Ukraine. Special VAT regime, budget subsidies, monopolization of the agricultural sector

12.01.2017

On December 26, President Petro Poroshenko signed the Law “On State Budget of Ukraine for 2017.”

The adopted State Budget was marked with revolutionary changes: the special VAT regime for agricultural companies is completely cancelled, and the agricultural sector operates on standard VAT terms and under a subsidy system. The number of full-fledge VAT settlement participants will reach 47,697 producers of agricultural produce (official data as of November 1, 2016). Earlier the benefit money of these companies will run into the company - government relationship.

There begins the practical implementation of the IMF’s initiative for the soonest possible switch of Ukrainian farming companies to the European mechanisms of tax administration and financial support. This is a positive and actually reformist step. But, as ever, the problem lies in detail, in preparedness for such a drastic solution. After all, any managerial decision is ultimately aimed at creating incentives for further development, not at punishing market participants.

Over the recent years, agriculture has been driving the country’s economic development. Its share in GDP grew steadily while the industry’s share was on the decrease. In Q3 2016, the agricultural sector’s GDP portion in terms of the previous year’s prices exceeded one-fifth and reached 21.73%. share in GDP structure

According to the Ukrainian Agrarian Confederation’s estimates, agricultural companies had to pay roughly UAH 93 Bl to the Budget in 2016 as VAT, excises, the fixed tax, the social tax, the profit tax, land and real estate taxes. This figure equals nearly 17% of the agricultural sector’s total product value. The cancellation of the special regime automatically brings to the Budget the amount of cancelled tax benefits (some estimates say it approximated UAH 30 Bl** in 2015).

In the period after the special regime, agricultural enterprises will very likely face rather painful consequences:

  1. An increase in financial expenses. In the real life, there will work out the well-known aspiration of administering centers to run at least part of this money manually and put in issue or hold off part of VAT refunds.
  1. More difficult access to subsidies. Enterprises which met the special regime requirements were granted mass and equal access to this regime irrespective of their size and relationship with authorities. In the new conditions this resource will be accessible according to procedures set by the Ministry. However, the ProZorro use experience shows that digital systems of data processing and determining the best performance do not rule out manipulating them by the “company - administrator” tandem. The above procedures have not yet even been brought to the notice of responsible regional executive authorities, let alone agricultural companies. It is still unknown when and in which form this will be done, though the year has already begun and growers need to plan their spring fieldwork.
  1. Distribution of the subsidy resource. The basic principle of distributing the budget subsidy is set out in the law on the 2017 State Budget: proportionally to the value of farming produce sold by the agricultural producer. In fact, this approach is aimed at supporting primarily large enterprises. With the total amount of “Financial support to agricultural producers” subsidies approved at quite a modest UAH 4.8 Bl, the bulk of it will be used up by major agricultural companies.   

Analysis shows that the following risks of agricultural producers are quite evident at the moment:

- insufficient preparedness for the switch to the standard (common) terms of VAT payment and the budget subsidies system;

- unequal conditions for the distribution of subsidies.

Agricultural producers will shortly understand the above-mentioned risks and correspondingly modify their behavior in line with long-term scenarios:

- firstly, they will raise prices for their produce to compensate for growing costs;

- secondly, the more advantaged position of major producers for gaining financial support will encourage concentration processes in the agricultural sector.  The trend towards active mergers and acquisitions in Ukraine’s oligarchic economy will lead to the formation of large monopolies in the agricultural sector as soon as in the coming 3-5 years.   

The scenarios of further agricultural production monopolization in Ukraine will be discussed in UkrAgroConsult's next article dealing with the consequences of the special VAT regime cancellation and the new system of agriculture development subsidies.

 

UkrAgroConsult