EBA urges not to create corruption risks through the possible establishment of a manual regime for regulating agricultural exports

21/ 11/ 2023

Agricultural exports are the main export item that provides foreign exchange earnings, taxes, and jobs, thus becoming the basis for macroeconomic stability and food security of the state and the states function in creating and ensuring proper business conditions and uninterrupted sales of Ukrainian agricultural products is becoming even more crucial. However, a series of draft laws have recently been registered in the Verkhovna Rada of Ukraine regarding innovations in grain export regulation. The European Business Association and, in particular, representatives of the Grain and Oilseed Committee have repeatedly pointed out that control measures should be commensurate with the riskiness of a particular transaction. At the same time, control measures for supplies made by companies with a global reputation and long experience in the Ukrainian market should be different from those applied to lesser-known companies that may be classified as having a higher risk profile. Clear criteria should be established to determine the potential riskiness of transactions. In this context, it is worth noting that the business has analyzed the above draft laws. The accompanying documents state that these initiatives are aimed at combating the shadow export of goods, in particular, minimizing widespread tax evasion schemes when taxpayers carry out operations for the export of certain types of grain and oilseeds outside the customs territory of Ukraine. The authors of the draft laws (in particular, No. 10168-2 and No. 10169-2) point out that grains and oilseeds are currently the main export items, so Ukraine needs to create all possible safeguards to prevent abuse and fraudulent schemes in this area, and to ensure more foreign exchange earnings for the state and the stability of the national currency. However, the mechanisms underlying the documents, according to the business, will have diametrically opposite consequences. Draft law No. 10168-2 introduces a non-transparent, complex, and manual mechanism for allowing market participants to export agricultural products, which is unacceptable in a country that has declared a course of fighting corruption. In addition, it is proposed to change the procedure for value-added tax refunds, which will bring the country back to decades ago when VAT refunds were not a predictable process, which, in turn, will repel international investors. The business believes that the adoption of the relevant changes will not lead to the expected results and may potentially cause complications and unfavorable market conditions that will have a negative impact on the entire industry, especially in the current environment, given the critical need to maximize grain exports, which are significantly limited due to military actions by the russian federation. Draft laws No. 10168-1 and No. 10169-1 propose innovations that will be extremely burdensome for farmers who, despite the large-scale destruction of agricultural infrastructure, field mining, and reduced production, make every effort to grow and store crops, providing the country with food. Looking at the individual provisions of the draft laws, draft laws No. 10168-2 and No. 10169-2 propose to establish a new procedure for VAT refunds, namely, the return of budgetary refunds as a percentage of foreign exchange earnings. Such rules significantly delay VAT refunds, which in turn leads to the diversion of working capital, which is critical for all agricultural market participants who refund VAT. In practice, it is impossible to track which goods were exported and which goods generated foreign exchange earnings. This is because agricultural products are products with generic characteristics that are stored and shipped in bulk rather than in batches separated by tax invoices. This creates an opportunity for the supervisory authority to deny VAT refunds without the taxpayer actually being able to prove the legitimacy of the VAT claimed for refund. This creates an additional danger for agricultural processors, as it obliges them to prove that the exported oil, meal, and husk, for which the foreign exchange earnings were refunded, were produced from a specific batch of oilseeds, which is impossible to do accurately given the generic characteristics of the grain, processed products and the specifics of the processing process. Accordingly, VAT refunds based on the export of oil, meal, and husk may become a discretionary decision of the tax authority and may give rise to endless, long-lasting litigation that will delay VAT refunds and drain working capital. In addition, Draft Law No. 10169-2 establishes an export duty of 10% on goods for which the exporter has not registered an export tax invoice. This may encourage the supervisory authority to deliberately delay the registration process and/or unreasonably suspend the registration of the tax invoice to induce the exporter to pay the export duty. The draft Laws No. 10168-3 and No. 10169-3 introduce a system for confirming the origin of agricultural products in the State Agrarian Register, which, according to business representatives, needs to be finalized, as it currently provides for a complex mechanism for its implementation and operation. In particular, the approaches to the functioning of the Register need to be worked out in great detail to avoid situations of blocking exports for reputable companies solely due to technical errors/inconsistencies in the Register (for example, a tax invoice cannot be issued for a quantity of goods exceeding the agriculture Limit according to the Register, and, accordingly, exports will not take place without a tax invoice). It should also be noted that it is crucial for businesses to understand all potential legislative changes and to be able to prepare for new mechanisms introduced by new legislative initiatives in a timely and high-quality manner. Otherwise, such changes may become a technical reason for stopping exports for bona fide exporters. According to the EBA Committee member companies, the adoption of the above-mentioned draft laws may create corruption risks due to the possible establishment of a manual export regulation regime, significantly complicate the work processes of all involved exporters, lead to delays in the dispatch of ships, and generally threaten the possibility of exporting Ukrainian agricultural products. Therefore, given the above, the EBA appeals to the Government and lawmakers to take a deliberate approach to the process of legislative changes in the field of agricultural exports, making balanced, not hasty, controversial, and risky decisions. For example, the CMU has recently introduced a procedure for the verification of agricultural entities, which pursues the same goals as the above-mentioned draft laws. In addition, various state authorities have tightened control over the return of foreign currency earnings in Ukraine. Therefore, EBA member companies propose to allow the existing new procedures and tools to work fully and, based on their experience, to develop legislative proposals together with business and the CMU to improve, expand, and deepen the effect of these control tools.

