End of special VAT regime for agribusiness
According to “Finalization Provisions” of the Tax Code, the special VAT regime for agricultural producers will end on January 1, 2017. As a reminder, the issue concerns a form of rebate, in which Art. 209 of the Tax Code currently allows taxpayers to retain from 15 to 50% (depending upon the type of agricultural products sold) of the VAT collected from sale of the agricultural products they produce after the return of input VAT.
While there were and still are some attempts to extend such regime to future periods, the current position of the government, which seems likely to prevail in the end, that there will be no further extension of this regime. Therefore, agricultural producers should probably prepare to live without such rebates.
The issue not only affects agricultural producers currently under this regime, but also buyers. As a matter of principle, the elimination of this special VAT regime may be welcomed by business buyers of agricultural products, as this shift takes away incentives for various manipulations with agricultural products in order to get VAT benefits. When for the buyer the VAT paid to the supplier is fully recoverable as a VAT credit or state refund, and the seller can keep a portion of the received VAT, there is strong incentive for the seller to increase that portion. For instance, one trick is to buy for cash from individuals, and then sell on products with VAT rebates as the buyer’s own production. Because such producers are mainly on fixed agricultural tax in lieu of income tax, there is no need to recognize such expenses. Another “option” can just be sham deals, when no real products change hands, but merely the respective paperwork. While the “benefits” of such operations may technically be utilized only at the level of agriproducers under that regime, the tax authorities mainly try to attack the buyers of agriproducts if there are any suspicions, as they are more easy targets with real money to collect in fines. Removing tax incentives may hopefully bring a final “peace” to this sphere, and provide much relief to businesses dealing with agriproducts down the chain.
However, on January 1, 2017, with the official ending of this special regime, it may not yet be the end of the story. For a couple of years after we may see various “projections” of the past from this regime.
The issue also concerns the transition to a general regime – for instance, if a prepayment is made now, when the supplier is still under the special regime. Under the current rules of VAT recognition of the “first event” (prepayment or supply, whichever comes first) the buyer shall get a VAT credit and a VAT refund, while the seller retains the respective portion of VAT, even if no supply is yet made. In such a way, the application of this regime may be extended for at least one more season beyond 2016. In fact, something like this also happened last year, when the portion of VAT to be retained by the seller was reduced from January 1, 2016 from 100% to the current range of from 15 to 50%. Reportedly, there were “presales” at the end of 2015 aimed at “catching” the outgoing 100% benefit. Last year, the change was additionally complicated by the change in the VAT regime for exported agricultural products: while earlier no VAT credits and refunds were allowed, from January 1, 2016 VAT credits and refunds were allowed regardless of the date of purchase of the exported products (as the export would already be made after January 1, 2016). Therefore, there was clear incentive to buy (or even just prepay) before January 1 and export in 2016. However, this was only for those who were sure such change would happen by the very last days of the year 2015, or for those who were “clever enough” to make respective documents at the very beginning of 2016 and backdate them to 2015 within the deadlines for the registration of VAT vouchers under the Tax Code. In any case, the benefits from the “edge” of this change in the VAT regime at the beginning of this year were mainly “insiders” who were able to “cope” with the tax authorities.
It seems that with the anticipated ending of the regime, we will see the same “game”, which is not fair for everyone. In order to deal with the potential transition issues discussed above, the Cabinet of Ministers registered on Sept. 15 draft bill No. 5132. This draft envisages that until January 1, 2019 no VAT refunds (including ones already claimed by the date this provision comes into effect) will be provided with respect to VAT paid on agricultural products not yet actually received. This looks like an offer to play a corruption game. Refunds may be available only until January 1, 2017 (the date that this rule is expected to come into effect) and then probably halted for the whole agrichain for two years. As the terms of VAT refunds effectively depend not only on the law, but also on the discretion of the tax authorities issuing respective “tickets” to the state treasury, being in time for the deadline is also a matter to be determined by the tax office. The risk of a complete halt in VAT refunds in relation to agricultural products after January 1, 2017 arises because the tax authorities cannot tell from the standard tax reports whether a claim for a VAT refund refers to already supplied products. Therefore, we may anticipate that everything will come to a halt until there are checks by the relevant tax audits, the right to which is also renewed by the said draft bill. When there is such a audit, nobody can exclude that the tax authorities will not play their “old game” of claiming that no actual supplies were made, and the operations were just sham deals. Another question is over the “queue” for such audits: who will be audited and confirmed first by the auditors. By the way, the current wording of respective provision of the draft bill limits VAT refunds not just to purchases from agriproducers under the special VAT regime, but on any purchases of agriproducts even further up the chain – which is unsafe position for those not buying directly from agriproducers under the special VAT regime.
As such, the discussed transition might be harmful to taxpayers because of a lot of uncertain points are left to be decided by the tax authorities. To protect the interests of honest taxpayers, the suggested transitional provisions have to be substantially reworked.
Judgment in case of Serkov v. Ukraine
Traditional tax Xmas gifts
The new social contract on VAT
Might the VAT “exemption” for soybean, sunflower and rape export not be used?