Kesarev Consulting presented its vision of the VAT administration reform at the AgriInvestForum in Kyiv

Mikhail Sokolov, Executive Partner of Kesarev Consulting (Kyiv Office), became one of key speakers of the panel “Strategy of reforming the tax system and state support of agribusiness” within the annual AgriInvestForum, which took place in Kyiv, Ukraine on May 17, 2016.

AgriInvestForum is an annual national forum, organized by the Ukrainian Agrarian Council and the Ukrainian Agricultural Investment Council. It provides a vibrant networking platform for executives of Ukrainian leading agri and food companies, bankers, policy makers and regulators, investment funds, international financial institutions and leading business media to discuss recent agricultural market developments as well as wider macro-issues and the outlook for the country.

Kesarev Consulting is Forum’s years-long partner and one of its most active participants due to the profound expertise it has in the regulation and taxation of agriculture. This year Mikhail Sokolov was not only one of the Forum’s key speakers, but also the moderator of two of its four discussion panels: “Strategy of reforming the tax system and state support of agribusiness” and “Land reform”.

In his speech Mr. Sokolov highlighted major challenges for agrarian business deriving from poor VAT administration and reimbursement system: 

– current legislation actually sets limits in the State Budget for VAT refund, that stimulates the growth of public indebtedness on VAT refund and blocks the capital of exporters;

– according to OECD estimates, the system of state support of agribusiness (which functioned as of 2014) together with complicated VAT reimbursement and various forms of the non-fiscal regulation was equivalent to the operations within the general taxation system plus 8% turnover tax;

– considering both positive and negative changes of state support, in 2015-2016 the Ukrainian agribusiness remained in more unfavourable conditions compared to foreign one;

– the “paybacks” for VAT refund, illegal demands by the fiscal bodies on advance payment of the income tax as well as the unjustified refusals/ delays in VAT refund have forced the traders to reserve up to 1/3 of the VAT size to be reimbursed (expressed in FOB/CPT price difference);

– the State Fiscal Service (SFS) has filed a huge number of criminal lawsuits against the taxpayers for tax evasion, with only 6 to 7% of which resulting in judicial judgements in favour of the SFS; this may imply that the unjustified lawsuits can be a SFS’s method of decreasing the sums of VAT to be refunded and an instrument to fulfil the tax collection plans;

– the SFS in many cases cancels the tax credit with conscientious taxpayers based on their counteragents’ compelled self-incrimination in criminal proceedings on tax evasion without a possibility of the former to appeal against such decisions in the court as they are not the parties of respective criminal cases.

In order to solve these problems, with Kesarev’ direct involvement, the legislation was passed, which introduced the open-to-public register of VAT refund applications, based on the “first come – first served" principle, and reduced the possibilities for cancelling the tax credit and annulling the VAT payer certificates. This should limit the possibilities for VAT refund delay/ refusal and, therefore, reduce corruption.

However, register’s functioning remains complicated due to introduction of two registers for different types of taxpayers (under the pressure of influential MPs)  and incompleteness of the data filed into the register.

Against this background Kesarev Consulting initiated and took an active part in development of a number of draft laws, aimed at improving the register’s functioning and solving other VAT-related problems, which were approved by respective parliamentary committees.

The key draft laws are as follows: 

– No.3810 – introduces the single register of applications for VAT refund and decreases the number of reasons for cancelling the tax credit and application of fines;

– No.3848 – provides for:

– introduction of a special open-to-public treasury account for VAT collection and refund;

– implementation of the principle of VAT administration, according to which only a positive balance between VAT received and refunded should be transferred to the State Budget with no right to fix limits for the VAT refund in the Budget; this should result in reimbursing full amount of the VAT to be compensated.

– No.3851-1 – provides for restoring the VAT special regime for the agrarians till 01.01.18.

Kesarev also initiated a discussion of the concept and developed a draft law on the introduction of minimum social tax liability on paying personal income tax and a single social fee calculated per 1 ha of land, which will narrow the possibilities for tax evasion by tenants of land and thus will equalize economic opportunities of all agricultural producers.

In his interview to AgroTV during the Forum, M. Sokolov informed on the measures for the state support of agrarians, introduction of which was being discussed with participation of Kesarev:

– decreasing the VAT rate for certain types of agricultural products;

– decreasing the excise for fuel used in agriculture;

– alignment of taxation conditions for large and small farmers by implementing the European system of VAT credit compensation to small farmers, who are not VAT payers;

– programs of direct support of those sectors of agriculturethat require it;

– improvement of agrarians’ access to credits;

– implementation of the so called “check-off programs” based on the American model, according to which a part of the costs collected as taxes from agricultural producers of particular commodities should be transferred to agrarian associations, which should use them, under the state supervision, for promoting relevant production and supporting R&D. This would allow directing the scientists’ efforts to exact needs of agribusiness.