Foreign companies have frequently found it daunting to do business in Ukraine. Now, those with representative offices registered as non-commercial entities have faced increased scrutiny by tax collectors.
Last year, the Ukrainian office of Pfizer pharmaceutical company was ordered to pay Hr 31 million in taxes and fees. The levy dates to 2010 when tax inspectors accused the company of violating its non-commercial status. According to the tax office, the pharmaceutical company’s Ukrainian branch had imported Hr 21 million worth of medicines for testing.
Normally, representative offices with non-commercial status only cover payroll taxes, which is usually 50-55 percent of salaries. In addition to payroll taxes, commercial entities pay 19 percent income tax and 20 percent in value-added tax.
According to Ron Barden, partner of PwC in Ukraine, the Pfizer case could embolden tax authorities to challenge representative offices beyond the pharmaceutical sector. The trend started with the pharmaceutical industry four years ago “and they had success. So now they want to do more of this,” Barden says.
Barden and other experts acknowledge that the tax authorities have a valid claim in alleging commercial activity by some representative offices. But he complained of indiscriminate enforcement.
“They go after everyone now,” Barden says. “Every time they look at a non-commercial office, they try to assess it. If the office has two or three employees and the tax demanded is $10,000 to $20,000, the companies choose to pay, because it costs more to fight. But in some cases they are assessing millions of dollars.”
The Ministry of Incomes and Fees, which since last year united the tax and customs divisions, has become a powerful force for cracking down on tax evasion and tax avoidance as Ukraine seeks to beef up its government revenue.
According to Serhiy Verlanov, legal manager at PwC Ukraine, the ministry in 2012 sent 45 pages worth of detailed instructions to local tax officials on how to treat non-commercial offices.
“On the ministry level, the approach is quite sophisticated. But that’s why this approach is hard to understand for local tax inspectors, and that’s why the application of this approach is quite formal, making it difficult to fight with a specific tax inspector when being audited,” said Verlanov.
Olena Levshun, a partner in EBS Ukraine, says international companies established non-commercial representative offices to enter Ukraine’s market because it used to be the favored way to establish a presence in Ukraine..“To some extent the violation (of non-commercial status) was unintentional, because the legislation is fuzzy,” she said.
Dmytro Savchuk, an associate in Lavrynovych & Partners law firm, says he warns clients who register a non-commercial office that their tax status may be challenged. “The legislation is intricate, and Ukrainian tax inspectors can twist it,” he says.
“The edge is quite thin,” says Viktor Shekera, senior manager of tax and legal consulting at KPMG Ukraine, of the grey zone between commercial and non-commercial activities.
EBS Ukraine’s Levshun believes that tax authorities are legitimately targeting commercial activities. Companies found to have evaded taxes must pay the back taxes plus penalties, but company officials can also be individually assessed fines of up to Hr 425,000 for a second offense.
To count as non-commercial, the representative office must conduct activities different from those of the head office. “If it’s a staff of two or three people, it looks reasonable, but not when it’s 50 people, a 1,000-square-meter office, and 100 cars in possession,” Levshun says.
Olena Makeieva, managing partner of Aksonova and Associates audit company, who holds trainings on taxation, said: “In the beginning, I ask how many in the audience think their company is non-commercial. And so many hands rise at once. In the end, after I go through the indicators of a commercial representative office, I ask the same question, and the situation is completely different. I see the sad faces of accountants, who are puzzled with the risks.”
Providing services to other companies other than the head office can also disqualify the firm’s designation as non-commercial. That’s what happened to Pfizer, tax authorities said.
But even the most careful approach is no guarantee, Barden says, because “you can never be 100 percent secure in Ukraine.”
Kyiv Post staff writer Olga Rudenko can be reached at [email protected].
