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Russia grain tax crackdown may hinder exports

Russia grain tax crackdown may hinder exports

MOSCOW: A crackdown on tax avoidance in Russia’s grain trade is causing uncertainty among shippers and could even be hindering exports at a time when profit margins are already thin and a large crop is imminent, traders said. Authorities in Russia, one of the world’s top wheat exporters, were estimated to be losing 65 billion roubles ($1.1 billion) a year in unpaid taxes on grain deals at a time when they are seeking to tackle a huge budget deficit. The tax issue involves buying and selling grain through a chain of transactions in which the value-added tax (VAT) liability is left with a small trading company which then ceases to exist.

Russian government moves to restrain the budget deficit caused by weak oil prices and Western sanctions, coupled with more transparency from computerised tax data processing, brought officials’ attention to the scheme this spring. Many Russian grain exporters signed an informal and voluntary agreement in May promising to avoid working with companies suspected of involvement in the tax wheeze from the start of the current 2017/18 marketing year on July 1. But the sudden change has created uncertainty in the market. “So far a new VAT system is an unknown factor for shippers, and in my view it is hampering Russian grain exports,” a trader said. “The days of easy money in Russian grain exports are over and the VAT change will make profits from exports even more difficult to achieve.”

Traders’ margins are already being squeezed by weak global wheat prices and by strengthening competition in Russia. Some of the small trading companies that the crackdown has now excluded from the supply chain were involved in sourcing the grain from farmers. There are fears their exit from the market could create a gap between some exporters and farmers. “Many traders have started to hire employees which will be collecting, for example, a large 25,000-tonnes shipment by 1,000-2,000 tonnes, but it is not a quick process. It will take time, which may affect export volumes,” Vitaly Sheremet, head of agribusiness at consultancy KPMG Russia and CIS, told Reuters.

The Russian tax service told Reuters that the situation had started improving even before July 1, and the fact that market players had moved quickly to take steps to remedy the situation meant there would be no punitive measures. One trader said that as of late July 60 percent of his purchases were made directly from farmers compared with a previous 15 percent. The rest of purchases came via well-reputed firms. “The market has restructured,” he said. However, other traders said the new rule could slow deals because exporters would want to be sure about the VAT status and would be cautious about taking risks. The new practice has also reduced the number of forward contracts.“There is a considerable amount of uncertainty in the market now,” another trader said.