Metallurgical and agricultural enterprises, the engines of a stagnant economy, which provide the main foreign exchange earnings from product exports, report an artificial blocking of export VAT refunds. In December, the State Fiscal Service (SFS) appointed massive additional inspections, which blocked the VAT refunds payment. Enterprises faced a working capital deficit. Many of them are not able to pay employees' salaries in the near future. The consequences of the current SFS actions might be even more serious: deterioration in the performance of leading metallurgical and agricultural will lead to a decrease in foreign exchange earnings in the country and hryvnia devaluation, experts warn
Why does State Fiscal Service block VAT refunds
SFS closes the loops in the budget by artificially transferring part of the export VAT refund to January 2020, which affects the real sector of the economy, the press-service of Ukrmetallurgprom associations of metallurgical enterprises said on Monday evening. "Mining and metallurgical enterprises that provide 12% of Ukraine’s GDP, 30% of foreign exchange earnings and about 700,000 jobs; in December they have not received more than 80% of their declared VAT refund, which totals about 86 million USD. According to our sources in the SFS, this is primarily due to a lack of funds in the country's budget. This time, this problem is being solved by a large transparent business, and not by effectively combating the shadow economy.
Agricultural companies also report about the problems with the artificial blocking of VAT refunds. “Indeed, exporters of agricultural products had problems in December: the State Fiscal Service informed them of additional checks to confirm the correctness of the VAT refund amounts declared for payment. Prior to the checks, payments were blocked. Nine large agricultural companies have reported such a problem," Leonid Kozachenko, the president of the Ukrainian Agrarian Confederation, notes.
The VAT refund is a common practice in Ukraine since 1997. Exporters are reimbursed for the VAT that they pay domestically when purchasing goods and services (for the production of export products). Products are exported at a zero rate. “Thus, the tax credit of enterprises exceeds obligations. The difference is claimed for reimbursement," Serhiy Salivon, Director of the Department of Economic Policy of the Federation of Employers of Ukraine, explained.
According to him, enterprises, which are members of the Federation of Employers, also faced the problem of delays in refunding export VAT.
“Enterprises have been subjected to numerous inspections, and thereby they are deferred VAT payments for a month. If the supervisor appoints an audit, this is automatically plus 30 days to the deadlines. The largest the recipients of compensation in the country are Arcelor Mittal Kryvyi Rih, Azovstal, Ilyich Iron and Steel Works of Mariupol. Surely they would not receive them,” Salivon assures.
He added that quite large enterprises from other industries face the problem: “In particular, in the mechanical engineering industry, the Lutsk SKF faced such a situation. The SFS is well aware that it sends inspections to transparent, multinational companies that are honest taxpayers and have found no violations. They just want to delay the process and postpone payments to January.”
Last year in December there was a similar situation.
Difficult times for Ukrainian exporters
Today, farmers and metallurgists are already going through difficult times. The situation with an artificial delay in VAT refunds further complicated their financial situation. “Over the course of several months, mining and metallurgical enterprises have been trying to inform that the industry has been in a deep crisis since the beginning of 2019, as evidenced by a drop in steel production and a record loss in the first three quarters of 2019. During the crisis, MMC enterprises do not have enough funds for accounts, it’s also not possible to mobilize these funds over the course of several days,” the Ukrmetallurgprom official statement reads. It is also said that the leading national industry is forced to work in conditions of a significant reduction in prices on the global steel market and a significant increase in the cost of metallurgical production.
Ukrainian metallurgists face protectionist measures that countries have been actively introducing in the past few years. At the same time, they have to work in conditions, when there is virtually no domestic market for their products.
“Since the beginning of the year, Ukrainian mining and metallurgical enterprises have been working with a significant lack of financial resources. A delay from the state of more than 86 million USD in VAT refunds, to which metallurgists have absolutely legal rights, is, to put it mildly, surprising. New SFS head Serhiy Verlanov repeatedly publicly emphasized that they were actively working on the administration of VAT in order to prevent the typical situation of the end (past, - ed.) of the year and delay refunds. July VAT in December became a record in recent years," Ukrmetallurgprom assures.
In the context of artificial delays in VAT refunds, we are talking about the agricultural and metallurgical sectors, which remain the locomotive that pulls other stagnating sectors of the Ukrainian economy.
It is worth noting that the biggest problems with VAT refunds were during the government of Mykola Azarov when payments were actually suspended. This led to a significant decrease in profitability in the largest metallurgical and agricultural industries, related industries. For at least the past two years, the state has regularly refunded VAT to large industrial enterprises. The sudden and unreasonable termination of the timely return of VAT to industrialists will destabilize the economy and can inflict a severe blow on the reputation of the new president and his team.
“The current situation looks like sabotage against the government, including against the principles of business support declared by Ukraine’s president,” the Ukrmetallurgprom association officially stated.
Catastrophic economic consequences
The situation with the non-payment of VAT will cause a serious blow to the economy. “It will be especially painful for metallurgists who worked in the unfavorable price environment for the second half of the year,” Salivon said.
“Untimely VAT refunds will lead to delays in payments to thousands of suppliers and contractors who may have difficulty paying salaries on the eve of the New Year holidays. Administrative washing of working capital from the industry in the form of untimely VAT refunds is likely to lead to a further reduction in production, as a result of which the budget of Ukraine will not receive tax revenues, and the country will receive foreign exchange earnings,” Ukrmetallurg message reads. Of course, this will lead to the devaluation of the hryvnia.
The biggest crisis for industrial cities could be the untimely payment of wages, and in the future, the complete cessation of payments. In turn, this will entail the non-payment of taxes, which will influence employees of budgetary spheres.
Consequences will be no less severe for farmers, Leonid Kozachenk, head of Ukraine's agrarian federation, notes. Given the shortage of working capital, they will not be able to purchase everything necessary for the timely implementation of activities as part of the spring sowing campaign.
"It’s too early to talk about the disruption of the sowing campaign, but it’s obvious that the campaign will not be so effective. The timing of the work can move forward, which will lead to certain losses in the volume of the crop. The southern regions, where traditionally, due to climatic conditions, will feel this especially acutely campaign starts earlier," he assures.
According to Kozachenko, in January, farmers should already sign contracts for the purchase of mineral fertilizers, and by the end of the month, they will need to accumulate at least 215 million USD for the purchase of these products to fertilize winter crops in February - March on frozen ground. From February, farmers must buy seeds for sowing, since in March the sowing company will begin in the south of the country. They also need funds for the purchase of diesel fuel.
Agricultural producers were put in a situation of shortage of funds on the eve of the most resonant reform - the opening of the land market. "You know, reform would open the land market. The farmers already have a shortage of funds, but where else can they get money to buy land from? Unfortunately, the country's leadership cannot answer this question. Therefore, while our farmers will wallow with their problems, foreign companies and oligarchs will simply buy up their land plots," Leonid Kozachenko states.
In the current situation, large industrial enterprises should declare an emergency.
"A few months ago there was a parliamentary initiative to abolish the reimbursement system altogether. The farmers came up with the argument that they are working and planning their processes as part of the marketing year from July to July," Mykola Gorbachov said.
“This would be absurd and would have disastrous consequences. In countries of destination where products of Ukrainian exporters are sold, VAT will still be charged. If Ukrainian producers are not able to refund VAT input, their products will simply become uncompetitive. After all, they will have to make the difference in the final price,” Serhiy Salivon noted.