Lithuanian-born Algirdas Semeta knows a lot about the difficulties of doing business in Ukraine.
Semeta heads the Business Ombudsman Council, the agency that monitors the government’s actions related to business. It may get 3,000 complaints from businesses by the end of this year, with more than 60 percent involving the State Fiscal Service, which oversees taxes and customs.
The top four complaint categories make up 90 percent of all cases. After the State Fiscal Service, most complaints are made against law enforcement agencies (Prosecutor General’s Office, National Police and Security Service of Ukraine or SBU), regulatory agencies and local authorities.
Even though Semeta remains positive about Ukraine’s future, he says that the country’s leaders have done little to make the country friendlier to either local or foreign businesses.
The ombudsman lists case after case of the authorities putting pressure on businesses. Most of them can be boiled down to a mix of outdated practices inherited from the Soviet Union, unprofessionalism and outright manipulation, where state authorities are serving vested interests.
“These bizarre cases against foreign investors really have not contributed to a positive image of Ukraine, and we would like to see as few as possible of such cases, because foreign investors talk to each other,” Semeta told the Kyiv Post in an interview on Dec. 12. “Even if they are not very frequent, they do a lot of damage to the investment image.”
Semeta hopes for better results next year.
“This year we can say that there has been a slight improvement in the business climate, but not as much as we would like to see,” he said.
Fiscal issues
The main reason why the ombudsman has been receiving so many complaints about the State Fiscal Service is because of the ongoing problems with the electronic value-added tax refunds. While the automatic refund system got praise in the business community, it also prompted an influx of complaints about various hiccups within the system.
But Semeta says that the recent electronic registration, even with its imperfections, is better than the manual system, where numerous loopholes allowed authorities to manipulate businesses.
“The system of automatic registration has actually allowed many businesses to receive their VAT refunds smoothly,” Semeta said. “But there are flaws in the system. We’ve already made our proposals to the Ministry of Finance.”
Nevertheless, on Dec. 7 parliament approved a law to temporarily suspend the electronic VAT tax refund system until March 1 and return to manual processing. During this time, the government needs to come up with the necessary changes.
“I said many times, and I continue to believe, that it was possible to actually make the necessary adjustments to the system without suspending it,” Semeta said.
Other business community representatives have expressed concern over the suspension of the automatic system. The European Business Association, for example, said that switching back to the old system would hurt the business community. The U. S. Embassy in Ukraine is concerned, too.
One simple issue that could be easily fixed in the system is for the authorities simply to provide an explanation of why the refund operation of a business was suspended.
“Businesses very frequently do not receive the reasons for suspension,” Semeta said.
Other complaints involve the state not sticking to deadlines specified in various pieces of legislation. Other simple adjustments would only require extra training for underqualified law enforcers and tax inspectors.
Other changes require organizational improvements. For example, each regional tax office is a separate legal entity, and that can create problems for businesses. Currently there is no way just to pay taxes into one account so that the tax authority could then redistribute it to its various pockets,” Semeta said.
A woman leaves the State Fiscal Service building on Dec. 13 in Kyiv. Ukrainian businesses complain about the taxation and customs service more than any other government body, according to Business Ombudsman Algirdas Semeta. (Volodymyr Petrov)
He is eager to see the full implementation of an electronic officer for taxpayers — one of his key recommendations. Acting Head of State Fiscal Service Myroslav Prodan promised to do this by the end of December. If accomplished, it would significantly improve communications between businesses and the tax authorities.
“We’re waiting to see whether this happens or not,” Semeta said.
He does see some improvements.
“Despite the growing volume of complaints, the work of tax authorities improved over the last month, and that has been confirmed by the business community at many meetings.”
Finance ministry
The ombudsman is also pleased with the work of Finance Minister Oleksandr Danylyuk: the minister has been advocating for the electronic VAT refunds, the creation of an agency of financial investigations and tax and customs administration reforms.
