Sharp debate continues on VAT rate on produce: LTV's De Facto

One of the most controversial issues in next year's state budget discussions is the issue of value-added tax (VAT) on vegetables, fruits, and berries grown in Latvia, which at the end of November resulted in an industry request to resign Finance Minister Arvils Aseradens, Latvian Television's De Facto reported on December 4..

The cause of the discrepancies is the different assessment of the impact of VAT. The data on which each party bases its position varies. It also means that decisions on the planned rate changes next year are made without a final agreement – whether or not there has been a benefit from the current 5% rate.

The reduced VAT rate of  5%, instead of 21%, for fresh vegetables, berries and fruits for the duration of a pilot project was introduced in 2018. The reduced VAT rate was intended for three years. In 2020, the Ministry of Agriculture concluded that the criteria had been met with success, while the Ministry of Finance considered that the pilot project was not a success. However, the government agreed to roll over the reduced VAT rate until the end of 2023.

The industry is confident that the benefit has been there. Elīza Ilze Malceniece, who owns the Braas farm with her family, is also one of those who, along with others in the industry, tried to keep the 5% rate. On the farm, around 15 different types of vegetables are grown on about 60 hectares.

“The first shock to the industry was that then Agriculture Minister Armands Krauze issued a public statement saying the 21% rate would be back from January 1. It was a big shock to the industry because the Ministry of Agriculture has always supported this 5% rate. Consequently, the industry was very worried that we don't have the support of the industry minister and then we started this active discussion in the public space and with politicians, with the Ministry,” says Malceniece.

As a result, government ministers agreed and coalition MPs in the Saeima supported a higher but still reduced VAT rate of 12%. In addition, Finance Minister Arvils Ašeradens hinted that the new offer was temporary while he came up with something else.

According to Ašeradens, the goal is to support Latvian farmers, but currently, importers also benefit from lower VAT. This, on the other hand, creates a shortfall in the state budget, and a cut of 12% also means a reduction of 16 million.

'We had foreseen subsidies in this case. Failed to negotiate with businesses. Then went to the other scenario that right now there is this 12%, reduced rate. And let's assess this situation here, how can the industry be developed anyway? Very many countries are managing with this – emphasizing exports, and we are ready to work on this so that Latvian businesses are the ones who will conquer other markets and Latvia's market and develop,” said Ašeradens.

“First of all, it's certainly not a compromise,” Malceniece says. “A compromise is when two sides agree, but the vegetable and berry industry has not been invited to talk about the issue. These 12% - we learned about them from the press. So I don't see it as a compromise.”

Even if it's not the full 21% rate, increasing the tax to 12% will also mean increasing vegetable and fruit prices in stores, growers warn.

De Facto calculations show that provided the basic price does not change, a kilogram of potatoes with an average price of 68 cents in October would cost 73 cents with 12% VAT, while a kilogram of tomatoes would cost €2.55 instead of €2.39.

Organizations representing growers point out that more expensive production can mean a drop in consumption volumes as well as an increase in the shadow economy, as the tax increases interest in selling goods without it. And that in turn distorts competition.

Mārtiņs Trons, board Member of the society “Farmers Saeima”, said: “We fight first for the public interest, second, of course for our interests. Because going back to 12% and then 21% later, the government is deliberately pushing the sector back into the shadow economy.”

Farmers refer to data from the Ministry of Agriculture, which shows that in the last six years the shadow economy decreased in the industry. This is confirmed by the Ministry in an interview with the programme “de facto”.

“We compared 2022 against 2017. We concluded that there had been a sharp decline in, say, the number of unfair transactions found by the Food and Veterinary Service. The reduction was 30%,” said Biruta Ingiļāvičute, deputy director of the Ministry of Agriculture's Rural Development and Support Department.

These conclusions, as well as other conclusions regarding the benefit from the 5% VAT rate, in turn, do not sit well with the Ministry of Finance.

Ilmārs Šņucins, deputy secretary of state for taxation at the Ministry, noted: “No one has specifically studied the shadow economy in this very small sub-sector. The Ministry of Agriculture referred to PVD testing. Well, that's the only measuring point. At the same time, as evaluated by the State Revenue Service, the sector has not specifically improved its situation. Of course, we cannot say that the industry has gotten worse or any new risks have emerged. But to say it's become far less risky, you can't say either.”

However, the most obvious example of how different data are used by either party is tax rates. The Ministry of Agriculture has estimated that other taxes paid by 5% ratepayers are increasing, and they reached €35.76 million in 2022. Meanwhile, the Finance Ministry says total tax contributions are falling. they fell to €0.3 million in 2022.

This data from the Ministry of Finance is viewed with suspicion by the farm owner. “I calculated what it was like on our farm and according to the Ministry of Finance's data, there are only about ten of this type of farms in Latvia. So there's obviously some mistake out there, someone is wrong with the numbers or there are things that are miscalculated. Therefore, I have a lot of incomprehension and I do not know whether I can trust the data provided by the Ministry of Finance,“ Malceniece said.

The fact that there are problems with data alignment was also concluded by Prime Minister Evika Siliņa at a Cabinet of Ministers meeting last week. She had met with those involved a week earlier and, during the government meeting, stated:

“It was very difficult to have conversations with the industry because the conversations were really aggressive. But the understanding can only form if my offer to both the industry and the Ministry of Agriculture and the Ministry of Finance to all get involved is also taken into account, and data is put together. ”

The Finance Ministry defends its figures but expresses its readiness to explain them. A meeting with industry representatives there was promised in December.

Given that the 5% rate period in this sector was experimental from the outset, the results were also expected to be evaluated by the government. There, even before the budget was examined, an interpretation of the figures should have been agreed on, bur that didn't happen. A relevant report was already prepared several months ago, however, it has never reached the Cabinet of Ministers table for official examination.

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