Serhiy Verlanov, 39, used to lead the country’s tax service and enjoyed a reputation as an honest official ready to change Ukraine for the better.
Today, however, Verlanov is accused of tax evasion and money laundering that has allegedly cost the country Hr 2 billion, or $71 million.
Verlanov is specifically accused of helping ArcelorMittal’s giant steel plant in Kryvyi Rih, 400 kilometers southeast of Kyiv, evade taxes by canceling tax audits — something Verlanov strongly denies.
Verlanov thinks that the tax reforms initiated by him when he spearheaded the tax service in May 2019–April 2020 destroyed schemes used by corrupt tax officials for personal enrichment. He believes he crossed these corrupt officials and now they are taking revenge.
The case as well as Verlanov’s abrupt firing is politically motivated, he told the Kyiv Post on Feb. 1. “It is a punishment for our work,” he said, adding that the tax service office in Ukraine has turned into a political tool.
Easy target
Today Verlanov lives in Germany, where he works for a law firm helping Ukrainians abroad.
Before his dismissal, he had served as deputy finance minister under Oksana Markarova in 2018–2019 and was a partner at law firm Sayenko Kharenko.
During his tenure at the State Tax Service, he launched extensive tax overhauls, including the introduction of the law on Base Erosion and Profit Shifting (BEPS), a comprehensive law against tax evasion in Ukraine.
At the time, some Ukrainian businesses labeled it a “terror tax,” believing it might hurt them. Its proponents, in turn, claimed the law would clarify the tax system and bring offshore money back to the state coffers.
But then, Verlanov started reforming the tax audit system — a service that audits businesses to ensure all the reported tax data is correct. The move angered officials who used to profit from it by using it to blackmail businesses and get kickbacks, he said.
“It’s a revenge of the system for firing corrupt tax authorities” and cutting their schemes, he said.
He also believes President Volodymyr Zelensky wants to jail him just to fulfill his presidential campaign promise of putting corrupt officials in jail. Verlanov denies he’s corrupt.
He also blames Zelensky for creating an “atmosphere of fear” among top officials and compared it to the situation in Ukraine in 2012 when ousted President Viktor Yanukovych was in power. Yanukovych would also use tax services to crack down on his political or business rivals.
“I was an easy target,” he said. “Who likes tax authorities?”
Serhiy Verlanov, former tax service chief, attends a meeting with ex-Prime Minister Volodymyr Groysman held in Kyiv on May 15, 2019. During his tenure at the State Tax Service, Verlanov launched extensive tax reforms, including lobbying for the introduction of the law on base erosion and profit shifting (BEPS), a comprehensive law against tax evasion in Ukraine. (Wladyslaw Musiienko)
Taming oligarchs
Verlanov also said that he’s being prosecuted for his views against the prevailing influence of oligarchs in the government when he was the tax service head.
About 170 lawmakers, out of 422 in parliament, lobby oligarchs’ interests, according to investigative media Bihus.Info. Some 100 members of parliament defend business interests of richest Ukrainian Rinat Akhmetov, while 70 MPs — of oligarch Ihor Kolomoisky.
The journalists claim these lawmakers prepare draft laws and amendments favorable to the oligarchs and vote for laws they are asked to vote for. The loyal MPs represent different parties, including Zelensky’s Servant of the People and Batkivshchyna spearheaded by former Prime Minister Yulia Tymoshenko.
Verlanov said that laws should apply equally to everyone, including oligarchs, who frequently evade taxes through their offshore companies.
“When a business generates revenues, you need to pay taxes, no matter how big your business is,” he said, adding that he tried to fight this through the BEPS law.
They also use schemes merging profitable companies with liable ones, which allows them to pay fewer taxes. The law helps fight this by declaring such schemes illegal.
Even with the new law, oligarchs manage to continue to evade taxes with the help of the lobbying groups in the Verkhovna Rada, who push for laws to grant oligarchs’ businesses fiscal incentives.
He said they, apart from “owning” MPs, have good lawyers, financial assets and connections with local tax authorities.
“It’s very hard to make the oligarchs and big business groups pay their taxes,” he said.
Tax inequalities
The fear of the economic consequences of the coronavirus crisis led to a delay in Ukraine’s tax plan in March and April 2020 — the government thought the crisis would be tough and stopped collecting taxes.
Then, the coronavirus crisis hit revenues from customs the hardest because the trade has declined during this period.
During this crisis, by changing tax rates for some businesses, the fiscal service undertaxed gas companies and collected less tax money from large corporations than they had to.
Meanwhile, entrepreneurs — especially those working in services — suffered three lockdowns without any state support and tax reliefs and kept paying value-added tax (VAT) and personal income tax, while having to shut down their operations during three lockdowns.
This has deepened tax inequalities in Ukraine, “bringing imbalance to the system” and “tax injustice,” Verlanov said.
For him, the state budget in 2021 will suffer from the poor results of the 2020 tax plan which benefited oligarchs rather than average taxpayers. Oligarchs’ corporations saved money in 2020 by paying fewer taxes.
This all has led to generating a deficit for the 2021 state budget plan, he said. In 2020, the deficit of the state budget increased from Hr 96 billion to Hr 298 billion as the state received Hr 146 billion less taxes than expected.
Ukraine collected Hr 851 billion in taxes in 2020.
Since it first imposed a lockdown to prevent the spread of COVID-19 in April, Ukraine has seen many protests by small business owners, employees and others who oppose the quarantine measures, which they believe harm the economy, and demand more state support.
One of such protests turned violent in December 2020 after demonstrators clashed with police on Kyiv’s central Independence Square.
Tax inequalities and failure to fulfill a tax plan in 2020 led to the rise of the shadow economy, Verlanov said. When taxpayers perceive the system as unfair, they switch to a grey economy to avoid paying taxes.
He said the shadow economy represents no less than 30% of the real economy and hampers fair competition on the market by price dumping.
“Tax authorities need to solve it to have a fair dialogue with taxpayers who are always bragging to their neighbors that they aren’t paying taxes at all and can get away with it,” he said.
But tax services need to build trust among taxpayers first, which, according to Verlanov, is impossible when the government openly uses taxpayers’ money improperly.
About 80% of the Hr 65 billion funds dedicated to the coronavirus crisis were not spent on hospital equipment and COVID-19 tests to fight the pandemic — the money went on repairing and building roads, Verlanov said
“How (should Ukrainians) tolerate spending their taxes on the construction of roads, while there’s not enough hospital equipment?” he said. Building trust — not roads — is the key to a functional tax service, he added.
