VAT and customs exemption in technical assistance projects

The VAT exemption in international technical assistance projects rests on three supports. The first is paragraph 197.11 of the Tax Code of Ukraine: the supply of goods and services in the customs territory of Ukraine and the import of goods are exempt where they are financed by technical assistance provided under international treaties of Ukraine. The second is the treaty itself: under paragraph 3.2 of the Code its rules prevail if the Verkhovna Rada has consented to be bound by it. The third is the Procedure approved by Resolution No. 153, which makes the exemption verifiable through project registration and the procurement plan.

How it works step by step

• The development partner or the implementer draws up a procurement plan in the form of Annex 5 to the Procedure and certifies it. The plan lists the goods, works and services to be bought with project funds.
• The plan is filed with the Secretariat of the Cabinet of Ministers together with the registration documents, or later through re-registration.
• Within five days the Secretariat sends copies of the registration card and the plan to the tax and customs services and publishes the plan on the Single Web Portal of executive authorities.
• The supplier concludes the contract at a price without VAT and issues a tax invoice for an exempt transaction.
• An implementer and a subcontractor using the exemption file an information confirmation in the form of Annex 8 with their tax office every month by the 20th.

A subcontractor within the meaning of the Procedure is a person that has a written agreement with the implementer or the recipient and carries out procurement with project funds. If subcontractors are designated after registration, the procurement plan is filed again together with a copy of the subcontract.

Grants from the EU, the United States and other donors

For the EU the basis is the Framework Agreement between the Government of Ukraine and the Commission of 12 December 2006. Its Article 3 says that contracts financed by the Community are not subject to VAT, and that a contract for the supply of goods originating in Ukraine is concluded on the basis of prices excluding VAT. Goods imported for such measures are free of customs duties, import duties and similar charges. The Agreement covers measures financed by the EU in whole or in part.

US assistance comes under a separate agreement on humanitarian and technical and economic cooperation of 7 May 1992. It exempts goods, supplies and other property provided or used in connection with US assistance programmes from tariffs, duties, import taxes and similar charges. The scope and status of US programmes has been changing, so the validity of a particular project is checked with the donor and against the register.

With other donors everything depends on the wording of the bilateral agreement. If it contains no tax clause, the general rule of paragraph 197.11 remains, and applying it still requires registration and a procurement plan.

Typical mistakes and who pays for them

• Purchases outside the plan. The item is not in the procurement plan, yet the invoice is issued without VAT. The supplier bears the risk of reassessment.
• Mixed payment. The project covers part of the price and own funds cover the rest. The exemption applies only to the part paid from technical assistance.
• The supplier did not check the project. Before shipment it is worth asking for copies of the registration card and the procurement plan and comparing them with the published list.
• A suspended project. If the recipient or the implementer has not submitted monitoring reports, the exemptions stop applying from the day after the suspension is published.
• The supplier’s input VAT. Selling without VAT, the supplier has to offset the tax credit on purchases made for that transaction (paragraph 198.5 of the Code), and this needs to be priced in.

In the financial report to the donor the amounts are shown without VAT. If the exemption was not used, whether the tax paid is an eligible cost is decided by the programme rules.