Search for ineffective owners or enrichment instinct?

Bureaucrats are going to teach Ukrainian farmers how to farm well on the leased land. In any case, this is the impression one can gain from the statement of Mykhailo Dobkin, head of the Kharkiv Oblast Administration, on the local radio. “To dissuade people from taking a too consumerist approach to land in the future, we are drawing up the legal grounds for the land now in the hands of unpractical users to be handed over to the owners who are prepared to invest new technologies, as many funds as necessary, and even a part of their heart in land. Then all this will result in good crops, and we will be able to harvest not 30-32 but 40-50 and more metric quintals of winter crops per hectare,” the KHODA press service quotes Dobkin as saying.

I wonder who will identify the “unpractical users” and on what grounds – maybe, by the principle “a little bird told me”? And will they take into account the fact that low yields may result not only from the poor efforts of agrarians, but also from the credit squeeze and the increased price of fuel and seeds for the farmer? Naturally, there must be an effective manager on land, and the state must monitor and promote this process as much as possible. But in the conditions when land laws are studded with blank spots, witch-hunting is unlikely to be an effective measure but is very likely to have deplorable consequences.

Kharkiv oblast’s agrarian community has not yet responded to this proposal from those on top. Meanwhile, agrarians have expressed their attitude to the question that infringes everybody’s interests – the projected changes to the taxation system. “The acceptance of the current proposals about changing the agrarian-industrial complex [AIC. – Ed.] taxation may result in almost 20-billion-hryvnia losses for agrarians,” the Ukrainian Club of Agrarian Business (UCAB) told The Day after analyzing the proposals about and concepts of changes in the tax law.

According to UCAB vice-president Volodymyr Makar, the abovementioned amount is an anti-record of sorts in the whole period of Ukraine’s independence. “Never before has there been such a concerted attempt to revise the AIC taxation system,” he notes. In his words, the implementation of tax innovations, coupled with losses due to unfavorable weather conditions in 2012 (13.6 billion hryvnias, as estimated by the Ministry for Agrarian Policies and Food, in the spring- and summertime alone), will make the sector totally unprofitable. “The profits of the entire agrarian sector were fewer than 26 billion hryvnias in 2011. They were reaped by 42,600 businesses and farmers who employ 580,000 people in the countryside. Should VAT exemptions be canceled, most of the farms will be making losses, and the question will be how to survive, not how to develop,” Makar emphasizes.

UCAB experts say that among the problems that worry agrarians the most is cancellation of VAT exemptions envisaged by the concept of taxation system reform proposed by the State Tax Service (this step will make agrarians lose an annual 13 billion hryvnias) and the non-refund of VAT during the export of grain and industrial crops, which is envisaged by the Taxation Code (the losses come to an annual 6 billion hryvnias). Besides, there are some other legislative proposals, including a draft law on making changes to Article 209 of Ukraine’s Taxation Code (on the specifics of paying VAT by agricultural businesses) registered under No. 10731, etc.

Commenting on such a large number of proposals, Makar says they run counter to the experience of our nearest neighbors. “For example, Russia is doing its best to keep intact and extend the term of tax exemptions for agrarian producers, now that it is entering the WTO, without calling into question, however, the refund of the export-related VAT,” the expert says. He says he hopes that Ukraine will also carry out a similar policy aimed at forming long-term favorable work conditions for agrarians.

The Day has asked some experts to comment on the search for ineffective land owners and the taxation changes that await the Ukrainian agro-industrial complex.

