Grey agricultural market in Ukraine: what measures should be undertaken in order to solve this problem?
The existence of grey (shadow) agricultural market in Ukraine is nothing new, but during the years of 2015 and 2016, the shadow schemes had increased considerably.
According to experts, the grey agricultural market in 2014 constituted 25-30%, while currency earnings returned to the country. In 2015, this figure increased up to 35-40%. At the end of 2016, the shadow schemes constituted about 50% of all market transactions with grain, oil and other crops while a significant share of currency earnings did not return to Ukraine.
Pursuant to market participants and experts, the total amount of unreturned currency earnings for 2014-2016 made up over USD 3-3.5 billion.
It should be noted that one of the reasons for its existence and the steady growth of a shadow agricultural market has been the issue of hidden land lease. Significant shares of arable lands are not registered and not reflected in the registers, and, therefore, no payments are made for such usage of arable land. It should also be noted that no one pays taxes on salary (Personal Income Tax and Unified Social Contribution), tax on income from sold products, Value Added Tax on supplies on the customs territory of Ukraine.
Such shadow schemes negatively affect the state budget of Ukraine as well as the bona fide players of the agricultural market, and, therefore, the existent situation requires urgent counteraction.
The measures of verification of origin of grain which are applied by the tax authorities in practice, lays down an additional burden on diligent exporters of agricultural products. Such measures complicate, interfere and even suspend the normal business activity of real participants of the agricultural market while the illegal activity of shadow participants remain untouched. The arrest of ships with grain of great traders in seaport of Ukraine in 2015, is another example of the results of application of such measures. Yet, the steady growth of shadow agricultural market during 2014-2016 explicitly indicates that these measures are non-working and may not solve the problem of the grey agricultural market. Moreover, they encourage the corruption in the tax authorities since these issues are under their control.
Ukraine is not the only country who faces the problems of illegal (shadow) schemes of export of agricultural products.
In the Russian Federation, shadow business schemes in the grain export market allowed intermediaries to profit from VAT, while the budget lost about 65 billion rubles per year. The Russian Federation decided to solve this problem by the active participation of the Federal Tax Service. In May 2017, large exporters and traders signed the “Charter in the Sphere of Agricultural Products Turnover”, promising to cooperate only with diligent market participants. By the middle of August 2017, this document was signed by about 450 companies.
The document is aimed at ensuring that all participants in agricultural products turnover bear a tax burden in good faith so that all trade transactions are carried out in transparent ways and exclude a multistage process of resale of agricultural products in order to create an intolerant attitude towards companies evading taxes.
Yet, the Russian Federation has a strong vertical of executive authority that allows controlling the fulfillment of political decision by the state authorities.
Due to Ukraine’s political system and high level of corruption (in tax authorities as well) which has consistently increased during the last years, needs to seek a solution for the problem of shadow agricultural market in the other plane.
The most crucial change is to make all participants of export agricultural market to pay their taxes and to return the currency earnings to Ukraine. Therefore, the origin of agricultural products (and grain as well) and the registration of arable land are not key topics at the moment.
By that logic, we must seek a solution to the grey agricultural market problem. We believe that this may be achieved by means of changing the order of application of a zero rate of VAT for exportation of agricultural products (grain as well) from Ukraine.
If the exportation of products is the first event (stage) and payment will be done afterwards, the export transaction shall be subject to 20% VAT with its subsequent reconsideration to 0% VAT upon the receipt of currency earnings for the exported products. Diligent exporters will have the possibility to use the input VAT accumulated during the purchase of agricultural products while the shadow players will have to pay 20% VAT when exporting agricultural products abroad.
The mechanism of application of a 20% export VAT with its further reconsideration to 0% VAT (upon the return of currency earning) shall work automatically excluding the possibility of manual control from the tax authorities’ side.
Even in the case of currency earnings not being returned to Ukraine in full, the state budget will have additional 20% VAT on shadow schemes of grain export. Moreover, a 20% rise in the cost of the illegal shadow schemes of grain export may affect the attractiveness of their application and encourage the players of agricultural market to get out of the shadow.
This also should restore the fair competition on the agricultural market and let the diligent exporters to work without intervention from the tax authorities to their normal business activities.