Selective tax policy destroying fair competition in the agrarian market

14/ 02/ 2019

In December 2017, the Verkhovna Rada of Ukraine adopted the so-called “soy-rapeseed amendments”, which cancelled the VAT refund on soybean and colza seeds from September 1, 2018 until December 31, 2021, and on rapeseed from January 1, 2020 until December 31, 2021.  Such actions obliterated the principles of free competition.  Indeed, producers of soybeans and rapeseed, who were deprived of the right to receive state financial support through the mechanism of VAT refunds when exported, are placed in unequal competitive conditions versus producers of other crops.

At the end of December 2017, there were attempts to restore the “status quo” by registering bill No. 7403-2 on the reinstatement of VAT refunds for soybean and rapeseed exports, which would have been the optimal solution for restoring the competitive environment. The business community supported this legislative initiative.  However, the situation changed by the end of summer 2018 – an alternative law 2440-VIII was adopted and entered into force, which made exceptions for producers who independently grow the above-mentioned products on agricultural land.

It should once again be emphasized that selective tax policy, in the form of a budget reimbursement of VAT refunds for the export of soy and rapeseed to agricultural producer enterprises only, violates the principles of free competition.  Such an approach discriminates against the rights of other exporting companies, small and medium-sized farmers, who were also deprived of the opportunity to receive a budget refund of VAT.  As a result, this may lead to an increase in the shadow grain market in Ukraine and cause a reduction of revenues to the state budget, since small and medium-sized farmers who are not able to export their products on their own will be forced to sell goods for cash.

Even today, the consequences of such a discriminatory policy are tangible: producers of soybeans suffered significant financial losses since they cannot sell their goods at world prices because of the artificial limitation of demand. Given the fact that Ukraine’s oil and fat sector only processes 27% of soya and 7% of rapeseed, soybeans and rapeseed growers are forced to reduce the planting of these crops, which will reduce the currency revenues to the state budget.

Ukrainian rapeseed has high demand in the high-margin markets of the EU, but the negative effects of non-reimbursement of VAT on this oilseed crop, which will start on January 1, 2020, will be even more severe. After all, in addition to reducing the area of ​​crops in Ukraine, European plants that are geared for rapeseed processing will suffer significant losses. This will lead our European partners to prefer rapeseed from other regions, so we can lose the EU market. This situation can lead to the “removal” of rapeseed and its crop rotation and the loss of technology working with them, which threatens the gradual depletion of soils.

In 2014 (from the beginning of October and until the end of December), Ukraine already had a similar system of selective VAT refunds, in which only about 500 companies could benefit.  According to preliminary estimates, it amounted to only 1% of all farms at that time. Not surprisingly, the largest Ukrainian agricultural holdings were the recipients of VAT, while most farmers and foreign exporters suffered significant losses because of the impossibility of reimbursing VAT.

Last week in the Verkhovna Rada bill No. 10027 was registered, which proposed to reinstate VAT refunds for the export of oilseeds (soybeans and rapeseed).

Experts of the European Business Association’s Grain and Oilseeds Committee agree with the justification for the need for this legislative initiative. In particular, the fact that such a situation in the market contradicts Part 3 of Art.  42 of the Constitution of Ukraine, according to which the state provides protection of competition in entrepreneurial activity.  In a civilized country, it is important to do the utmost to prevent unjustified restriction of competition.

Irina Dushnik Executive Director of the Committee on Grain and Oilseeds
At the same time, the existing situation contradicts the commitments taken on by Ukraine in its accession to the World Trade Organization and the signing of the Association Agreement. For example, the relevant EU Council Directive on a common system of VAT does not provide for restrictions on the right of certain categories of economic operators to refund VAT when exported.

The grain business community calls for support of the relevant bill and the restoration of fair conditions of taxation and proper competition in the agrarian market.

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