VAT refunding remains a major issue in Ukraine

VAT tax refunds due businesses are presently paid by the government of Ukraine with lag times that range from months to over a year, and in some cases with an ultimate bureaucratic denial of valid refund claims...

VAT tax refunds due businesses are presently paid by the government of Ukraine with lag times that range from months to over a year, and in some cases with an ultimate bureaucratic denial of valid refund claims.

The size of the refunds due private businesses and the time it takes to pay them in Ukraine during the past two years represents the worst record in the world by any government.

The problems could be solved by expeditious action by the new government to change certain slow and many times corrupt administrative practices.  A new laws should be passed by the parliament that would recognize expeditious payment of VAT refunds as a government obligation that included penalties and interest for failures to refund in a timely fashion.

The new government of Ukraine did make some large VAT refunds in late January of 2008 but the payment only represented around 15% of that owed to some companies.  These larger payments need to continue in a timely manner.

BACKGROUND

For business and industry in Ukraine, dealing with the country`s chaotic and ever-changing tax laws and regulations is one of the most troublesome burdens.

Dealing with Ukraine`s State Tax Administration (STA) is a problem usually requiring much larger than usual expenditures for accounting staff and huge amounts of management time.

For some USUBC members the issue of getting refunds of VAT paid on exports has become a problem amounting to hundreds of millions of dollars affecting all aspects of company decision-making.

A strong case can and should be made that VAT refund failures have a very direct and highly negative impact on farmers through the pricing of commodities, particularly sunflower seed.

As Ukraine has slowly rationalized its agricultural production to put greater emphasis on sunflower seed production, sunseed crushing has become a highly dynamic and profitable sector.

Recent projections suggest that Ukraine accounts for 14 percent of world sunflower production in the current marketing year and is the third largest exporter of sunflower seeds.

However, in order for Ukraine to keep and expand its position as one of the world`s great oilseed producers, the country desperately needs to relieve the VAT refund burdens that have fallen on many Ukrainian manufacturers and processors but disproportionately on the country`s sunseed sector.

Under Ukrainian law, when crushers export their products, they are entitled to have the VAT element of the seed purchase price refunded within three months latest. However, the VAT refund arrears continues to grow as the government either refunds in a very delayed fashion or in some cases finds pretexts not to refund at all.

The failure to receive VAT refunds causes severe financial problems for some crushers and has an extremely negative effect, particularly in two ways.

First, crushers make decisions about whether to purchases and the pricing of purchases of sunflower seed based on world markets but more importantly based on their projected profitability.

Second, crushers who are showing low or no profitability because of uncertain or non-existent VAT tax refunds will naturally be less active in (1) offering advance payments for crops that are often essential for farmers to purchase pre-season inputs and (2) more conservative in their  pricing because of a lack of their own funds, tied up in the government bureaucracy.

Company boards, dealing with the necessity to make investments in places that best serve the company`s interests and future profitability, tend to see Ukraine as an increasingly risky venue for major investments. This has already caused some major investments to be delayed and some cancelled permanently.

All of the above is further complicated by the fact that tax authorities operated regionally and their budgets are related to their net revenues. Therefore, tax offices have a clear incentive not to refund the VAT on exports.

An immediate and intense joint effort has been undertaken by the United States government in conjunction with business organizations such as the U.S.-Ukraine Business Council (USUBC) to make the new Ukrainian government fully cognizant of the negative effects that state VAT tax refund policies have on (1) the income of farmers through lower purchase prices of sunflower seeds and (2) the negative investment decisions caused by a failure of companies to received VAT refunds in a timely fashion.

The problem of VAT refunding should be one of the major issues for Prime Minister Yulia Tymochenko`s new Council of Investors (CI).

The CI should recommend the government immediately set up a high level committee, with international business participation, to jointly  pursue and recommend specific steps the new government could take to solve the VAT refund issue.

USUBC Agribusiness Working Group

U.S.-Ukraine Business Council (USUBC)

Washington, D.C., Monday, February 25, 2008

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