A NEW TURN: WHAT IS BEHIND IT?

Over the past 10 years of struggle for survival, metal trade with Russia has now faced a new problem. The magazine’s editorial board addressed deputy head of department for international trade and economic cooperation of the Ministry of Economy Mr. Vladim


A NEW TURN: WHAT IS BEHIND IT?

A NEW TURN: WHAT IS BEHIND IT?

Over the past 10 years of struggle for survival, metal
trade with Russia has now faced a new problem. The magazine’s editorial board addressed
deputy head of department for international trade and economic cooperation of the Ministry
of Economy Mr. Vladimir SHEVCHENKO with a request to comment on Russia’s new tax policy.

On July 1, Chapter 21 of the second part of the new Tax
Code of the Russian Federation entered into force. The Code was enacted by the Federal Law
of the Russian Federation No.118-F3 “On entering into force of the second part of the
Tax Code of the Russian Federation and changes to a number of legislative acts of the
Russian Federation on taxes”.

Once again, “rules of the game” are changed for
Ukrainian and Russian exporters and importers as regards levy of one of the most important
taxes – value-added tax.

Before getting into details of these changes, let us
discourse on the history of the problem in brief.

January 1994: Ukraine introduced the following scheme of
VAT collection in foreign trade:

- VAT on commodity exports was revoked;

- VAT is levied on imports.

This system is based on the “destination country”
principle and is used by most countries worldwide.

By that time, the Russian Federation had the following
system of VAT collection in effect:

a). with non-CIS countries – Russian exports were exempt
from VAT, imports were subject to VAT;

b). with CIS countries – exports were subject to VAT,
imports – exempt.

On September 7, 1996, Decree of the President of the
Russian Federation No.1216 dated August 18, 1996 on levy of VAT on commodities that
originated on the Ukrainian customs territory entered into force.

By enactment of this Decree, Russia adopted three regimes
of VAT collection:

a). with non-CIS countries – Russian exports were exempt
from VAT, imports were subject to VAT;

b). with CIS countries (except for Ukraine) – exports
were exempt from VAT, imports were subject to VAT;

c). in economic relations with Ukraine – both exports and
imports were subject to VAT.

Russia’s introduction of asymmetric VAT collection in
export/import relations with Ukraine posed financial difficulties not only for Ukrainian
exporters but also for Russian exporters, who in fact now suffered from double taxation.

Levy of VAT on imports of Ukrainian commodities extremely
negatively affected Ukraine’s exports to Russia: by September 1996 Ukraine’s monthly
commodity export to Russia amounted to USD 500 million, whereas in 1997, this figure
dropped to USD 350 million, which corresponded to a 30% reduction.

Ukraine repeatedly voiced its concerns about the necessity
of settlement of VAT problem in bilateral trade. Due to the agreements reached on the
presidential level during the visit of President of Ukraine Mr. Leonid Kuchma to Russia on
November 16-17 1997 and pursuant to Protocol of negotiations between governmental
delegations of Ukraine and Russian Federation, which took place in Moscow on December
11-12 1997, the parties agreed to reciprocally revoke VAT collection on imports of
commodities that originated on the customs territory of the other country.

On February 1, 1998, regulation of the Cabinet of Ministers
of Ukraine No.13 “On fulfillment of Agreement between the Government of Ukraine and the
Government of the Russian Federation on free trade” dated January 5, 1998 entered into
force, as well as the corresponding legal act on the Russian part – Decree of the
President of the Russian Federation B.Yeltsin No.1392 “On revocation of Decree of the
President of the Russian Federation No.1216 “On collection of value-added tax on
commodities that originated on the Ukrainian territory and are imported to the customs
territory of the Russian Federation” dated December 31, 1997. The two legal acts
abolished the two countries’ reciprocal collection of VAT during import customs
procedures.

Further, when imported commodities were sold on the
territories of the two parties, VAT was levied in accordance with the national
legislation.

On November 25, 1998, Ukraine, along with seven other CIS
countries, signed in Moscow a multilateral Agreement on principles of collection of
indirect taxes levied on exports and imports between CIS countries. Article 2 of this
agreement provides for non-collection of indirect taxes (to which VAT is referred) on the
commodities that are exported to the CIS countries.

However, this agreement was not signed by the Russian
Federation, Uzbekistan, Turkmenistan, and Kazakhstan.

On April 2, 1999, in Moscow, Ukraine and the Russian
Federation signed the Protocol to the Agreement on the Free Trade Zone dated April 15,
1995. Article 8a of this document states that beginning January 1, 2000, the parties shall
not levy VAT on the commodities exported to CIS countries.

