# Specifics of VAT Taxation for Re-export Transactions

> Are re-export transactions subject to VAT? A client asked us to clarify the specifics of the VAT treatment of re-exports — here is our analysis.

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## Is it necessary to tax re-export operations with VAT?

One of our regular clients approached us with a request to clarify the specifics of VAT taxation for re-export operations. He also informed us that his tax inspector, whom they had consulted with a similar question, was convinced of the necessity to accrue VAT for such operations at a rate of 20% in accordance with paragraph 198.5 of the Tax Code of Ukraine (hereinafter – TCU), because, according to him, the State Fiscal Service of Ukraine (hereinafter – SFS) had previously provided a similar clarification on this matter in one of its individual tax consultations.

### Is it necessary to accrue VAT at a rate of 20%?

Apparently, the tax inspector, in his conversation with our client, was referring to the SFS Letter dated 14.09.2017 N 1960/6/99-99-15-03-02-15/IPK. Indeed, in this letter, tax authorities concluded that for similar operations, taxpayers should accrue VAT at a rate of 20% "*based on the tax base determined in accordance with paragraph 189.1 of Article 189 of the TCU*".

The main arguments of the tax authorities, on which they relied when forming this conclusion, were as follows:

- According to sub-paragraph b) of paragraph 198.5 of the TCU, the taxpayer is obliged to accrue tax liabilities if goods/services "*are intended for use or begin to be used in operations exempt from taxation in accordance with Article 197, sub-section 2 of Section XX of the TCU, international treaties (agreements) (except for cases of operations provided for by sub-paragraph 197.1.28 of paragraph 197.1 of Article 197 of the TCU)*".
- Operations involving the export of goods under the customs regime of re-export (with the exception of export operations in accordance with paragraph 5 of part 1 of Article 86 of the CCU) are exempt from VAT taxation in accordance with the norms of the TCU. Therefore, in accordance with paragraph 198.5 of the TCU, such a taxpayer is obliged to accrue tax liabilities for similar operations.

In our opinion, such logic of the tax authorities is erroneous (and, accordingly, their conclusions are unfounded) for the following reasons:

1. Indeed, sub-paragraph b) of paragraph 198.5 of the TCU requires the taxpayer to accrue tax liabilities in the case of using goods/services in operations exempt from taxation. However, the key here is that the norms of this sub-paragraph apply *not to all without exception* operations exempt from taxation, but only *to a clearly defined list of similar operations directly by this sub-paragraph* – if such operations are exempt from VAT taxation in accordance with Article 197 of the TCU (and even then, with the exception of operations defined in sub-paragraph 197.1.28 and paragraph 197.11 of the TCU), sub-section 2 of Section XX of the TCU, and the norms of relevant international treaties.
2. Operations involving the export of goods under the customs regime of re-export *are exempt* from VAT taxation *in accordance with paragraph 206.5 of the TCU* (with the exception of operations involving the export of goods in accordance with paragraph 3 and paragraph 5 of part 1 of Article 86 of the Customs Code of Ukraine, for which the application of a zero VAT rate is provided for in accordance with sub-paragraph 195.1.1 of the TCU).
3. Therefore, although re-export operations fall under the category of "operations exempt from VAT", they *are not the operations referred to in sub-paragraph b) of paragraph 198.5 of the TCU.* Accordingly, there is no need to accrue VAT tax liabilities for such operations.

As we can see, the conclusions of the tax authorities on this matter are unsubstantiated and unfounded.

Our company’s specialists are always ready to help and defend your legitimate interests in disputes with tax authorities.

You might also be interested in our other articles [VAT payment upon return of improvements](/en/blog-en/is-the-cost-of-improvements-subject-to-vat/ "VAT payment upon return of improvements") and [Acquisition of NGO services with VAT](/en/blog-en/vat-treatment-of-services-acquired-by-non-profit-organizations/ "Acquisition of NGO services with VAT").

**[Hanna Matseva](https://www.uhy-prostir.com/en/about-us/hanna-matseva/index.html.md)** (CEO and Partner, Accounting Services, Payroll and HR Administration — UHY Prostir)

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