Tax officials likely to target big companies with deep pockets, not average citizens
Businesses and residents -in Ukraine have made many painful adjustments in the wake of the global economic downturn. But as 2009 progresses, they will almost certainly have to endure at least one more headache: aggressive tax collecting from a revenue-starved government.
A gaping budget deficit may force tax inspectors to work overtime to plug the shortfall. That bracing reality is, at least, what tax experts are advising everyone. Citing clients, the tax pros say many businesses have already felt the prying eye of inspectors desperate to collect more, or at least as much, as was raised for state coffers last year when the economy was doing better.
Government officials deny giving such orders to tax inspectors and, in an apparent call for calm, they insist all is well.
Serhiy Vlasenko, deputy head of Ukraine’s State Tax Administration, denied there was any shortfall. Yet figures from the state treasury appeared to contradict his words, suggesting only about half of planned tax revenue had been collected by Jan. 26.
“In January, tax authorities over-performed, collecting 106 percent of [planned] revenues,” Vlasenko told the Kyiv Post. He explained that lower tax revenues were expected and adjustments made “taking into consideration the crisis.”
A different story is heard elsewhere.
“The tax inspectors [are coming] at clients more and from many more sides than they were six months ago,” said Ron Barden, partner at the Kyiv offices of PricewaterhouseCoopers, one of the world’s so-called ‘Big Four’ accounting and auditing groups.
Igor Davydenko, partner at the Kyiv offices of Salans law firm, agrees. If companies truly have less taxes to pay due to business slowdown, one strategy the tax authorities seem to be adopting is to make up the difference by slapping on more fines for violations, possibly more so than last year.
“In the previous years, the essential part of taxes collected appear to have come from fines imposed by tax authorities for disclosed violations. I believe it will happen again this year,” Davydenko said.
Despite reassurances by officials that all is fine for now with budget inflows, businesses say they are experiencing clear signs of trouble.
Landkom, a foreign-owned farming group that has expanded fast in western Ukraine after raising more than $111 million, says its business helped Ukraine reap a record grain harvest in excess of 53 million tons last year. Instead of praise, the group is now facing massive losses due to the state’s inability to refund — on time and in full — value added tax paid on grain that was exported. Tax law envisions that this tax is to be refunded for goods that are not consumed in Ukraine.
“When a tax officer came to do the inspection, they said to my accountancy team and auditors that they are laughing at us for claiming the refund, because the state simply does not have any money to pay us,” said Richard Spinks, CEO of Landkom.
Landkom says the tax administration’s overdue refunds have piled up to more than Hr 74 million. For this and other reasons, the company has cut plans to sow 54,000 hectares this year down to 34,000 hectares. Landkom has also postponed investments and expansion plans.
Spinks said his company, which employs 750 Ukrainians, last received a value added tax refund in June 2008.
Tax experts said the experience of Landkom is becoming increasingly common.
Lawyers at Salans said tax authorities have also adopted new strategies to boost tax receipts. For example, homeowners are being encouraged to expose neighbors who earn income by renting out flats, but who pay no tax on this income.
Experts also expect stronger crackdowns on companies that blatantly avoid paying large sums of taxes by giving employees the largest share of their income ‘under-the-table’ in envelopes.
Nevertheless, your average citizen should not expect his or her chances of being targeted by tax officials to be large.
PricewaterhouseCoopers’ Barden said the “larger taxpayers,” namely large- and medium-sized businesses, are the likely targets. “There are bigger amounts involved,” he added.
But ultimately, if more is squeezed out of big enterprises, their employees will also feel the pinch, either via layoffs or cuts to salaries, benefits or working conditions, experts said.
Tax advisers urge companies that are likely to be targeted to prepare and protect themselves, foremost by hiring companies with expertise in the area to conduct a so-called tax audit. It’s a way of testing your company to see what violations tax officials may find, thereby reducing fines that could be imposed upon your company and costly legal fees that run up in a court standoff.
While fees vary dramatically depending upon the firm providing such services and the size of your company, tax experts said an audit can, on average start at $5,000 for a small company. Larger companies could pay $50,000 or more to expose millions of potential tax violations. Tax auditors can bill anywhere from $100 per hour to much higher rates in the $700 range.
Barden said one of the easiest yet most important preparations companies can do to reduce chances of fines by tax inspectors is to make sure all documents “are as accurate as possible.”
“The more paperwork you have, the better,” Barden advised.
This might also be the year for many who evaded taxes in the past to consider legalizing shadow income. Doing so will cost a 5 percent minimum penalty if you correct the mistake by yourself. If you are caught, the penalty could cost 50-100 percent and include criminal offenses.
Looking ahead, tax experts said the best way for Ukraine to boost tax revenue would be to clean up its tax system, liberalizing it enough to boost investment into the country.
The country still has a long way to go in this area, however. A recent report done by PricewaterhouseCoopers, International Monetary Fund and the World Bank entitled “Paying Taxes 2009. The global picture,” ranked Ukraine 180th out of 181 countries in terms of the ease of paying taxes. Rampant red tape, corruption and the overall complexity of the tax system are the main problems in Ukraine’s tax system, according to the study. Many tax experts say Ukraine could also boost budget revenues by cutting taxes, a move they insist would increase the tax base and business activity overall.
“If you improve the investment climate, more companies will invest in Ukraine. That means more taxes will be paid, more people will be employed, and so on,” Barden said.
