The wine industry is on the verge of a revolution: Is the industry-specific law bankrupting enterprises?
Commentary by InfoMarket Agency
The law "On Grapes and Wine" designed to revive winemaking and promote Moldovan wine products in Moldova and abroad, has already bankrupted nine enterprises in the industry. Although this is not about tax evasion, the State Tax Inspectorate (IFS) has already initiated insolvency proceedings against nine winemakers due to enterprises’ non-payment of contributions to, in essence, a private fund - the Vine and Wine Fund.
Insolvency proceedings have been initiated against Burlacu-Vin SA, Vinaria Zimbreni SRL, Migdal-P SA, Colegiul National de Viticultura si Vinificatie din Chisinau, Aidin SA, SC Megavil Grup SRL, SC Invinprom SRL, SA Bas Altin SRL, AKM-Divinus SRL. It is quite possible that this sad list will be replenished this year. Everything seems to be according to the law, but what is wrong with the law in its essence?
In 2013, the parliament adopted amendments to the law "On Grapes and Wine" (2006), by which it established the Vine and Wine Fund (FVV). The National Office for Vine and Wine (ONVV), established on the basis of a public-private partnership, has been entrusted to manage the Fund by applying the same amendments to the law.
According to the law, all industry participants are forced to pay part of their proceeds to the Fund; the state at the end of the year directs to the Fund the same amount of funds as was received from the industry enterprises.
The Vine and Wine Fund is intended to promote Moldovan wine products abroad, modernize the industry, increase exports, etc.
The most interesting thing is that the State Tax Inspectorate (IFS) was obliged to administer the FVV in terms of replenishment under the same law. That is, de facto, the tax inspectorate controls the collection of contributions to the Vine and Wine Fund according to the same principles applied while collecting taxes to the budgets. And if a company does not pay the contribution to the FVV on time, severe punitive sanctions in the form of fines are applied to the company, with the subsequent transfer of the case to court for declaring the company insolvent.
The State Tax Inspectorate complies with the provisions of the law. In response to InfoMarket Agency’s official request on data for the last three years, ISF provided a number of figures, which we have combined into a table.
| 2018 | 2019 | 2020 | H1 2021 | |
| Amount paid by companies to FVV (thousand lei) | - | 26102,0 | 20213,6 | 6332,5 |
| IFS inspections of economic agents in the industry (units) | 3 | 6 | 8 | 4 |
| Additional accruals to the FVV following tax audits, including penalties and fines (thousand lei) | 172,99 | 765,06 | 714,89 | 1761,06 |
As the State Tax Inspectorate explained to us, for objective reasons, there are no data on payments to the Fund in 2018.
Interestingly, only one economic agent challenged the actions of the IFS in court in 2018. The final fate of this lawsuit has not been officially announced, but since the matter concerns compliance with the law, albeit bad, but the law, the company’s chances to win the case against ISF are miserable.
Who should pay contributions to the Fund and for what and how many such enterprises are there? Cristina Frolov, Director of the National Office for Vine and Wine, at a meeting with the editor of InfoMarket Agency, could not name the exact number of companies that pay contributions to the Fund: their number changes every year, and the fees are administered by the State Tax Inspectorate.
In turn, IFS, in response to InfoMarket Agency’s official request, reported that according to the IFS information system, 130 taxpayers make accruals and payments to the FVV.
Moreover, everyone pays for everything! Here are excerpts from the law that was in force until May 2021:
The payers of mandatory contributions to the Fund are:
а) producers of grafted seedlings for the production of grapes intended for the manufacture of grape and wine products;
b) wine producers;
с) producers of wine-based drinks, wine-based products.
Contributions are made in the following amount:
а) 0.12 lei per one sold grafted seedling for the production of grapes intended for the production of grape and wine products;
b) 30.0 lei per one ton of sold grapes intended for processing (carried out by a winery that purchased grapes for processing);
с) 0.1 lei per one liter of sold wine or wine-based drink;
d) 1.6 lei per one liter of sold absolute alcohol contained in products obtained on the basis of wine, with a volume fraction of alcohol of at least 25 percent.
In May 2021, amendments to the law came into force, which, eight years after the previous edition, slightly cleaned up the gaps in the legislation (but did not change the essence and principles - more on that later).
The concept of Subjects-payers of contributions to the Fund has been introduced, which are:
a) producers of grape planting material of wine varieties;
b) exporters of fresh or crushed wine grapes, exporters of stum of all categories;
c) producers of wines, stum-based products and aromatized grape and wine products;
d) producers of wine-based products.
The determined objects of taxation as a mandatory contribution to the Fund are:
a) supply of grape planting material of wine varieties;
b) export supply of fresh or crushed grapes, wine varieties and stum of all categories;
c) supply of wines, stum-based products and aromatized grape and wine products;
d) supply of products derived from wine.
It was changed the rate of mandatory contributions to the Fund for the following position:
d) 1.2 lei per liter (instead of the previous 1.6 lei per liter) of sold absolute alcohol contained in wine-based products with a volume fraction of alcohol of at least 25 percent.
