VAT as a liquorish feeder for Ukrainian oligarchs

Author : Oleksiy Kushch

Source : 112 Ukraine

In 2017, Ukraine has compensated the exporters over USD 4,3 billion for the value added tax
18:00, 12 January 2018

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112 Agency

In 2017, Ukraine has compensated the exporters over USD 4,3 billion for the value added tax. This sum exceeds the expenditures of the central budget for the army, education, medicine, science, and innovation. Four billion euros are the top of the current rental economy model in Ukraine, aimed at satisfying the interests of a dozen clans that control the country's largest financial and industrial groups. Ukraine’s entire economy, including its population, small and medium businesses, collects taxes in order to pay compensation to the raw materials and semi-finished products with low added value exporters, and, as we can see, the trade balance still remains negative. The country has created a mechanism for the destruction of the real sector of the economy, which brings benefits to small handful of "ultimate beneficiaries," at the time when the whole country is hardly working to fill it. If we apply the physiological metaphor to describe this process, it would look like forty million northern lemmings are rushing toward the precipice, hoping for a miracle to save them. But a miracle would not happen. Lemmings just need to stop, whereas this action cannot be attributed to some supernatural forces. In order to avoid a disaster, they need to think rationally.

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Buying goods in the store, we pay 20% of the value in a common “coin box” called VAT. An average person cannot come to the tax refund to get the amount of tax paid. All our money goes to someone’s pocket, because it is an indirect tax and consumer pays its, the amount of VAT is already included in the cost of goods, required works and services. Small and medium businesses are also not allowed to share the VAT pie: most small businesses work on a single tax and are unable to receive reimbursement, although they buy goods and services, the cost of which is increased by the amount of tax. As for the average business, its place in our country is also "average". The right to compensation seems to be as it is, but it will not always be possible to realize it. The fiscal services are wiped off with cameral checks, not to mention the risk of blocking tax invoices written out in favor of counterparties. There is no need to think about reimbursement, but only about how not to substitute your client, who is waiting for the registration of a tax invoice in his favor in the electronic register.

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Primarily, the system of VAT reimbursement was justified by the need to stimulate exports. By reimbursing the tax to exporters, you can "clean" export goods from the internal taxes. As a result, goods that are exported to foreign markets are exempt from indirect taxes applied domestically and gain a competitive advantage in the world labor distribution system. It is not difficult to see that a sufficiently low tax rate should be applied for the functioning of this mechanism, since in the case of a 20% VAT rate in Ukraine, the state provides almost 20% profitability for industries with a low level of added value (raw materials). In this connection, one case from the work of the credit department of a commercial bank is recalled. The client offered to finance his project on growing flax fiber. On paper, the business plan was unprofitable (-5%). The businessman has replied to it: well, so the state compensates the 20% VAT for me, as a result we get + 5%.

In real life, the VAT refund system did not lead to a positive trade balance in Ukraine: for many years there has been a deficit of foreign trade in the country, and imports significantly exceed the exports. In obese years, this indicator expands to "minus" 10-15 billion dollars. According to the National Bank of Ukraine (NBU) forecasts, in 2017-2020 the deficit of the payments balance will reach about 4 billion dollars annually. And in January-November 2017, the negative balance of trade in goods in Ukraine reached USD -7.836 billion, although for the same period in 2016 this figure was USD -6.018 billion, that is, by USD 1.8 billion less. As we see, the increased stimulation of exporters did not make our country proficient in terms of foreign trade. In 2017, each Ukrainian has paid for about USD 110 for this model of export incentives.  

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In December 2017, the largest exporter of sunflower oil Kernel was the leader in obtaining a budget refund of VAT: it received USD 26 million. Next comes Arcelor Mittal (Kryvyi Rih) company (USD 23,5 million). Then three metal factories from Rinat Akhmetov’s group come; they have received 51 million USD. Producer of chicken meat "Myronivsky Hliboproduct" has got USD 12 million, "Caterpillar elevator" – USD 8,8 million, exporter of agrarian products "Engelhart" – USD 6,3 million. The above-mentioned Kernel company, after which, as the media writes, stands the well-known deputy Vitaly Khomutynnyk (about 5% of shares), according to the results of the last year, received about USD 320 thousand of export compensation. 

Ukraine has created a system to stimulate the export of raw materials from the country and still pays a high price for it. According to the results of 11 months of 2017, the amount of value added tax, which after deducting the compensation fell into the state budget revenues, amounted to USD 2 billion, according to the GFS data, while the personal income tax rate was USD 2,4 billion. That is, the taxation of all the added value created in Ukrainian economy was less than the tax levied on the population. On the one hand, this proportion shows that the structure of our tax payments becomes similar to the EU countries (the amount of VAT is inferior to income taxes there). On the other hand, we have realized that our taxation level (20% VAT) is one of the highest, and almost half of the population lives below the poverty line. Why does the tax on income of the poor population exceed the income from the value-added tax of domestic producers, although the tax rate is at a very high level? Hence, the reason is not in the application of "European standards." Ordinary people lose their last money, but most of the collected VAT goes not to the budget, but to the pockets of the oligarchs, and the money that is generated in a single electronic register for compensation is no longer enough, and the state has to "top up" in the system about USD 0,7 billion annually.

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Actually, VAT on Ukrainian goods should have been reduced to at least 15%, which would have a deflationary impact on the economy (reduce the consumer price index to 5-7% per year), so it would give an additional impetus to the development of the domestic market and promotion of goods of domestic producers. At the same time, VAT import should be maintained at the level of 20%, with the exception of imports of technology and high-tech equipment. This will partially protect the domestic market from cheap imports. As for the VAT refund, the export of raw materials must be completely deprived of this type of budgetary support. Naturally, it is impossible to destroy this mechanism moment-by-moment without damage to the country's balance of payments. A transition period of 3-5 years is necessary, when the amount of compensation will be reduced by 5% annually. Reimbursement of VAT must be paid to exporters of goods with a high level of added value and innovations, which have an increasing return on the scale of production, and not a diminishing, as it is now observed in the raw materials and agriculture. In addition, the export of raw materials should be subject to an additional duty of 5%, which will allow the formation of a special reserve fund for economic development. Only in such a variant of fiscal interaction, the export of raw materials will gradually slow down, and the one that remains will "work" for restructuring the economy towards more complex industries.

Related: Ukraine's vicious circle of dodging taxes

It is expected that the low level of domestic  VAT would contribute to the development of the domestic market, small and medium businesses and the tertiary sector of the economy (services, medicine, education, and science). Reduction in the rate of the domestic VAT without damage to the revenue side of the state budget could be achieved by reducing the amount of export compensation for this tax. Preferably, export reimbursement should be a financial bonus for efficiency and innovation, not a reward for the one who owes the country's commodity bins faster than everyone else.

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