After government reimbursement of exporters’ value-added tax (VAT) slowed to a trickle during the crisis, total arrears are estimated as exceeding $3 billion.
Companies owed the money complain that they are effectively providing interest-free loans to the state and being shorted of capital needed for their businesses.
But not everybody has trouble collecting from the government. Those out of political favor in Ukraine’s byzantine world of official corruption are finding themselves out of luck.
“We have not been refunded any VAT since September 2009,” said Jean Jouet, chief executive officer of the Kriviy Rih steel mill, the nation’s largest, which is owned by the world’s largest steel concern and Ukraine’s largest foreign investor, ArcelorMittal.
“The buildup of non-refunded VAT is continuing in 2010, adding around another Hr 200 million each month,” Jouet said. “At ArcelorMittal, Kryviy Rih VAT receivables have now reached more than Hr 2.3 billion. If you add to this advanced income tax, an additional Hr 1.4 billion, ArcelorMittal Kryviy Rih is today a creditor to the state for Hr 4 billion. This is such a huge amount, that the company is clearly facing severe cash management issues today.”
Adding insult to injury, Jouet says that Ukrainian-owned, well-connected steel companies have managed to get VAT they paid on exports reimbursed. According to Jouet, ArcelorMittal is disadvantaged by its lack of connections and unwillingness to pay bribes.
“We are the outright champions in terms of the non-refund of VAT,” said Jouet, pointing out that the state’s VAT debt to ArcelorMittal constitutes around 10 percent of its entire VAT refund debt to exporters. “We are witnessing the unfair treatment of international investors,” he argued. “The list of companies that have unreturned VAT does not include our biggest competitors, which means that these companies basically do not experience difficulties with return of VAT.”
Jouet’s claims are backed by documents provided by Ukraine’s Tax Administration to a Verkhovna Rada roundtable on the mining and metallurgy sector.
According to these documents, in the first three months of 2010, Industrial Union of Donbass was returned Hr 413 million worth of VAT, and Azovstal Hr 262 million. Azovstal is part of Ukraine’s richest man Rinat Akhmetov’s mighty Metinvest holding. Akhmetov is a deputy in the governing Party of Regions and considered its chief financial backer. Industrial Union of Donbass (IUD), owned by oligarch Sergei Taruta, is also deeply tied into the political establishment.
“Metinvest, IUD, and Konstantin Zhevago [owner of iron ore producer Ferrexpo] have all had VAT returned, but not ArcelorMittal,” said Oleh Rybachuk, former head of the presidential secretariat under ex-President Viktor Yushchenko and a member of the ArcelorMittal supervisory board. “The whole refund process should, in fact, be automatic, since companies export a steady amount each month, and it is easy to monitor.
“Yanukovych’s people from Donetsk came to power saying they had the managerial skills to run the country improve the investment climate, but we have seen nothing of this yet, nor are we optimistic,” Rybachuk added.
Analysts point out that global companies like ArcelorMittal have high levels of transparency and post high profitability, rather than conceal profits. In addition, they have financial banking from their parent groups. This means the government knows they have enough cash to keep working if VAT refunds are withheld.
Embattled steel producer MMK Ilyich is another company getting shorted, coming in second place after ArcelorMittal. According to the information provided by Ukraine’s Tax Administration, VAT arrears for the first three months of 2010 reached Hr 962 million. According to Volodymyr Boiko, director of Ilyich, the VAT arrears jeopardize the stable running of the stand-alone steel company.
In 2009, Boiko periodically threatened to close the plant because VAT refund arrears were absorbing working capital. Analysts believe that MMK Ilyich arrears are a result of the stand-alone, management-controlled company lacking patrons in Kyiv. But with the company currently the target of a hostile takeover attempt, there are also suspicions that the snowballing refund arrears are a method of pressurizing Boiko to sell out.
Politics also play a role regarding VAT returns to agriculture exporters, who account for 25 percent of Ukraine’s total exports. According to Volodymyr Klymenko, president of the Ukrainian Grain Association, VAT debts to grain and sunflower oil exporters had reached Hr 5 billion (approximately $440 million), by the end of March 2010, causing a 20 percent drop in purchase prices to Ukrainian producers. Recently U.S. grain giant Cargill threatened to reduce operation of its grain-trading business in Ukraine due in part to the VAT refund situation, with media reports putting total debts to Cargill at $100 million. Many major grain exporters in Ukraine are multinational set-ups, including, besides Cargill, Glencore, Bunge, Louis Dreyfous and Alfred Toepfer.
Besides the question of political sweetheart deals and a discriminatory approach against foreign companies, the VAT issue is becoming a giant engine of corruption, with officials demanding sizable kickbacks to assist the reimbursement process.
In an interview with weekly Kontrakty on May 10, Viktor Sheibut, first deputy chairman of the State Tax Administration, acknowledged hearing that the current level of kickbacks demanded by officials for VAT reimbursement had reached 20-30 percent of the sum claimed, although he could not confirm the figure. According to Stephen Pickup, chief financial officer of London-listed agricultural operator Landkom, which is also suffering from government failure to refund VAT, paying a bribe moves a company to the top of the queue. But foreign-listed companies like Landkom cannot do this.
Because international companies have few possibilities to protect themselves in Ukraine, they have been lobbying internationally for a solution to the problem. “As a member of the European Business Association, we took part in a common initiative with EBA and raised the issue with various international institutions, International Monetary Fund, European Bank of Reconstruction and Development and World Bank,” said Arcelor’s Jouet.
U.S. company Cargill has been more active in Washington, using the U.S.-Ukraine Business Council to lobby its cause at the highest level during President Viktor Yanukovych’s visit, including calling him out on the issue during a lunch with investors. The situation with non-refund of VAT is negatively impacting Ukraine’s difficult talks with the International Monetary Fund, Serhiy Lyovochkin, President Viktor Yanukovych’s chief of staff, confirmed on May 26.
On June 1, the government published its long-awaited solution to the VAT refund arrears. It would issue domestic bonds to companies in lieu of cash, a solution already implemented by Yanukovych during his spell as prime minister in 2004. The scheme envisages five-year bonds with 5.5 percent interest and paying down 10 percent of the principle semi-annually. Companies are free to opt for the bonds or to hold out for cash in the distant future, and there are no restrictions on the secondary re-sale market.
Analysts anticipate a repeat of 2004, with cash-strapped companies quickly selling their bonds at a significant discount on the secondary market. While analysts expect companies to be happy to have at least some of their cash returned, considerable anger remains at what has been basically robbery via the backdoor of Ukraine’s crucial export sector.
“I don’t believe in this solution at all,” Rybachuk said. “It implies an unacceptable discount for us.”
Kyiv Post staff writer Graham Stack can be reached at [email protected].
