27/ 06/ 2014

Due to the efforts and active cooperation of the European Business Association (hereinafter – the Association) with the Cabinet of Ministers of Ukraine (hereinafter – the CMU) on 24 June 2014 the Ministry of Economic Development and Trade of Ukraine elaborated and promulgated the Draft Resolution of the CMU “On Certain Issues of Implementation of Subpart 197.1.1 of Part 197.1 of Article 197 of the Tax Code of Ukraine” (hereinafter – the Draft Resolution). The Draft Resolution defines the list of national and imported baby goods for newborns, the supply operations of which are exempted from value-added tax (hereinafter – VAT).

Background: For a long time, experts from the Association were working on proposals with regard to developing this list of goods.

Under subpart 197.1.1 of part 197.1 of Article 197 of the Tax Code of Ukraine No2755-VI, dated 2 December 2010 (hereinafter – the Tax Code), the supply operations of baby food products and baby goods for newborns are exempted from VAT according to the list, adopted by the CMU. However, it is worth noting that the Tax Code does not approach differently the tax exemption for domestic goods and imported goods, while the CMU Resolution No996, dated 8 September 1997, contains a list of nationally produced baby food products only, sales of which by dairy kitchens, specialized shops and distribution points are exempted from VAT.

Such preferential treatment of domestic producers, as was repeatedly emphasized by the Association, not only infringes the Tax Code provisions, but also goes against the international obligations of Ukraine. Namely, we are talking about paragraph 1 of Article III of Part II of the General Agreement on Tariffs and Trade of 1994, one of the fundamental WTO documents, which stipulates that internal taxes affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products should not be applied to imported or domestic products so as to afford protection to domestic production.

Moreover, for instance, domestic producers do not manufacture food for children with allergies and digestive dysfunction, premature babies, and other similar products for children with special needs. However, such products have the closest formula to breast milk and help to raise healthy children. The exemption from VAT according to our expectations will enlarge the baby food market, raise accessibility of the products to the public and, therefore, play a significant role in ensuring a healthy generation of young Ukrainians.

We are glad that the state bodies are open to cooperation with business and welcome the Draft Resolution. We express our gratitude to the representatives of the ministries who were involved, and to our member-companies for their active participation and persistence in solving the problematic aspects.

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