UAC Deputy Chairman for Tax Policy, a partner of Crowe Erfolg Ukraine, and the Deputy Chairman of the Tax Committee at the CCI Olga Bohdanova told us why reducing the VAT rate to 14% on intermediate agricultural products is beneficial for both - the state and farmers in her blog for Agravery.

The bill №3656, which reduces the VAT rate from 20% to 14% on intermediate agricultural products, is beneficial to both - the state and agricultural producers. It does not provide for budget losses, as the VAT rate on final consumption goods remains at 20%. Accordingly, the price of goods for the final consumer does not change. The state has received its 20% of finished products, and will receive.

At the same time, the bill helps to reduce abuses in VAT fraud, and, accordingly, saves budget funds from embezzlement. Currently, a trader is reimbursed 20% of VAT when exporting grain/industrial crops. In a case of adoption of the law, the compensation will be 14%. As a result, it will be economically unprofitable to resort to certain "twists", because the rates for such companies’ services are quite high. This should provide some transparency in VAT management. And that is why this bill is supported by the State Fiscal Service of Ukraine.

The costs for the use of borrowed funds and the amount of VAT which was paid to the manufacturer's budget are reduced.

Now about the economic effect for agricultural producers. For a farmer, a reduction in the rate on intermediate agricultural products means that he will need a smaller amount of advance/prefunding for products during the sowing period and a smaller amount of VAT will be paid to the budget.

Let's look at an example. The farmer can take money for sowing in a bank, can be credited with goods: plant protection products (PPP), fuel, seeds, etc., or can receive an advance from a trader for the purchase of agricultural products.

For example, the farmer took from the trader an advance of 120 conventional units (hereinafter - USD), where USD 20 is a VAT liability. For example, he spent USD 40 on wages and taxes. The remaining USD 60 he spent on the purchase of PPP and fuel and in this purchase USD 10 is at the VAT credit. That is, such a farmer paid USD 10 of VAT to the budget (USD 20 of VAT liability minus USD 10 of VAT credit). That means, the movement of cash from the farmer is: 120−40−60−10 = USD 10 remains. If the rate is 14%, the advance will be USD 114, where USD 14 is a VAT liability, and we need to pay to the budget USD 4 (USD 14 of VAT liability minus 10 USD VAT credit). Then the costs of the farmer are the same as at a rate of 20%. That means, the cash flow at a rate of 14% for a farmer will be: 114-40-60-4= USD 10 remains. That is, it is false to say that farmers will receive less money. As we can see from the example, the balance of money from the farmer does not change, as well as the amount of income without VAT.

However, any trader who lends, sets a certain rate for the use of money and taking into account this forms the value at which he is ready to buy agricultural products. For example, if a trader pledges 18% per annum for six months of use of his USD 120, then USD 11 are the value of per cents (120*18%/12*6). If we say that the farmer will receive not USD 120, but USD 114 (at a rate of 18%), but because the amount is less, the payment of per cents will be USD 10 (114*18%/12*6). That is, for farmers the amount of costs for the use of borrowed funds will be less.

Or another example. The farmer sold the products for USD 120 including USD 20 of VAT liability and USD 100 is his income. But the buyer does not pay him. The farmer is forced to take a loan to replenish working capital at 18% per annum for six months. That means, its per cents’ expense will be USD 11 (120*18%/12*6). This means that out of USD 100 income he will pay USD 11 to the bank, the balance is USD 89. If the farmer sold the product for USD 114 including USD 14 of VAT liability and USD 100 is his income and the buyer does not pay him. The farmer is forced to take a loan to replenish working capital at 18% per annum for six months. That is, its per cents’ costs will be USD10 (114*18%/12*6). This means that out of USD 100 income he will pay USD 10 to the bank, the balance is USD 90.

Therefore, a reduction in the VAT rate is a reduction in the cost of borrowed capital.

A negative VAT value is not a problem

Another sensitive point is the negative VAT value. Farmers are worried that there will be inspections by the tax service, because the amount of VAT credit can be higher than the VAT liability, even in situations where the farmer does not export products. This situation can arise if, for example, a farmer makes capital investments in the construction of elevators, warehouses, machinery, etc. That means, such a farmer's purchases with VAT at a rate of 20% are significant, and sales with VAT at a reduced rate of 14%. Or the farmer spent a lot for sowing (purchases at a rate of 20%) but did have good crops and income is not significant (sales at a rate of 14%). Well, for example, a farmer got USD 114 of currency receipts including USD 14 of VAT liability and USD 100 income. And spent USD 114 including USD 9 of VAT credit. That means a negative value - USD 5.

Thus, the basis for conducting an unscheduled documentary inspection is that the payer has submitted a declaration in which: (1) the budget reimbursement is claimed (if there are grounds for inspection specified in the Section V of the TCU), and/or (2) a declared VAT negative value, which is more than UAH 100 thousand (the paragraph 78.1.8 of the TCU). However, I do not see any problem in this case. Farmers who do not engage in "aggressive" optimization (ie do not cooperate with "twists", do not sell products for cash, etc.) will undergo such inspections and receive a VAT refund, which can be used to replenish working capital.

In this aspect, it is worth to mention the pharmaceutical industry. It buys all raw materials at a rate of 20% and sells at a rate of 7%. They a priori always have a negative VAT value, which the state reimburses them all the time. So, the industry has been operating since 2014 and quite successfully. The most important thing that we need to understand here is that there are no negative problems if the farmer complies with the law. The main thing for the tax service is to make sure that the tax credit, due to which a negative value arose, is "clear". That means, if the inspection shows that the farmer really bought fuel from a reliable supplier, PPP, he really uses them in his business, then such an agricultural producer will not have problems with VAT refunds. Those who are "scrolling" VAT schemes are worried.

Just like pharmacists, there are developers who build shopping malls. It takes an average of three years to build a mall. All this time they buy materials, services with VAT. They have no obligations at all. Our law provides for VAT refunds in such situations. And they are reimbursed UAH tens of millions.

Administration is not complicated

Farmers are worried that the bill №3656 will complicate administration. I want to emphasize that no complication will occur. The rate of 14% on intermediate agricultural products does not provide for the recalculation of input VAT.

Farmers should not be afraid of this bill and reduce the VAT rate. You just need to understand all details and understand their benefits from such changes.n

Wednesday, 25 November 2020


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