On June 21, 2000, Protocol Decision of the member countries
of the Commonwealth of Independent States, which was signed in Moscow, obliged Russia to
immediately commence negotiations on withdrawal from free trade regimes and switching to
indirect tax collection based on the “destination country” principle.

Since June of the last year until May of the current year,
five rounds of bilateral negotiations were held on the governmental-delegation level with
the purpose of agreeing a draft intergovernmental Agreement on the principles of indirect
tax collection, although no mutually acceptable terms have been reached so far.

- What are the main problems in this connection for the
Ukrainian party?

After entering into force of the second part of the Tax
Code of the Russian Federation on July 1, 2001, and taking into account that this
legislative instrument has retained VAT collection on exports of natural gas, oil, and gas
condensate, Ukraine may suffer from the following negative consequences:

1. VAT collection on exports of natural gas, oil, and gas
condensate will artificially reduce exports of these resources to Ukraine, because exports
of the same commodities to other countries are still subject to VAT repayment.

2. Return to the scheme that had existed until February
1998, when Russian importers had to pay 20% of the customs value on imports of Ukrainian
products, will substantially lower the Russian importers’ interest in Ukrainian goods
and, consequently, cut back Russian imports from Ukraine, at least, in the first couple of
months.

3. A number of Russian products are likely to become more
competitive on the Ukrainian market than the corresponding Ukrainian products.

4. Russia-bound exports of the Ukrainian products that were
further re-exported to Belarus (a profitable scheme, due to non-collection of import VAT
on the Russian-Ukrainian border and transparency of the Belarussian-Russian border) will
be reduced.

5. The international agreements on establishment of the CIS
free trade zone, which were reached earlier, will now undergo the changes that will
produce extremely negative effects on Ukraine’s political and economic situation.

- What are the possible effects of the changes in the
scheme of VAT collection by the Russian party since July 1 of the current year on exports
of Ukrainian goods to the Russian Federation?

Regulation of the Cabinet of Ministers of Ukraine No.13
dated January 5, 1998 and Decree of the President of the Russian Federation No.1392 dated
December 31, 1997 had been effective until July 1. These regulations gave the importers
the right to postpone the VAT payment until the imported commodities were sold
domestically.

Because the Russian party departed from this scheme and
introduced the “destination country” principle in its VAT collection effective July 1,
2001, Ukraine’s monthly exports to Russia may curtail by 10-15% for the near 3-6 months.

- What are the possible consequences for imports of
Russian commodities to Ukraine and those for the Ukrainian domestic market?

- Owing to the fact that Russia has prolonged VAT
collection on exports of natural gas, oil, and gas condensate, Ukraine cannot count on a
decrease in prices for Russian energy resources, which now account for over 60% in the
structure of Russian exports to Ukraine. The cost of imported energy resources directly
affects the cost of Ukrainian products (if prices for energy resources had been reduced to
the expected limits, Ukraine could have saved around USD 500-600 million).

- Non-collection of export VAT on Russian goods that
are exported to Ukraine has two aspects, doesn’t it?

Certainly. Russian exporters may either reduce their prices
by up to the VAT value or increase their earnings by keeping the prices at the same level.

The second scenario will not have any substantial effect on
the Ukrainian domestic market.

In the first case, however, Ukrainian producers of the
commodities that compete with those imported from Russia will face significant
difficulties with sales on the domestic market. On the other hand, this competition
between Russian and Ukrainian products may have a positive effect too (search for new
markets, improvement of product quality etc.).

Should Russia refuse to search a compromise decision,
Ukraine is likely to take the following reciprocal measures:

introduction of a similar scheme of VAT collection on
Russian imports;

monitoring of and control over monthly imports from Russia
and the corresponding anti-dumping and other restricting measures;

stricter customs control on the country’s eastern border
and active measures against smuggling from Russia (particularly, in respect of alcohol,
tobacco, and confectionery products).

As it is know, regulation of the Cabinet of Ministers of
Ukraine No.745 dated June 27, 2001, introduced the scheme of VAT levy on Ukraine-bound
Russian imports, which is similar to that initiated by the Russian party.

- The corresponding regulation of the Cabinet of
Ministers of Ukraine was an expected adequate measure on the Ukrainian part, wasn’t it?

- I think it is understandable that the above observations
are merely of the forecast nature. We will see the actual pattern of changes in the
Ukrainian-Russian trade brought about by the introduction of the new taxation scheme no
sooner than in September-October, when the statistical data for the first 2-3 months after
“the First of July” are ready.

So, a new turn: what is behind it?

The interview was taken by Lubov Shingur

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