like, you pay us for our services, and if the goods are not sold before the expiration date, this is your problem.
At the same time, the chains are promoting their own brands that compete with the brands of manufacturers, however, as you can imagine, such competition is rarely fair. First, the chain wants, to sell its own goods, and not the goods of suppliers.
The result of this policy is that capital is pumped out of producers and increases the profits of the owners of retail chains. And they, in turn, either invest it in the development of their own business, or put it in their pocket. This is not so important as in both cases, they are enriched at the expense of Ukrainian producers. At the same time, they fail to pursue a similar policy with respect to large foreign companies.
It is possible and necessary to correct this situation. And there is no need to invent something new - in the same EU this problem is solved at the legislative level, limiting the appetites of retail chains in favor of national producers. Accordingly, we need to do the same, but taking into account which tools for such restrictions work effectively in practice, and which do not. At the same time, we need to simplify and reduce the cost of building new retail space, as well as help to increase the number of independent players in the retail market. As a result, we will increase competition not only in the fight for buyers, but also for suppliers.
Obviously, the owners of retail chains that exist on the market are not delighted with the corresponding proposals of farmers and the UAC, in particular. That is why, the draft law developed with our participation, which solves at least the first part of the relevant problems, is very difficult to promote it. Although the same Ministry of Economy takes the most active part in this work and manages the corresponding process. Let's hope that in the coming year we will be able to make progress on this issue and public interests will prevail over private ones.Monday, 18 January 2021