Vadym Melnyk, 49, met the Kyiv Post wearing a shirt with rolled-up sleeves and a Swiss watch, which, according to him, cost “only $800.”
“I have nothing to hide and can explain the sources of my income,” said Melnyk, who has been the head of the State Fiscal Service for the last six months.
For now, the State Fiscal Service is still the de facto tax police. However, the government has already decided to split it into separate tax and customs services.
As a result, Melnyk’s office, with its 3,900 employees — mainly investigators fighting tax evasion and smuggling — is undergoing active liquidation.
On Sept. 25, a new state body, the Bureau of Economic Security, will take over the functions of its predecessor.
“For the first time in the history of Ukraine we see the liquidation, not the reorganization of a state body,” said Melnyk. “It’s very serious.”
Top scheme for tax evasion
In Ukraine, one thing remains constant: half of the nation’s economy is in the shadows. Reducing it will mean cracking down on tax evasion and smuggling.
“This is exclusively our purview,” Melnyk said.
Ukrainian tax evaders’ favorite scheme is the illegal refund of the 20% value-added tax for exporters and importers, according to Melnyk.
“This scheme provides the biggest opportunities for tax evasion,” he said.
Grain traders are among the top violators. Thanks to a tax credit on exported goods, they can receive a net refund on VAT after export. Traders can use a multi-layered scheme to claim the refund without exporting their goods, the tax chief said.
Melnyk estimated that around 25% “or maybe even more” of Ukraine’s grain producers dodge VAT through exports.
“This is illegal VAT,” said Melnyk.
The scheme is not just popular among those who deal in grain. It can be used on anything: bricks, cement, sand, metal, used cars or even toys.
When Melnyk took office in December, tax police started actively tracking suspicious invoices. “If we tackle this scheme, we will partially solve the problem of smuggled goods,” he said.
The total value of VAT invoices that escaped the tax police’s scrutiny declined from $142 million per month in December 2020 to the $100 million today. The state budget loses about $1.4 billion per year to this scheme.
Illegal spirits
Melnyk calls the illegal production and sale of excisable goods like spirits “incredibly brazen” — not just because it’s breaking the law, but also because it damages people’s health.
Buyers get bootleg booze via delivery companies Nova Poshta or UkrPoshta and can’t track down the sellers online. This creates the risk of people trying to consume poisonous methylated spirits.
According to Melnyk, one liter of vodka, the most popular hard alcohol, costs $3.10 in supermarkets while some online stores sell the same vodka for $1.
“If you pay all your taxes on one bottle of vodka, then it can’t cost less than $2,” said Melnyk.
In the first four months of 2021, tax police opened 383 smuggling cases, two-thirds of which involved illegal sale of spirits; some 140 websites were closed.
Even the excise stamp does not guarantee that the product is sold legally. In late March, tax police officers seized a batch of excise stamps, shipped from Turkey to Ukraine via the Chornomorsk seaport. If used, they could have helped evade up to $1.4 million in excise tax.
“In the store, products with such excise stamps will look like they are legally made,” said Melnyk.
A couple browses the liquor aisle of a Velyka Kyshenya supermarket in Kyiv on March 27, 2020. One liter of vodka costs $3 in supermarkets while some online stores sell the same vodka for $1. The cheapest liquor is most likely bootleg. (Volodymyr Petrov)
Illegal fuel
The same situation is happening in the fuel market. But while spirits are produced domestically, most fuel is exported, requiring a different scheme.
Some companies import solvents without excise duty, which the law allows. They add these solvents to a cheap type of gasoline, like A‑92, and advertise the mixture as the higher-quality, more expensive A‑95 fuel.
According to Melnyk, some of the country’s best-known petrol station companies engage in this practice, adding that he can’t name names because of an ongoing investigation. Over 100 gas stations involved in the investigation were forced to shut down.
It is hard for Melnyk to say whether the number of contraband goods in Ukraine has increased or decreased of late, but he is sure that work to stop it has “intensified.”
“In the first four months of the year we have practically reached the annual indicators,” he said.
The value of all the seized products illegally produced in Ukraine, including tobacco, reached $76 million in 2019 and $77 million in 2020. Since the beginning of 2021, $63 million in illegal goods has been seized.
On average, around 30–50% of all open cases end up in court, as opposed to the 1% that news agencies have previously reported, according to Melnyk. Still, most of the suspects escape justice due to “very high corruption risks.”
Bribes range from $10,000 to $100,000, Melnyk said. Investigators make just $350 per month, on average.
“We have the lowest salaries (among state bodies), but we don’t cry, we don’t whine,” he said, even though he as the head of the service feels “insane shame” for such paltry salaries.
Economic Security Bureau
With 4,000 new employees likely to work in two headquarters in Kyiv, the new government agency that will substitute the current tax police will use digital tools to achieve better results. “That is how Europe works, we need to strive for this,” Melnyk said.
Salaries in the bureau will start from $1,100 a month. He believes better salaries won’t eradicate corruption, but fewer people will leave the state body.
When Melnyk hears news that a tax police official owns a luxury house or a fancy car, Melnyk gets angry. “There is no place for such people in the new Bureau for Economic Safety,” he said.
Meanwhile, Melnyk said that nearly half the State Fiscal Service’s current staff will try for a job in the new bureau.
But there is one hidden danger.
Melnyk is afraid that those who won’t fit into the new service may start working for shadow businesses because “they know how the system works from the inside.”
While expressing concerns about the lack of a commission to select a new head, he said he plans to participate in the competition for the head of the bureau.
“A soldier who does not dream of becoming a general is a bad soldier,” said Melnyk.
