Talking point:VAT issue update

  • Ihor Pikhurko Financial Director  Hafele Ukraine
  • Roland Kaschny General Director,  KLINGSPOR TOV
  • Markiyan Malskyy Head of West Ukrainian  Branch Office in Lviv Attorney-at-law,
  • Max Deminskyy General Manager of  SE “Sorensen and  Haahr”
Issue 36, June 2011.

Ihor Pikhurko Financial Director Hafele Ukraine

Though the investment climate in Ukraine improves, the VAT refund issue is still one of the most critical obstacles to attracting foreign investment. Most companies have the legal right to claim VAT reimbursement but few of them can state that it is an easy process.Automatic VAT refund procedures have already been introduced in the 2011 Tax Code. However few foreign
companies may actually be eligible for the automatic VAT refund procedure. The reason lies in the numerous conditions which companies must satisfy in order to qualify. At the same time, significant amounts of outstanding VAT for 2009-2010 have not been processed yet. Not having the access to VAT refund, companies must seek other sources of financing to make their business more competitive in the market. Being aware of the VAT refund problem, many companies have postponed investments as they would currently add an additional 20 VAT to investment cost with no guarantee that this amount can be recovered according to tax
legislation. Enhancing the Ukrainian investment environment definitely requires setting up a transparent and fair VAT refund process, with industry confidence that the Government will adhere to these rules.

Roland Kaschny General Director, KLINGSPOR TOV

We are a typical start-up Company, establishing our own production facility in the Sokal Region. We import a considerable amount of equipment and raw materials. The VAT is reimbursed after a delay and 50 of the originally claimed amount is accrued. 50 should be pre-paid as a profit tax. However, no new production facility will turn an immediate profit. This issue has been discussed with the local tax authorities for several months already and is still unsolved. We have been waiting since December 2010 for a refund of approx. 500 000
UAH for completed construction activities.There is a wide range of improvements for local tax authorities to implement if they are to support foreign investors.

Markiyan Malskyy Head of West Ukrainian Branch Office in Lviv Attorney-at-law, LL.M., MILE

The problem of VAT refund in Ukraine (or rather its chronic non-refund) is a well-known fact and probably the most discussed topic in business circles. The traditional reason, which creates an enormous debt for VAT refund, is the deficit of funds in state budget. However, even top government officials admit to the presence of corruption in the VAT refund system. Therefore, the implementation of the automatic VAT refund is particularly important for Ukraine. The change envisages the regulation of taxpayers’ relationships with the government and purports to eliminate the influence of the subjective factor on the resolution of VAT refund issue.
The implementation of VAT refund, provided by the Tax Code, will considerably facilitate the procedure and terms of refund. To obtain the VAT refund the taxpayer has to comply with certain criteria, and the determination of compliance should also be automatic. However some provisions of the Tax Code on automatic VAT refund contain obscure norms and procedures, which still give the possibility for abuse by tax bodies and may lead to an insignificant
number of companies obtaining the VAT refund automatically. Therefore, the improvement and efficiency of the automatic VAT refund procedure ought to be our first priority. So far a major concern remains that the positive idea of automatic VAT refund will never really be brought to life and taxpayers will still be “negotiating” their refund in exchange for advance tax
payments or write-offs.

Max Deminskyy   General Manager of SE “Sorensen and Haahr”

Our company has current VAT liabilities from the state’s side. Tax reimbursement within the jurisdiction of the Lviv Tax Inspector flows without significant delay. However, there are still
issues on VAT amounts sent to Kyiv STA. Recently, we have bought a lot of consumables abroad (due to a lack of supply in the domestic market) and amounts which are to be checked by STA can be suspended. I think there is no need to discuss the importance of fund reimbursement on time, especially concerning VAT paid on imported goods which can be easily inspected. The new Tax Code with its transitional provisions is “an added headache”: few people understand its innovations, even in the tax office itself. Hopefully, the situ-
ation will be corrected soon and we will get more detailed explanation.