However, a series of draft laws have recently been registered in the Verkhovna Rada of Ukraine regarding innovations in grain export regulation.

The European Business Association and, in particular, representatives of the Grain and Oilseed Committee have repeatedly pointed out that control measures should be commensurate with the riskiness of a particular transaction. At the same time, control measures for supplies made by companies with a global reputation and long experience in the Ukrainian market should be different from those applied to lesser-known companies that may be classified as having a higher risk profile. Clear criteria should be established to determine the potential riskiness of transactions.

In this context, it is worth noting that the business has analyzed the above draft laws. The accompanying documents state that these initiatives are aimed at combating the shadow export of goods, in particular, minimizing widespread tax evasion schemes when taxpayers carry out operations for the export of certain types of grain and oilseeds outside the customs territory of Ukraine.

The authors of the draft laws (in particular, No. 10168-2 and No. 10169-2) point out that grains and oilseeds are currently the main export items, so Ukraine needs to create all possible safeguards to prevent abuse and fraudulent schemes in this area, and to ensure more foreign exchange earnings for the state and the stability of the national currency.

However, the mechanisms underlying the documents, according to the business, will have diametrically opposite consequences. Draft law No. 10168-2 introduces a non-transparent, complex, and manual mechanism for allowing market participants to export agricultural products, which is unacceptable in a country that has declared a course of fighting corruption. In addition, it is proposed to change the procedure for value-added tax refunds, which will bring the country back to decades ago when VAT refunds were not a predictable process, which, in turn, will repel international investors.

The business believes that the adoption of the relevant changes will not lead to the expected results and may potentially cause complications and unfavorable market conditions that will have a negative impact on the entire industry, especially in the current environment, given the critical need to maximize grain exports, which are significantly limited due to military actions by the russian federation.

Draft laws No. 10168-1 and No. 10169-1 propose innovations that will be extremely burdensome for farmers who, despite the large-scale destruction of agricultural infrastructure, field mining, and reduced production, make every effort to grow and store crops, providing the country with food.

Looking at the individual provisions of the draft laws, draft laws No. 10168-2 and No. 10169-2 propose to establish a new procedure for VAT refunds, namely, the return of budgetary refunds as a percentage of foreign exchange earnings. Such rules significantly delay VAT refunds, which in turn leads to the diversion of working capital, which is critical for all agricultural market participants who refund VAT. In practice, it is impossible to track which goods were exported and which goods generated foreign exchange earnings. This is because agricultural products are products with generic characteristics that are stored and shipped in bulk rather than in batches separated by tax invoices. This creates an opportunity for the supervisory authority to deny VAT refunds without the taxpayer actually being able to prove the legitimacy of the VAT claimed for refund. This creates an additional danger for agricultural processors, as it obliges them to prove that the exported oil, meal, and husk, for which the foreign exchange earnings were refunded, were produced from a specific batch of oilseeds, which is impossible to do accurately given the generic characteristics of the grain, processed products and the specifics of the processing process. Accordingly, VAT refunds based on the export of oil, meal, and husk may become a discretionary decision of the tax authority and may give rise to endless, long-lasting litigation that will delay VAT refunds and drain working capital.

In addition, Draft Law No. 10169-2 establishes an export duty of 10% on goods for which the exporter has not registered an export tax invoice. This may encourage the supervisory authority to deliberately delay the registration process and/or unreasonably suspend the registration of the tax invoice to induce the exporter to pay the export duty.

The draft Laws No. 10168-3 and No. 10169-3 introduce a system for confirming the origin of agricultural products in the State Agrarian Register, which, according to business representatives, needs to be finalized, as it currently provides for a complex mechanism for its implementation and operation. In particular, the approaches to the functioning of the Register need to be worked out in great detail to avoid situations of blocking exports for reputable companies solely due to technical errors/inconsistencies in the Register (for example, a tax invoice cannot be issued for a quantity of goods exceeding the agriculture Limit according to the Register, and, accordingly, exports will not take place without a tax invoice).

It should also be noted that it is crucial for businesses to understand all potential legislative changes and to be able to prepare for new mechanisms introduced by new legislative initiatives in a timely and high-quality manner. Otherwise, such changes may become a technical reason for stopping exports for bona fide exporters.

According to the EBA Committee member companies, the adoption of the above-mentioned draft laws may create corruption risks due to the possible establishment of a manual export regulation regime, significantly complicate the work processes of all involved exporters, lead to delays in the dispatch of ships, and generally threaten the possibility of exporting Ukrainian agricultural products.

Therefore, given the above, the EBA appeals to the Government and lawmakers to take a deliberate approach to the process of legislative changes in the field of agricultural exports, making balanced, not hasty, controversial, and risky decisions. For example, the CMU has recently introduced a procedure for the verification of agricultural entities, which pursues the same goals as the above-mentioned draft laws. In addition, various state authorities have tightened control over the return of foreign currency earnings in Ukraine. Therefore, EBA member companies propose to allow the existing new procedures and tools to work fully and, based on their experience, to develop legislative proposals together with business and the CMU to improve, expand, and deepen the effect of these control tools.