VAT blocking: how Ukrainian exporters are losing millions due to the actions of the State Tax Service

GMK Center organized a roundtable discussion with business and expert community «Problems of exporters during war: challenges of regulation» representatives to discuss the challenges faced by exporters during the war and jointly develop solutions. One of the key issues was blocking or delaying VAT refunds.

According to company representatives, the problem of tax authorities rejecting VAT refunds during inspections has become critical for all companies trying to continue production activities in the context of a large-scale war.

Rejections arise not only due to non-compliance with the legal requirements for obtaining a budgetary refund, but also due to disagreement by the tax authorities with the amount of negative VAT value. In practice, such disagreement often arises due to claims by the tax authorities that tax liabilities are understated, or tax credits are overstated.

Iryna Yevsiukova, Head of the Accounting Department at Ferrexpo, outlined two main challenges faced by their company:

1. Blocking of tax invoices. She noted that this problem is familiar to many companies. Tax authorities block tax invoices, which results in companies losing money, being unable to control financial planning, and is especially acute during martial law.
2. Refusal or delay in VAT refunds. One of the reasons is the blocking of tax invoices, the other is the inability of counterparties to trace the procurement chain.

The recent amendments to environmental legislation and their inconsistency with the tax code also create difficulties.

Inna Polutsyganova, Head of Corporate and Legal Affairs at Centravis, confirmed the issue of VAT refunds for exporters as particularly critical.

This problem existed before the full-scale invasion, but now its impact and consequences are becoming critical. This concerns the purchase of inventory items from companies with a so-called «Russian footprint,» i.e., those with shareholders or ultimate beneficial owners associated with the aggressor country.

The expert familiarized the participants of the Roundtable with the case of her high-tech enterprise for the production of seamless stainless pipes, which is located in the frontline area in Nikopol. 98% of its production is exported.

Despite daily artillery shelling and drone attacks, the company continues to operate and provide jobs for 1,500 employees. From 2022 to the present, the company has paid over UAH 900 million in taxes. It provides foreign exchange earnings to the country: over 250 million euros over the period.

Nevertheless, since March 2022. Centravis has had unrecovered VAT of UAH 312 million. And this is without taking into account fines of UAH 17 million accrued for declaring budget refunds in the relevant periods.

«The problem is that there are virtually no effective ways to protect the taxpayer. We understand that at the stage of administrative appeal of tax authorities’ decisions, the likelihood of canceling the results of audits is extremely low, it is virtually non-existent,» stated Inna Polutsyganova.

Therefore, in order to protect its rights, a company must go to court, where the judicial procedure can take years. The expert stated that bona fide taxpayers who work officially and do not violate the requirements of the current legislation are being held hostage to the situation.

The critical situation with VAT refunds was caused by the company’s transactions with one of its key counterparties, a raw material supplier from Zaporizhzhia. The company is also located in the frontline area and employs more than 3,000 people.

«The problem is that the ultimate beneficial owner of this company is a certain individual who, according to the tax authority, has Russian citizenship,» the expert explains.

This information is not true, but the tax authorities do not recognize the company’s right to a VAT refund.

«The company tried to appeal this decision administratively, but it did not bring any results, so we were forced to go to court,» says Inna Polutsyganova.

Currently, the company already has several court decisions, and several cases are still pending.

«We apply to the judicial authorities for certain periods of inspection. For one of the periods, we have a positive decision from the first and second instance courts. For the second period, we have a positive decision of the first instance court,» the expert said.

The counterparty is also appealing the tax authority’s decision in court and already has three positive court decisions in the first and second instance courts.

One Centravis case and two counterparty cases are pending in the court of cassation, but it is not possible to predict the timing of the completion of these proceedings. For example, there has been no movement in the case, which entered the cassation court on October 5, 2023.

The companies have repeatedly prepared appeals to the competent authorities, the Cabinet of Ministers of Ukraine, the Ministry of Finance, the State Tax Service, and the Ministry of Economy to explain the situation and ask for its resolution and amendments to the legislation. They emphasized that in certain cases the legislation is imperfect and creates conflicts that are used by the tax authorities.

Currently, there are no positive decisions based on the results of these appeals.

Inna Polutsyganova outlined the consequences of non-refund of VAT to a company:

1. Money is being «washed away»: by paying import VAT, the company does not receive a significant portion of the VAT refund for exports.
2. Businesses are forced to look for alternative suppliers, and unfortunately, they are not in Ukraine. Therefore, the money goes to non-resident companies rather than to national companies.

As a result, Centravis has to buy raw materials at higher prices and with longer delivery times. These factors increase production costs.

The absence of an active position of the Cabinet of Ministers of Ukraine and other competent authorities regarding conflicts arising from the application of the Cabinet of Ministers’ Resolution No. 187 «On Ensuring the Protection of National Interests in Future Claims of the State of Ukraine in connection with the Military Aggression of the Russian Federation» makes companies hostage to losses and requires them to make extra efforts to continue operating.

Refusals and delays in VAT refunds create serious difficulties for exporters, and the state should remove legal obstacles to the return of financial resources to producers as much as possible.