With the International Monetary Fund holding back further lending over suspicions that Ukraine’s budget deficit is overly optimistic at 5.3 percent of gross domestic product, the government is faced with a choice – cut spending or increase revenues.
Unwilling to undermine its populist mantra, the new administration appears to be turning to well-worn tactics to boost the tax take.
In other words, tax collectors are turning the screws on businesses.
Businesses are complaining that the tax administration is refusing to accept income statements, claiming mistakes in the report or demanding that companies declare profits even if there are none.
Fines are then assessed for missing deadlines or other additional payments are imposed.
The owner of three small import and trade companies, who asked not be identified out of fear of reprisals from tax authorities, said the government did not accept her report declaring zero income at one of her companies. The company in question has been registered, but is not operating.
“After I declared some income and paid a tax on it, they didn’t stop. I was later asked to pay a little bit more, but I refused,” the business owner said. Her obstinacy has resulted in penalties running up to Hr 50,000 now. “If in previous years [the tax administration] applied pressure to get bribes, now it uses pressure to get payments for the budget.”
The tax administration is not the only government agency trying to squeeze out more revenue. The business owner said that pressure is coming from the customs agency, which assesses tariffs on imports.
“I don’t know how high they’ll raise them. If they don’t stop, we will have to close up eventually,” the owner lamented.
Another business owner, the financial director for a group of companies in petrol and construction with more than Hr 50 million in revenue, also refused to be identified out of fear of government reprisals.
This owner said that, for the first time, the tax administration has refused to accept reports because the company isn’t located where it’s registered.
“This is insane. The business was established 10 years ago. Tax officials have always known where we are, and visited us with various inspections and checks,” the owner said.
She also said a tax official asked her to pay taxes based on revenue, not profits. For all these reasons, the owner has yet to submit the report. For every month the owner is late, the government will impose fines – so far Hr 680.
“It is not a question of money, but attitude. We won’t go to court for Hr 700. I just suspect we were put on some kind of list,” the owner said.
Many economic experts and politicians consider the 2010 budget, with revenues projected at Hr 219 billion, to be optimistic bordering on fanciful. The figure for revenue is 18 percent higher than the 2009 budget, including 36 percent more in tax collections, while gross domestic product is expected to grow by only 3 percent. Experts have estimated that the actual combined deficit of the budget, Pension Fund and state gas company Naftogaz could reach up to 16 percent.
“With such a modest economic growth rate, how can a budget get so much more taxes?” asked Kseniya Lyapina, an Our Ukraine lawmaker and deputy head of the State Committee of Ukraine for Regulatory Policy and Entrepreneurship.
Despite claiming that additional cash for the budget will be taken from the shadow economy, estimated to account for 40 percent of all business activity, the government has instead put greater pressure on business that operates legally, Lyapina said.
Bigger businesses, for instance, are strongly encouraged not to file reports that show losses or low incomes. They are also discouraged from making declarations claiming refunds of value-added tax.
“This tactic [of refusing to accept declarations of losses] has always been common, but it became worse this year because more companies suffered losses during the economic downturn in 2009 than during the economic boom,” said Ron Barden, a partner at PricewaterhouseCoopers, one of the Big Four tax and legal advisories.
“If the tax administration continues chasing people and challenging every appeal all the way through, and if the economy picks up, then budget targets can be met. But if you tax too much, it stops the economy,” Barden added.
But an official at the president’s administration, commenting on the condition of anonymity, said that the tax authorities know the risks, and won’t take more than people can afford to pay. “Nobody wants to kill their milking cow,” he said.
The refusal to accept reports and declarations are against the law, according to Barden. One way to protect a company’s rights is to go to court. Another is to develop various strategies to ensure that the reports and requests for VAT refunds are submitted on time, Barden said.
“How do you spend time and money to fight with tax officials, unless it is over a significant amount of money?” Barden asked.
Valentyna Pronina, an expert from the Association of Taxpayers, said the tax administration is obliged to accept reports and declarations that fulfill the requirements.
“To ensure that the report is accepted, a company can send it by the post 10 days before the deadline, submit it in person with two witnesses or via the electronic reporting system,” said Pronina.
But, business insiders say, the tax administration has many levers of pressure and rely on companies and entrepreneurs to find compromises in order to avoid additional inspections and audits.
Kyiv Post staff writer Olga Gnativ can be reached at [email protected].