“AT PRESENT, NO LAWS HAVE A CLEAR-CUT DEFINITION OF AN EFFECTIVE USER OF FARMING LANDS”

Rostyslav KRAVETS, lawyer, senior partner, law firm Kravets, Novak and Partners:

“It is possible to influence a leaseholder who uses land for wrong purposes by way of canceling the lease contract. To find an unpractical user of cultivated lands, you must thoroughly check the fulfillment of lease agreements, and only then, on the basis of this, the leaser will make a decision. If the city, oblast or district council was the leaser, they should find evidence of a misuse of the leased land. Then these lands will be again auctioned off to a suitable lessee. This is the only way. On the other hand, a city or village council cannot force the owner of a land share (a concrete individual) to cancel the lease with the farmer who they think is ineffective or unpractical. They can only make recommendations, while the decision is to be made by the concrete owner of the land plot. At present, no laws have a clear-cut definition of an ineffective user of farming lands. Concrete demands to this effect are laid down in lease contracts. We must complete the land reform – otherwise the search for unpractical farming land users will result in lawlessness with respect to agrarian business. But the new land law will also be unable to solve the problem of an effective land owner if the current level of corruption remains unchanged.”

“THE PROFIT TAX WILL RESULT IN LOSSES FOR MANY BUSINESSES”

Maria KOLESNYK, head, analytical department, consulting agency AAA:

“There is no other way to simplify [taxation] because the AIC is subject to a preferential tax treatment. And the crucial question of any changes is whether or not the agrarians will be stripped of these privileges. At present, businesses pay the same agrarian tax, depending on the size of the leased land. And should the profit tax be introduced, this will result in losses for many businesses. I do not think the current agro sector taxation system should be changed. For, as long as there is no profit tax, there are no minimization schemes in the AIC.”

“IN UKRAINE, THE LEFTOVER PRINCIPLE OF AIC FUNDING HAS BEEN IN FORCE SINCE EARLY 1991. IT IS HERE THAT CHANGES ARE NEEDED”

Leonid KOZACHENKO, president, Ukrainian Agrarian Confederation:

“There have been a lot of complaints about the concept proposed by the Ministry of Finance and the State Tax Service. Most of them were caused by a cumbersome procedure of administering taxes. For this reason, even taxmen should not be blamed, for they themselves do not know how to do things properly. So, in my view, the taxation reform should be essentially about simplifying the administration of tax collection. Many complaints are about the system of the projected new taxes and limitations. In particular, it is not advisable to introduce the turnover tax if the VAT partially remains in force. Besides, agrarians oppose the cancellation of the 1-percent excise duty on perennial plantations. We are told that this duty is ineffective. But it is wrong. It is very difficult today to receive long-term funding. This duty helped solve some financial problems, for example, when one wanted to lay out a garden. The collected money helped farmers ride out the credit squeeze – even though only a certain part of the collected money reached the AIC. But this was the question of corruption, not of the Taxation Code. So we should follow the way of developed countries in tax matters. What can we see there? We can see that agriculture is heavily subsidized because it brings handsome profits. In Ukraine, by contrast, the leftover principle of AIC funding has been in force since early 1991. It is here that changes are needed.”

“IT IS RIGHT, BUT ONLY UNDER THE CONDITION THAT THIS OCCURS IN A RULE-OF-LAW STATE, WHERE THERE IS NO CORRUPTION”

Maksym FEDORCHENKO, head, information and resource center Reformation of Land Relations in Ukraine:

“The current law sets out the possibility of seizing farming land from an ineffective owner if the latter has not been using this land systematically for more than three years. There was a precedent in Kyiv oblast, where prosecutors demanded that a farmer, who had been sowing or harvesting nothing on his land plot for three years, be denied the right to use the land. The prosecutors won the case. It is right to deny the ineffective user the right to own the land, but only under the condition that this occurs in a rule-of-law state, where there is no corruption. But when this clause is made use of by the powers that be, which act in a single-party political system, we can suppose that this may become in instrument of pressure on businesspeople. Therefore, all the slogans about searching for effective owners can be both positive and negative. In the latter case, what really matters is not the law but such factors as ‘I want,’ ‘we have decided so,’ or ‘this must be done.’ Here is the risk. A lawless state with a warped political system and a powerful lobby of various groupings in power, where the authorities merge with business, creates the danger of this approach. But, sooner or later, this problem should be tackled because ineffective users of land really exist.”