VAT reduction provokes the emergence of new tax fraud in the processing of milk and meat - Tulush

Despite the intention of the provisions of the document to combat tax abuses in the agricultural market, some of its norms, on the contrary, provoke the emergence of new optimization tax schemes.

This opinion was expressed by the HEAD of the department of financial, credit and tax policy of the National Scientific Center "Institute of Agrarian Economics", Ph.D. Leonid Tulush, writes the press service of the NSC.

According to him, we are talking about the inclusion of livestock products in the list of types of agricultural products, in the implementation of operations for the supply of which a reduced VAT rate of 14% is applied, including:

live cattle; live pigs; live sheep; in whole MILK.

“After all, the MEAT and milk processing market is represented by both VAT payers and business entities that supply the relevant products without VAT. This happens due to the formation of optimization schemes using the subjects of the simplified taxation system, which are legally exempted from the need to charge additional VAT on the price of products that they supply,” Leonid Tulush emphasized.

it is noted that according to expert estimates of meat and meat products market operators and official statistics, the share of meat supplies (processed and packaged) and meat products (excluding poultry meat supplies) without VAT is at least 35% of its total volume. The corresponding share of supplies without VAT on the dairy market exceeds 15%.

According to the scientists of the Institute of Agrarian Economics, in the case of the purchase of meat and dairy raw materials with VAT at a rate of 20%, its processing and subsequent sale already in the mode without VAT, the relevant entities receive an advantage of 2-4% of the cost of the final product, depending from the share of the cost of meat and dairy raw materials in the final price.

“That is, business entities that can organize their activities without the need to charge VAT on the cost of final products, have the opportunity to sell their products cheaper by the appropriate percentage - having the same profitability of activities, and the enterprise is a VAT payer, thus forming its competitive advantages” , — says Leonid Tulush.

The scientist emphasized that after the implementation of the provisions of the Law of Ukraine No. 1115 - in terms of reducing the VAT rate on operations for the supply of meat and milk raw materials to 14% - the benefit of business entities that purchase it with VAT, and sell the manufactured products in the VAT-free mode, has grown to 6-7%.

He noted that under such conditions, large producers of meat and dairy products, which have no other options for functioning than with VAT, experience tax discrimination, since they are forced to charge the difference in input (14%) and output (20%) VAT rates in fact at the expense of profits, thus reducing the profitability of their activities.

According to Leonid Tulush, such a situation may encourage individual operators of the meat and milk processing market to grind their business in order to prevent the need to charge VAT at the rate of 20% on the output.

“In order to optimize the tax burden, we should expect the appearance on the market of intermediaries that ensure the formation, in particular for dairy processing enterprises, of input VAT at their desired VAT rate of 20% - due to new tax transactions that will lead to a decrease in budget revenues and the formation of additional "earnings" for intermediaries from among the tax optimizers," predicted Leonid Tulush.

In his opinion, the practical implementation of the provisions of the Law of Ukraine No. 1115 regarding the application of a reduced VAT rate on operations for the supply of certain types of livestock agricultural products already during the first month of its application made it possible to identify a number of risks that contradict the very idea of ​​a legislative initiative to deshadow the agricultural business, and exactly:

stimulating the emergence of new tax optimization schemes as a result of the formation of appropriate motivation among business entities; reduction of VAT revenues to the state budget; the introduction of tax discrimination against conscientious taxpayers from among large and medium-sized processing enterprises, do not resort to the use of optimization schemes.

“Since the further application of the relevant legislative provisions may adversely affect the economic interests of business entities from among conscientious taxpayers and the state, livestock products should be removed as soon as possible from the list of certain types of agricultural products for the supply of which a reduced VAT rate is applied,” summed up Leonid Tulush.

It should be reminded that the Association of Milk Producers has already felt how the new tax initiative has added tension to the market in the first month of its operation.