The city council approved a plan last week that will send inspectors to determine where the city's businesses are registered. They hope to uncover a sizable number of businesses that aren't paying their fair share to city coffers.
n’t paying their fair share to city coffers.
The culprit, according to city officials, is a legal loophole that allows businesses to register as taxpayers in any city, regardless of where they actually operate.
The city’s plan, adopted by the City Council on March 14, would dispatch an army of inspectors to determine where each of the thousands of companies doing business in Kyiv are registered. They believe that a significant number of businesses working in Kyiv are registered in other cities.
Mayor Oleksandr Omelchenko is expected to approve the plan, which originated within the Kyiv City Administration, which he heads.
About half the profit tax paid by businesses is returned to the local government where the firm is registered. Yet legislation allows businesses to register as taxpayers in any city, regardless of where they work.
“There are many instances when companies that actually operate in Kyiv register outside the city or other oblasts. As a result, they pay taxes to As a result, they pay taxes to budgets in those regions rather than to our budget,” said city council budget and finance committee chairman Volodymyr Prysyazhnyuk.
Prysyazhnyuk said that State Tax Administration officials would likely join city inspectors in the canvass.
State Tax Administration spokesman Vitaly Lukyanenko said there are no laws on the books to prevent businesses from registering in a different city.
“This is a problem,” he said.
About 200,000 companies are registered in Kyiv, according to Oleksandr Shlepnin, deputy director of the city’s Private Enterprise Department. Shlepnin said he believes that the number could be much higher.
With 14 percent of Kyiv’s budget derived from the profit tax, the city has a stake in changing the law, he said.
Tax specialists say there are many reasons why a company would register outside Kyiv.
“Tax laws are fairly consistent throughout the country, but there are some relatively minor Kyiv city taxes that certain companies might want to avoid,” said Pavlo Moroz, senior tax specialist at Deloitte & Touche’s Kyiv office.
“In another case, they might try to register in a free economic zone or a region blessed with lower tax bases,” Moroz said.
But Moroz cautioned that it is illegal for a company to register in a free economic zone if it is not operating there.
Some companies have ties to other regions and are headquartered in Kyiv, but not registered there.
“I think this could have occurred historically as the company developed. For example, a company may have once been based outside of Kyiv at the location of its factory, but then decided to open its headquarters office in Kyiv,” Moroz added.
Yet Shlepnin and Lukyanenko agree that any changes to the tax code would need to be drafted carefully. Kyiv is home to several large taxpayers that are registered but which have extensive production facilities elsewhere in the country.
By compelling companies to pay taxes in the regions in which they operate, Kyiv could lose profit tax revenue, Shlepnin said.
“[State oil and gas monopoly] Naftogaz Ukrainy and [state‑owned nuclear power plant operator] Energoatom are huge taxpayers registered in Kyiv, but they operate primarily outside Kyiv,” said STA’s Lukyanenko. “Kyiv wouldn’t want to lose that revenue.” Companies that are registered elsewhere are not violating the law, Prysyazhnyk said, and no action will be taken against the firms. The survey is merely meant to help the city decide how to approach the problem.
Still, implementing the count could prove tricky.
“I don’t see how the city will be able to conduct the survey,” Shlepnin said. “There is no mechanism for doing this.”
Deloitte & Touche’s Moroz agrees. He said that several laws stand in the way of the business census.
The nation’s tax laws prescribe specific conditions that must be met before an inspection can be conducted, he said. Moroz said that tax collectors and Kyiv officials can’t just go door‑to‑door scrutinizing businesses without warning. Businesses are entitled to 10 days notice before an inspection, he said. That gives firms more than enough time to re‑register or to move their operations ahead of the inspection.
In addition, regional tax inspectors can inspect only businesses that are registered in their region. This creates a Catch‑22 for inspectors, who are allowed to visit only businesses they know are registered in the city while looking for businesses that are registered elsewhere.
If city inspectors can’t visit businesses that aren’t on the local registration rolls, state tax inspectors, who have nationwide authority, can.
STA spokesman Lukyanenko said the city would receive his agency’s support provided that the inventory is in accordance with the tax law.
Kyiv city officials have provided few details about how the inspections will be conducted, but say that they aren’t being pressed to get the job done quickly.
