KPMG’s Robert Shantz reflects on ways to make your tax affairs more efficient.
KPMG is one of the so-called Big Four global accounting and auditing firms that specialize in auditing, accounting, tax and legal advisory services. In this Kyiv Post interview, Robert Shantz, the group’s senior partner in Ukraine and an expert on tax and legal services, discusses the essence of tax optimization advising, and the benefits it can offer to businesses operating in Ukraine.
KP: What kind of companies or individuals turn to firms for tax optimization and why?
RS: Our client base is pretty broad. It consists of both international and large Ukrainian business groups. Tax optimization is about being more efficient in tax planning, [staying] entirely consistent with what the legal provisions permit. The advice on what types of approaches may be made available in terms of tax optimization depends on what business sector a company or a client operates in. Specific strategies might include more emphasis on restructuring if we’re [assisting] a group of companies. Because there is no consolidation of corporate profits tax…among companies within a group, you may [have] … losses in one company and a huge tax bill in another. Other approaches may include opportunities for cross-border transactions … within the transfer pricing rules, of course, allocating profit to the jurisdiction that has lower tax rate.
KP: Where is the line between tax optimization and evasion?
RS: Tax evasion is an activity that is not consistent with legal provisions…Tax optimization is working within the rules to make your tax affairs more efficient. There is a very clear line there.
We do see [companies] which are using what they consider tax optimization approaches [but] that we feel are not fully consistent with legal provisions, and therefore could be deemed tax evasion. As compared to five years ago, the use of tax optimization techniques with little or no technical merit has probably decreased, both because of reduced tax rates, particularly regarding personal income tax, and the increased interaction and integration of Ukrainian businesses with international markets.
KP: Could you provide some figures and perspective on how the market has been developing in the past few years?
RS: As for tax optimization, the demand for our services was fairly consistent. There is less tax evasion today. Also, when KPMG started working in Ukraine in the 1990s, it was mostly working with foreign investors coming to Ukraine. In the last 3-4 years, we are getting more Ukrainian clients. It is very difficult to specify the precisesize of the market or by how much it grew. But interest in these services is increasing.
KP: What kind of business are you expecting this year?
RS: In the near term, we expect economic conditions to remain challenging. Hopefully, as we go from short to medium term, I think we will start to see more of an upturn. We expect a gradual increase in the level of activity as the year progresses. Yet I’m not sure the demand for tax optimization services decreased [during the recession.] It’s more like the nature of the request changed. Demand has remained consistent and may have even increased. But in the current economic environment, more businesses are incurring losses. In the past, tax optimization had its focus more on trying to increase deductible expenses. Now, more attention is being paid to preserving these losses that are currently being incurred to get a tax benefit in the future.
KP: Have fees for tax optimization services changed since the economic downturn? What is the average cost?
RS: Any professional service firms are being more flexible in terms of their fee structures now. It varies from project to project, but compared to what we have seen last year … the fee quotes have been reduced by 10 to 20 percent, sometimes even much more. Hourly rates can range from $100 to $700…and the total cost of a project can range from a few thousand dollars to tens of thousands of dollars, depending on the size and complexity of the project.
KP: Is the crisis the best time for businesses to optimize?
RS: Any time is a good time to consider efficient tax planning. The crisis focuses people on all of their costs. In that sense, I think many companies have refocused on how they can reduce their tax burden. When there is a downturn in the economy, there is a natural tendency to cut spending.
KP: How much can your services decrease a company’s tax burden, on average, or in a simple case example?
RS: It tends to be very specific for each case and varies greatly from company to another. But one recent project, for example, involved annual savings of more than $200,000.
KP: How do you grade Ukraine’s tax system?
RS: The Ukrainian tax legislation is a bit less clear as compared to some more-settled jurisdictions. The disadvantage is that it’s harder to answer a tax question in Ukraine with absolute certainty. But the potential benefit, depending on your risk profile, may be more flexibility to take different positions in interpreting laws in a way that may give you a tax benefit. KPMG together with the American Chamber of Commerce suggests 10 initiatives on how to make Ukraine’s tax system better and provides specific recommendations regarding the changes required. The key points are that taxes should be fair and neutral. Administration of taxes should be efficient and transparent and penalties for violations should be reasonable. The way the system works now in Ukraine, you can be penalized up to 300 percent for certain understated and underpaid taxes. In a 2008 study by the World Bank and the International Finance Corporation, 181 world economies were analyzed and rated in terms of 10 key business indicators. In terms of paying taxes, Ukraine was rated second to last: 180 out of 181. So there is a room for improvement.