The steps demonstrate Danylyuk’s “willingness to improve the business climate,” Semeta said. “Of course not everything is in his hands, and all of these ideas need to get full support in parliament.”
The business ombudsman’s office played a key role in the recent approval of the law on decreasing pressure against businesses, which came into force on Dec. 7.
“This law was based on the recommendations in our systemic report,” Semeta said. He said the law is “extremely important,” and should prevent authorities from abusing their powers during criminal investigations and searches.
“When everything is videotaped, starting from the decision of the investigative judge until the final steps during the criminal proceeding, it should impose much more discipline on law enforcers.”
But Semeta also notes that video recordings will only be mandatory from Jan. 1, 2019. “We will monitor things thoroughly, and will make public any kind of violation reported to us in the future,” he said.
More problems
There is plenty of monitoring to do. Ukraine’s civil service is completely outdated, and its Soviet-era habits still grate.
“They try to act as rulers, which is really not acceptable, and that’s why we are advocating so much for the full and fast implementation of civil service reform,” Semeta said. “Yes, it is happening, there is a lot of support from the EU for this reform, but the pace of the reform is still too slow.”
Until the Soviet mentality is swept away, businesses in Ukraine will face many problems, he said, adding that “clear deadlines for making decisions written in the law are often disregarded for no reason.”
“In a normal situation, civil servants should help businesses to do what they need to do in order to get licenses,” Semeta said. “But here very frequently civil servants actually look for ways to create obstacles.”
Vested interests are part of the equation, as are law enforcers who are paid bribes by businesses to cause problems for competitors.
“Very frequently competitors file applications to open criminal investigations, so there are plenty of cases where in fact there are elements of unfair competition.”
This is one of the reasons why Semeta recently decided to launch the Ukrainian Network of Integrity and Compliance initiative, with the purpose of uniting businesses who commit to fair practices. So far only 50 companies have signed the initiative.
“The idea is to create a critical mass,” Semeta said.
Negative laws
Actions by Ukraine’s law enforcement agencies have also had a negative effect on the business climate recently, including recent attacks on the National Anti-Corruption Bureau of Ukraine, the country’s only independent law enforcement agency, by the Prosecutor General’s Office and the SBU.
In one incident, the Prosecutor General’s Office revealed the identities of several NABU undercover agents who were investigating a case of corruption at the State Migration Service.
“That was a really bad step and a bad signal to the international community,” Semeta said. “I hope that these attempts will simply come to nothing, because Ukraine needs strong anti-corruption institutions, and without them, it is very difficult to expect improvements either in foreign investment or in the business climate in general.”
Parliament also adopted a so-called Made in Ukraine law, which puts in place protectionist measures for Ukraine-made goods and limits foreign countries’ exports to Ukraine.
“Ukraine has an association agreement and a Deep and Comprehensive Free Trade Area agreement with the EU, it has to follow EU rules, which are based on openness and free trade,” Semeta said.
Ukraine’s investment climate is not making huge leaps in the right direction. While showing steady improvement in the World Bank Doing Business ranking, the nation is slipping in the Global Competitiveness Index. Its best showing is in the Global Innovation Index. But Ukraine ranks 50th or below, making it difficult to attract the foreign direct investment that the nation needs.
Business sanctions
The problem is exacerbated by the government’s ability to sanction any foreign trade operation of a company in Ukraine.
“It’s really one of the remaining areas that I think is a particularly corrupt area that needs significant liberalization,” Semeta said. “Currently, sanctions can be applied to any business on the basis of submissions by the State Fiscal Service.”
If the state body decides that a company violated a law, the company can have its foreign trade operations suspended and also be fined. “One can impose a penalty, but why stop the foreign trade operations of a company?”
The SBU will very often propose that a company’s foreign trade operations be suspended. The agency then submits its proposal to the economy ministry, which in turn makes a final decision.
This, Semeta said, “just doesn’t happen in any Western country.”