In fact, in addition to reducing the rate for distillers, producers of seedlings are exempted from obligatory payments to the Fund if the seedlings remain in Moldova; as well as wine and spirits producers when purchasing raw materials in the local market.
These details are critical to understanding the situation in which the industry has been driven over the course of eight years by the 2013 Amendments to the law “On Grapes and Wine.”
From 2014 to May 2021, the bunch of grape made mandatory payments to the Fund three times: when it was a seedling, when it became a raw material, when it became a finished product.
This year, the situation has been corrected, but this does not solve the main problem: the obligatory payments, which are essentially equated to taxes, and the effectiveness of the use of the Fund's means for the development and promotion of the industry.
In response to InfoMarket Agency’s official request on receipts to the Vine and Wine Fund for the last three years, the ONVV sent us the following data:
| (thousand lei) | 2018 | 2019 | 2020 | H1 2021 |
| Total Amount of the FVV | 43089,6 | 29919,5 | 19696,1 | 6332,5 |
| Contributions Paid by the State | 21662,2 | 3817,6 | 0 | 0 |
| Contributions Paid by the Wine Industry | 21427,4 | 26101,9 | 19696,1 | 6332,5 |
That is, over the past three and a half years, the industry has directed to the Fund a total of 73,557.9 thousand lei. The same amount should have been provided to the Fund by the state, but in reality only 24479.8 thousand lei came from the budget. That is, the state has fulfilled its obligations prescribed by law only at 34.6% (over the past 3.5 years).
In fact, the situation is even worse: since 2014, when the National Office for Vine and Wine and the Vine and Wine Fund started operating, the state has never fulfilled at 100% its obligations under this “public-private partnership”. However, due to the same reason of non-fulfillment of obligations to the Fund, prescribed by law, nine enterprises in the industry went bankrupt because of lawsuits filed by the IFS.
And finally, the most interesting thing: how are the funds of the Vine and Wine Fund spent? The law outlines where the funds should be directed. These are 11 items of standard phrases, such as: "export promotion", "technology and know-how transfer", "development of investment projects", "analysis", "training", "consultations", and "maintenance of the vine and wine register".
The National Office for Vine and Wine also replied with quotations from the law to the request on the use of the Fund's resources. In the same response of the ONVV it was emphasized that platforms such as the Marketing, Viticulture and Wine Platform, which include representatives of the industry, have been created to inform and advise the wine industry on the activities of the ONVV. Meetings are held on a quarterly basis, during which priorities for further activities are determined. Additionally, there are conducted surveys on certain sectors and activities related to the industry. The transparency of the processes is published on the official website of the ONVV.
There are only four documents published on the ONVV website: the ONVV annual report for 2019, the ONVV procurement plan for 2020, the procurement plan for 2021 and, most interestingly, the ONVV 2020 budget, published on July 8, 2021. (Maybe this is a coincidence, but the first (of two) official request to the ONVV, including a request to meet with ONVV Director Cristina Frolov, was sent by InfoMarket a day before the publication of the 2020 budget on the ONVV official website, that is, July 7, 2021.)
The published budget for 2020 itself is presented in a very condensed form. What can we learn from it? Here are the main indicators (extracts), in thousand lei:
| I. INCOME | 19758,71 |
| 1. Industry | 19696,16 |
| 2. State | 0,00 |
| 3. Other Income | 62,55 |
| II. EXPENSES | 18522,62 |
| 1. Export promotion, market research and analysis | 9889,93 |
| 1.1 Sectoral development strategy | 472,07 |
| 2. Support and development of the wine sector | 1688,90 |
| Including: Implementation of programs for the development of viticulture and vinification / Development and implementation of projects, investment programs and technical assistance in the wine sector / Transfer of technologies and know-how / | 1499,64 |
| Implementation of training and professional development programs "Wine Academy of Moldova" | 113,80 |
| Management of production of wines with a protected geographical indication, with a protected designation of origin and with a country brand / Development and implementation of programs to ensure the compliance and quality of wine products / Conducting industry analyzes; | 75,46 |
| 3. Remuneration and financing of expenses | 6378,89 |
| Including: Labor costs | 5085,40 |
| Travel expenses | 23,80 |
| Administrative expenses | 1150,27 |
| 4. Purchase of fixed assets | 119,42 |
| 5. Other expenses (warranty return) | 92,83 |
As for the participation of the industry in the processes of spending the Fund's resources, one can hardly talk about the entire industry. According to the tax inspectorate, 130 economic agents pay contributions. The Coordinating Council (Management Board) of the ONVV includes 13 people appointed by the Ministry of Agriculture. Including: “three representatives delegated by the ministry, one of them is an employee of the ministry, two representatives each delegated by the Vine and Wine Association of the Delimited Geographic Region "Codru" and Association of Producers of Wine with Protected Geographical Indication "Stefan Voda", three representatives delegated by the Vine and Wine Union of the delimited geographical region "Valul lui Traian", one representative each delegated by the Association of Producers of Wine with Protected Geographical Indication "Bălţi" and by the Association of Cognac and Brandy Producers of Moldova and the Association of Nursery Growers and Winegrowers”.
