Ukraine’s top taxman has confirmed what many analysts, politicians and journalists have long suspected: massive tax evasion and avoidance by companies is each year robbing financially-stretched budget coffers of billions of dollars in badly needed revenue.
Citing analysis of customs declarations, Oleksandr Klymenko, head of Ukraine’s State Tax Service, said nearly $25 billion in profits are stashed abroad annually in tax havens by export-oriented businesses using transfer pricing schemes. Closing such schemes would alone noticeably close the nation’s tax gap of uncollected revenue, which was estimated by Korrespondent magazine to be $44 billion in 2011.
“Fifty two percent of exported Ukrainian goods are supplied through third parties (middleman companies), of which, 13.8 percent go through offshore zones,” Kommersant business daily quoted Klymenko as saying. “In metallurgy alone more than 75 percent of the volume of operations for black metals goes through third parties. Some $8 billion went through third parties.”
Klymenko added that the largest user of third parties is the grain market where 98 percent of export operations, or more than $3 billion worth of transactions are conducted using third parties, often times with companies that are connected to each other.
Klymenko did not name companies suspected of evading taxes illegally, or those that abuse legal tax optimization schemes. He said tax authorities in cooperation with the National Bank of Ukraine are working on a plan that could in the near-term stop companies from moving up to $10 billion of yearly taxable money to offshore zones.
The capital flight obstacles he wants to erect are still in the works, he said, adding that authorities will get tougher down the road on companies guilty of abusive practices.
“We have mechanisms (being developed), but until they’re finalized, I don’t want to announce them to the public,” said Klymenko.
About a third of total 2011 tax payments to local and federal government budget coffers came from just 20 companies listed by Korrespondent magazine in a Sept. 7 ranking of the nation’s top taxpayers.
The figures show to what extent Ukraine’s economy is undiluted and controlled by a handful of people and companies. Analysts said that while the ranking is not completely accurate, it nonetheless helps to illustrate the scope of tax dodging across the nation’s economic landscape because of legal and illegal means of tax avoidance, including the use of transfer pricing, offshore countries and various forms of illicit money conversion and money laundering schemes.
Korrespondent found that the nation’s 20 biggest taxpayers paid some $13.6 billion in taxes last year. The bulk of this came from the ten biggest contributors who paid $11 billion into the state and oblast budgets in the form of profit tax, value-added tax, rent, excise and other taxes.
According to the Finance Ministry, a total of $33 billion made it into the federal state budget in 2011 as tax revenue. Other tax receipts made it into regional government coffers. The state tax service recently reported that in January-August of this year, the 15 largest taxpayers paid $5 billion into the budget.
Eleven of the top 20 taxpayers singled out by Korrespondent are foreign, four are wholly or partially government-owned, and the remaining five are private businesses. Oil and gas, steel, coal, electricity, rail and tobacco companies make up the top 10 list.
“It’s not a secret that many Ukrainian companies, especially those that are linked to oligarchs, minimize their taxes not only with the help of technical measures but through their influence and connections,” said Alexander Minin, senior partner at KM Partners, a Ukrainian law firm.
Hennadiy Voytsitskyi, head of the tax practice at the Kyiv office of international law firm Baker & McKenzie, said western companies have completely different standards when it comes to paying taxes.
“To pay taxes is a many years tradition for them. They pay taxes in Ukraine or in their native country,” he said. “While for some Ukrainian businessmen it’s a matter of honor not to pay taxes.”
Distrust of how government spends public funds was cited for widespread tax evasion.
“I, like many entrepreneurs, don’t believe that the taxes we pay are used rationally,” Korrespondent quoted Ihor Humenny, president of UBC Group, a maker of freezing storage facilities.
Voytsitskyi said tax rates are a secondary question and have nothing in common with a desire to pay or not to pay taxes. “The state does not care about its citizens and citizens do not care for the state,” he added.
Maintaining a competitive edge was also cited as a reason for tax avoidance, especially in the wholesale, retail and information technology sectors.
Overall, Korrespondent said, companies simply don’t want to deal with the daunting task of full tax compliance citing the discretionary power of authorities who demand tax payments in advance, impose fines and who can confiscate computer hardware and company documents.
Additionally, the publication cited the risk of exposure to potential company “raiders” if a company operates fully in the white.
Ildar Gazizullin, senior analyst at Kyiv’s International Centre for Policy Studies, said that even though Korrespondent’s list of top taxpayers ostensibly reflects Ukraine’s mostly natural resource and commodity-based economy, he would’ve expected to see agribusinesses and financial service companies.
“These sectors started to recover last year and show healthy profits,” said Gazizullin.
Taking into account that Ukraine’s economy is largely export-oriented, oligarch-owned metallurgy and chemical companies should have been presented much more in the top list, said Minin from KM Partners. “It seems tax control is stronger for companies which work on the domestic market, than for export-oriented businesses,” Minin added.
The largest taxpayer is the state-owned oil and gas monopoly Naftogaz Ukrainy which contributed more than $4.6 billion to the state budget. Naftogaz has historically been the nation’s largest taxpayer, but it also enjoys generous government subsidies, which offsets the company’s tax burden.
Two companies, steel and iron ore giant Metinvest and coal and electricity behemoth DTEK, both controlled by Ukraine’s richest billionaire oligarch Rinat Akhmetov, were portrayed in the Korrespondent ranking as being amid the largest taxpayers in Ukraine. Together they paid about $2 billion in taxes last year, according to Korrespondent, becoming the second and fourth largest taxpayers.
But Metinvest and DTEK wouldn’t provide the Kyiv Post with a breakdown of how much profits they had onshore in Ukraine, and how much their offshore affiliates made.
Other major Ukrainian businesses registered offshore were not in the ranking. “The Korrespondent list in this case is comparing apples with oranges,” said Gazizullin.
Still, much remains to be done to collect on taxes. The economy ministry in April said Ukraine’s shadow economy is 34 percent of gross domestic product, or $56 billion. Independent economists estimate that 40-60 percent of GDP lies underground.
Kyiv Post staff writers Oksana Faryna and Mark Rachkevych can be reached at [email protected] and [email protected].
