The key problem of VAT in Ukraine and many countries around the world is corruption and abuse, aimed at obtaining illegal benefits through budget reimbursement for a fictitiously formed tax credit. So, everyone may be wondering, where exactly a fictitious tax credit is formed and what its value is particularly in Ukraine?
The answer to this question can be obtained from completely open official statistics, but if they are analyzed from a certain angle. These are not macroeconomic indicators, because aggregate integrated figures are not very suitable for meaningful analysis, except for the identification of certain time trends. These are not indicators of the micro level, since the details do not show the overall picture. Attention should be focused in such a way as to see the macroeconomic picture and, at the same time, it should be sufficient to distinguish the details of the general economic “mosaic”. Among the financial indicators such data include the official data of the State Tax Service of Ukraine on the payment of taxes in the sectoral context, and among the economic – these are data of the intersectoral balance of Ukraine in terms of NACE, which de facto quantitatively characterize the existing objects of taxation: gross value added, wage fund, profit etc.
If we compare the indicators of tax revenues for individual taxes in the sectoral context with the tax bases of the respective taxes, and do it again in a few years to make sure that the conclusions are still valid, we can see an interesting picture giving much useful information.
To answer our question, we obviously need to look at the ratio of the structure of the received budget reimbursement with the structure of exports in the sectoral context. To begin with, let us remember that a budget reimbursement is a negative difference between the amount of a tax credit and a VAT obligation, which can de facto occur in only three cases. In the first case the VAT payer invests a lot, in the second the VAT payer buys materials / intermediate goods at the basic rate, and sells at a reduced rate, in the third – he is engaged in foreign economic activity, i.e. exports. Given that the first two cases are not about Ukraine (investments are meager, and according to Article 193 of the TCU the reduced tax rate is applied only to the supply of medicines to Ukraine, and 14% for agriculture was introduced only this year), then only the third option, export, remains, which applies a zero tax rate. As a result of comparing the data on the structure of budget VAT refunds and the structure of exports in terms of NACE for 2018, we have the following picture.
The figure shows how the corresponding indicators of industries according to the NACE are located around the line of uniform distribution. The hypothesis is simple and self-evident: if an economic entity / industry provides a certain share of the country’s exports, then in proportion to this share, or more precisely, ideally the same amount, the economic entities / industries should receive budget reimbursement. Of course, the realities of life and specifics of economic agents provide a certain level of variability, but in general, as we see from Figure 1, the pattern works. Of the 19 NACE, in fact, all are close to the line of uniform distribution, and the level of approximation, as evidenced by the trend line, is quite good. In particular, we see that the processing industry of our economy (marked C) in 2018 provided 54% of exports and, accordingly, received 52% of the budget reimbursement! The level of statistical convergence is quite impressive, which is confirmed by data for different years.
As can be seen from the figure, the two NACE industries fall out of the general rule. This is domestic agro-industrial complex, which is designated according to the NACE classifier as A, provided 17% of exports, and received only 2.2% of the total budget reimbursement for the economy. This is due to specifics of the activity, more particularly, in the production chain of agricultural producers the largest share is own production (more than 30%), which does not contain input VAT. Conventionally speaking, growing sugar beets or grain does not contain VAT, and it is very small in the final price of their sale.
At the same time, we have the wholesale and retail trade sector, which is marked as G, which receives 27.6% of the budget reimbursement for less than 0.1% of total exports in the economy! You say it may be a coincidence. My answer is no. If the same calculations are performed according to the same data by the same method, the picture remains unchanged. In 2017 and 2019, this industry received 31% of all budget reimbursement. It is clearly presented in Figure 2, which shows the same indicators of the structure of exports and budget VAT refunds for 2017-2019. Therefore, we can conclude that it is in this area the main part of the fictitious tax credit is formed.
Moreover, even according to the official data of the State Tax Service, which recently reports on VAT efficiency in terms of NACE, we can see that this figure is the lowest for industry G. For 11 months of last year, the average value is 1.3%, with a maximum of 16.98% in the field of state administration and security (referred to as O in the NACE). The simple, not weighted, arithmetic mean of this figure in the economy as a whole is approximately 7%. In the field of wholesale and retail trade, we cannot identify any specific features, such as for agriculture. Anyone is unlikely to trade at a loss for a long period of time. This area of activity has always been one of the most profitable and even in the crisis of last year did not become unprofitable. According to the State Statistics Service, for 9 months of last year, the operating activities of large and medium-sized enterprises in most sectors of the economy of Ukraine were unprofitable. In contrast, the highest profitability was recorded in sector J “Information and telecommunications” (24.2%) and “Wholesale and retail trade” (16.2%). Therefore, there is no reason to attribute low tax efficiency to any specifics. In this sector in 2019, according to the State Statistics Service, UAH 531.6 billion of value added was accumulated, which is 13% of the VAT tax base.
Therefore, comparing all the data together allows us to draw a conclusion that in Ukraine during 2017-2019, about 30% (!) of the budget VAT reimbursement was illegal. In the prices of 2019 it was UAH 43 billion per year or UAH 3.5 billion per month. To obtain such illegal benefit in wholesale trade in 2019, about UAH 260 billion per year or UAH 21.5 billion per month of fictitious tax credit was generated. I think it is no accident that our assessments coincide with those previously stated by various experts. Only one thing remains interesting: to what extent are the positive changes that took place in the field of VAT administration last year irreversible? We look forward to the relevant statistical reports of the State Tax Service and the State Statistics Service for 2020.
Kostiantyn Shvabii, expert of the Growford Institute, professor, Doctor of Economics for LB.UA.