Cracking down on forex earnings: government's plan to repatriate businesses' overseas profits

The National Bank, which halved the timeframe for returning foreign currency earnings to agricultural exporters in the fall, allows for a reduction in the timeframe for other commodities, except for grain, announced Deputy Governor of the National Bank of Ukraine (NBU) Yuriy Heletiy.

"We are currently considering the issue of other commodities to encourage the return of export earnings in this difficult time for the state," he said at a press briefing at the NBU on March 14.

The regulator claims that previous similar initiatives have already brought hundreds of millions of dollars back to the country.

LIGA.net analyzed why the central bank, which is supported by the government, is concerned about this issue and what businesses should expect next.

Return of proceeds – how the issue of agricultural exports united the NBU and the government

As the regulator's press service told LIGA.net, the volume of non-returns and overdue payments over the past 10 years amounted to $7.17 billion as of March 1, 2024.

"At the same time, not the entire volume of relevant transactions should be attributed to non-returned export earnings or ‘black exports’. The deadlines for settling export transactions may be violated for objective reasons, and foreign exchange earnings may be returned after a certain period of time," the NBU's experts stated.

This issue has been discussed for years between farmers and tax authorities. To avoid violations, the tax service charges a penalty for each day of delay. Farmers appeal these decisions in courts. This was the case even before the war.

Practice shows that in these disputes the truth is in the middle, and in 50% of cases the courts side with exporters, while the other half of the tax authorities' claims are recognized as justified.

Given that in cases not related to tax refunds, the State Tax Service can lose up to 90% of courts (according to the Business Ombudsman's Office – ed.), the "50% mark" in this case can be generally assessed as effective work. Especially when you understand the specifics of these processes and the schemes that exporters use.

However, with the outbreak of the full-scale war, the state lost the lion's share of revenues from metal exports, and agricultural products became the country's main source of foreign exchange, so the problem took on a different specificity.

The government and the NBU have since taken up the issue. The National Bank, which in the first year of the war was forced to extend the deadlines to six months (by the decision on April 5, 2022), is halving the deadlines for settlements for agricultural exports from 180 to 90 calendar days starting November 11, 2023.

In particular, they have to settle payments for exports of wheat, rye, barley, oats, corn, soybeans, rapeseed, sunflower seeds, soybean oil, sunflower oil, rapeseed oil, and oilcake within 90 days.

Those affected were not happy.

This decision was made at the request of the Cabinet of Ministers, which the central bank received earlier.

In early November 2023, the Cabinet of Ministers adopted a new procedure for the export of agricultural products, according to which only exporters included in the State Agrarian Register or companies that have received a license for such exports will be able to do so.

What does the National Bank say about the earnings?

"The return of foreign currency and its sale has a direct impact on the supply of foreign currency in the market, and therefore affects the balance sheet," says Yuriy Heletiy, Deputy Governor of the National Bank of Ukraine.

He said that in December 2023, based on the analysis of 200 agricultural companies, export revenues increased by 1.6 times compared to October.

The government and the NBU are analyzing the situation with other (non-agricultural) products, Heletiy added.

To this end, the National Bank has strengthened information cooperation with the State Customs Service and the State Tax Service.

Schemes of non-return of foreign currency earnigns

The central bank claims to be aware of "creative schemes to circumvent restrictions" and is ready to counteract them.

In particular, in February, the regulator banned the closure of currency supervision when payments for exports are made in hryvnia and the use of currency repurchase transactions (foreign currency swaps).

The NBU calls these schemes "creative" as opposed to the long-known "traditional" ones.

LIGA.net has already written about them. In particular, regarding "black" exports.

This involves a trader buying grain from farmers for cash and then exporting it through a chain of intermediaries.

Here, documents for grain and confirmation of bank transfers are important, so there are schemes for creating fictitious documents, in particular, regarding the origin and purchase of such products.

In addition, there are also "gray" models of grain exports. Their fundamental difference is that "black" grain purchased for cash is mixed with "white" batches purchased officially. The exporter of such a "mix" is a legal company that, in addition to earning money on resales, also receives a VAT refund.

"There are two schemes when they demand VAT refunds for exports because they buy with VAT documents and sell without. On top of that, there is a non-return of foreign currency earnings. And, if we assess the threats to national economic security, it is the non-return of foreign exchange earnings that is greater, because, as a rule, openly ‘black’ exporters do not receive VAT refunds from the budget, as they simply do not pass the audit," Ukraine’s Economic Security Bureau told LIGA.net.

What's next?

The authorities are considering various options for dealing with foreign currency "evaders".

"We see an increase in the return of revenues by the agricultural sector, which is measured in hundreds of millions per month. But this is not the end, and we continue to actively cooperate with the government. In particular, to improve the criteria for verified exporters of agricultural products," says Deputy Governor Heletiy.

In February 2024, it was reported that the Cabinet of Ministers and the NBU insisted on linking VAT refunds to the return of foreign currency earnings.

However, according to Danil Getmantsev, chairman of the Parliamentary Committee on Finance, Taxation and Customs Policy, the launch of such a complex mechanism is fraught with technical difficulties.

In his opinion, it is necessary to create another system as complex as the electronic VAT administration system to track all these transactions. Because there are thousands of contracts, each of which may involve thousands of deliveries, and all of them need to be brought together in one place, at one point online.

"At the committee level, we decided to abandon this rule on VAT refunds based solely on the return of foreign currency earnings. But the Cabinet of Ministers insists on it. And for two months now, we have been waiting for the government to submit the final version that will allow us to implement it. I don't believe it exists, but we will wait," Getmantsev explained.

No proposals have been received yet. In addition, industry associations have opposed this innovation.

But there are other proposals. In particular, the National Securities and Stock Market Commission (NSSMC) proposes its own accounting options.

"Exchange trading with its transparency has advantages, so it is possible that we could offer an automatic VAT refund in the case of trading for export on the exchange. Or, for example, it would provide access to Ukrzaliznytsia's transportation, because exchange trading allows you to plan your loading. I think it would be attractive for many not super large companies. Especially if they can sell at a higher price on the exchange," said Arsen Ilyin, a member of the NSSMC.