The issue of taxation of the agricultural sector is one of the most difficult for Ukrainian farmers, because there is a lot of speculation about it. In particular, it is believed that agriculture in Ukraine is subsidized, agricultural producers have many benefits and pay the least taxes compared to other sectors of the economy.

The participants of the online discussion "How much taxes do agrarian business pay in Ukraine: a comparison in terms of economic sectors and international practice", which took place on September 16, tried to find out whether this is true.

The agricultural sector is a donor for state and local budgets

According to General Director of the Ukrainian Club of Agrarian Business Roman Slastion, in fact, Ukrainian agriculture today is a donor for both local and state budgets. At the same time, every year there are attempts to increase the tax burden on agricultural producers. In turn, the stereotype of subsidization of the Ukrainian agricultural sector is reflected in the draft bills №5600 and №5636. The last one, by the way, proposes to double the single tax of the fourth group for agricultural producers.

At the beginning of his speech, Roman Slastion spoke about the tax instruments that farmers had over the years and gave tax data on how much tax Ukrainian farmers pay.

For example, in 2019, the agricultural sector paid UAH26.06 billion in taxes to the state budget and another UAH5.2 billion to local budgets. If we consider this amount as a percentage of the total amount of taxes paid by all sectors of the economy in 2019, it is 5%.

If we consider this amount in relation to the volume of sold products, the taxes in agriculture are 1.2%. For comparison, the wholesale and retail trade pays 0.7% of income tax and a single tax on sales, processing industry - 0.9%, power - 1.1%.

In addition, there is such a thing as an income tax on land lease in agriculture sector. According to an official information, in 2019, farmers paid UAH46 billion for the lease of land shares, of which - UAH9.1 billion was withheld as an income tax, which was almost 2% of revenue.

"Why am I talking about this? Because if farmers did not have a moratorium on the sale of agricultural land, most of them could buy these assets, like other industrial producers, and would own them without paying an income tax. Being hostages to the moratorium, farmers pay extra compared to the rest of the economy. If we take into account this tax, then agricultural sector pays twice as many taxes as all industries in Ukraine on average,” Roman Slastion said.

Another point that the tax service does not take into account is social agreements, he says. Most farmers pay charitable contributions to the development of local communities or local residents. Such payments usually range from UAH100 to 250 per hectare. And this is an additional UAH1.5-2.5 billions.

International experience

The UAC Deputy Chairman Mykhailo Sokolov in his speech compared Ukraine's agriculture with the agricultural sectors of competing countries according to the PSE (Producer Support Estimate) indicator, which is determined annually by the Organization for Economic Cooperation and Development (OECD) for a list of countries, which also includes Ukraine.

According to Mykhailo Sokolov, this indicator takes into account not only state support, but also other measures that affect the activities of agricultural producers. For example, support for prices in the domestic market, preferential taxation, or on the contrary, artificially lower prices in the domestic market or increase of prices for services which are used by agricultural producers (eg logistics).

"That means, this indicator gives an opportunity to see an integrated assessment of the impact of all state policy on the agricultural sector. And, according to this indicator, there is only one country that is in the list below Ukraine – it’s Argentina. The PSE is much higher in other countries. These data show that the Ukrainian agricultural sector is in a certain disparity compared to its foreign competitors. And if we pursue a policy of increasing this disparity, we can get results much worse than those that Argentina has now, which will later lead to a decline in production," Mikhail Sokolov said.

According to his estimates, if the Ukrainian agricultural sector was supported at the European level, at least UAH405 billion would have to be set aside for its state support in the budget. Instead next year's draft budget provides only UAH4.5 billion to support agricultural producers, which is 54 times less than is allocated by the European Union. And this is without taking into account the subsidies that, despite the support of the EU, each European country can allocate for the development of the agricultural sector separately.

The additional tax burden will destabilize the Ukrainian agricultural sector and lead to a loss of its competitiveness in the world.

Oleg Hetman, coordinator of the expert groups of the Economic Expert Platform, voiced the two biggest problems of the Ukrainian tax system, which were identified by the experts of their platform during a research.

The first problem is the high level of tax burden, in particular, on a salary budget. It is associated with excessive and not optimal redistribution of GDP through public finances at the level of development of the state.

The second one is the inconsistency of the tax structure with national characteristics and goals of economic development. In particular, direct taxes and labor taxation play too important role for a country where there is systemic corruption and where real estate and land taxes are weightless at the same time.

Regarding the taxation of the agricultural sector, according to Oleh Hetman, experts of the Economic Expert Platform believe that the single tax of the fourth group is a successful replacement for income tax.

"In fact, it is the tax on distributed profits that everyone has been dreaming about for many years, combined with the land tax. And it is a good example of replacing direct taxes (which are connected to real estate) and a good example of good administration where there is no dispute between businesses and inspection authorities about the amount of tax that should be paid. At the same time, the method of its calculation should be modified to take into account the peculiarities of agriculture management in arid regions," Oleh Hetman explained.

However, according to the next tax innovations, not all farmers will be able to stay on the single tax of the fourth group. For example, poultry farmers want to be classified as taxpayers according to the general taxation system. Executive director of the Union of Poultry Farmers of Ukraine Serhii Karpenko, expressed his opinion on this issue.

He believes that the draft bill №5600, which provides for such an innovation, violates the general principles of agricultural support and the principles of the tax code. According to him, the draft bill is discriminatory, as it creates a different approach to certain industries. And if nowadays the poultry industry is in such a danger (which should have been taxed differently) it means that the next one can be pork or beef producers.

Serhii Karpenko believes that such a legislative norm, first of all, will lead to an increase a level of illegal production and the use of cash when paying. Secondly, it will complicate the administration of taxes, because a part of the poultry farms has land plots under cultivation, and they will leave their activities on a single tax, so that at least some part of the production was profitable. To do this, they have to allocate poultry to a separate legal entity, and violate the existing structure of production.

"I do not know examples in the world when tax increase can stimulate business development. In our opinion, this norm, first of all, will harm small and medium-sized producers, because they are not so effective in terms of tax administration. It will also harm big business, but it will be able to transform and reduce the consequences of this situation,” he said.

Serhii Karpenko is also convinced that such an innovation makes the poultry industry even less attractive for investors. Nowadays about a dozen companies are sold, because their owners want to leave this business. But no one buys these companies, because they are unprofitable.

Chairman of the Verkhovna Rada Committee on Finance, Tax and Customs Policy Danylo Hetmantsev and Chairman of the Verkhovna Rada Committee on Agrarian and Land Policy Mykola Solskyi unfortunately could not join the discussion and answer questions from land market participants. However, the organizers expressed their intention to discuss these issues again as soon as possible and hear the answers from the legislature representatives.