Not only small, but also large producers are dissatisfied with the fact that for eight years, apart from the paid contributions, they have not personally felt any benefit from the ONVV.
Yes, similar Funds exist, for example, in Italy (Prosecco) and France (Cognac). For the right to write the appropriate name on its products, the manufacturer must not only meet the established quality criteria, but also pay a contribution to the Fund from each bottle sold. On the other hand, the inscription Prosecco or Cognac on the bottle brings an additional 1-2 euros in income - so it’s not a pity to pay to the Fund. Our situation is described above.
According to the current law, charges to the Vine and Wine of Moldova are formed at the time of shipment of products, signing of the invoice. This means that there is a purchase and sale operation and the corresponding funds are transferred to the seller's account. Once the funds have been received, some of them must be donated to the Fund. So why do businesses go bankrupt? Businesses go bankrupt because they are charged additional taxation, and in a crisis, and especially with a 30% drop in sales in 2020 against the backdrop of the pandemic, revenues are declining while maintaining the level of necessary expenses. In such conditions, it is sometimes necessary to sell products below cost in order to cover part of the costs. And if from the point of view of economic activity the enterprise registers losses and does not pay income tax (because there is no income), then from the point of view of the law “On Grapes and Wine,” the enterprise is obliged to pay contributions to the Fund in accordance with the established tariff. And this, just as in the case of income tax, is monitored by the IFS with all the ensuing consequences.
The situation in the industry has reached a critical level. Winemakers, representing more than 70% of the sector, have united outside the walls of the ONVV to force the state to rectify the situation. InfoMarket Agency learned about this when our correspondents talked to more than a dozen managers and owners of wineries. Unfortunately, for reasons well known in the industry, none of them agreed to be quoted openly.
Summarizing the opinions expressed, it can be noted that the Vine and Wine Fund is extremely necessary to advance the interests of the industry. And the ONVV is supposed to manage the Fund (FVV). As far as it is concerned the question on how transparent the Fund is for the winemakers who finance it, the general answer can be boiled down to the fact that the most important issue is the efficiency of using the Fund's resources. One can beautifully describe how the resources of the Funds were used, but everyone, especially the small winemakers, want to feel the "work result" of their contributions on themselves.
Should payments to the Fund be mandatory or voluntary? And here everything converges on the issue of the effectiveness of the Fund and the activities of the ONVV. On the one hand, no one will pay voluntarily. Moreover, for eight years, many companies have not felt that they are being charged a "wine tax".
On the other hand, it would be more correct that contributions to the Fund were voluntary; thereby the ONVV would try to work harder for an effective result for each winemaker. Indeed, today ONVV has no material incentive to work better and more efficiently - money comes in any case according to the law.
The voluntary contributions will force the ONVV not only to work more efficiently, but also to account in more detail for each leu (MDL) received from the industry. Annual meetings on the principle of joint-stock companies (which, in essence, is very similar in the Fund), would remove the Fund members’ all questions regarding its use.
Winemakers also disagree with the fact that contributions to the Fund are actually tax and are administered by the State Tax Inspectorate. When it comes to a professional association (which should be the ONVV), then only its leadership should determine the degree of participation of enterprises, especially during the crisis, in which everyone suffered because of the pandemic. There should be deferred payments if it threatens bankruptcy, temporary membership suspension, etc. - there are many mechanisms. But it should not be a punitive body in any way. Investments, assets, and, most importantly, people stood behind the nine enterprises that were bankrupted by the State Tax Inspectorate in compliance with the current law!
Finally, when it comes to public-private partnership (PPP), then each partner must fulfill its obligations in full. The industry has accumulated big claims against the state, which, according to the law, must direct to the Fund the same amount that was collected from winemakers but de facto finances the Fund at less than a third. In the last two years, the state has not transferred a single leu (MDL) at all. And since the state is not able to fulfill its obligations under PPP, then maybe this partnership is not necessary at all? The Fund is almost entirely financed by the industry's enterprises, which means that its participants must manage it, as shareholders manage a joint-stock company. Then the state will not have the right to interfere in the activities of the professional association.
This means that there will be no open letters: similar to the one that appeared in late August 2021: more than 40 winemakers, representing 70% of the industry, expressed a vote of no confidence against the ONVV director Cristina Frolov and the current policy of the organization she leads. In an open letter to the President of Moldova, Speaker of Parliament, Prime Minister, Head of the Ministry of Agriculture and the leadership of the Agency for Integrity, it is noted that the ONVV director threatens the credibility of the National Office for Vine and Wine itself. Winemakers believe that Moldova may lose the institution that laid the foundations for the reform and restart of the industry in 2013, because in the current conditions of the economic crisis, no producer will consider it reasonable to pay contributions to the Vine Wine Fund. // 06.09.2021 - InfoMarket.
