Ukraine’s Finance Minister Oleksandr Danylyuk has faced immense pressure this year over efforts to cleanse the country’s value-added tax system of corruption, with threats ranging from investigations over his taxes to falsified allegations of sexual harassment.
The minister’s team has focused on two VAT-related reforms: implementing an online electronic registry of companies subject to VAT refunds, and automating the system that blocks fraudulent refunds for the country’s 20 percent VAT tax.
Danylyuk has been fighting for the changes in an effort to reduce corruption schemes that have seen billions of hryvnias stolen from the state budget, either in tax evasion or straight-up embezzlement.
The changes would simplify VAT payments for businesses, while ensuring that the state budget receives the money it needs for schools, hospitals and defending the country from Russia’s war.
But those who have profited from the schemes have fought back, bogging Danylyuk down in a tax evasion probe while flinging accusations at him in the Ukrainian yellow press.
“We’re against the return of corruption to the VAT system,” Danylyuk said in Oct. 4 comments to journalists at the Verkhovna Rada. “Trying to influence the Finance Ministry does not work, and will not work.”
Best example
April 1 saw the ministry score a key victory for transparency by implementing a public VAT refund registry in an effort to shine the spotlight on one of the most profitable — and dirtiest — parts of the State Fiscal Service.
According to Illya Neskhodovsky, a tax expert at the Reanimation Package of Reforms, the register is “completely unique.”
“It’s transparent, and arguably the best example of such a register in the world,” he told the Kyiv Post.
The system began to operate on April 1, weeks after former State Fiscal Service chief Roman Nasirov was suspended from his post after his arrest by the National Anti-Corruption Bureau of Ukraine.
One Finance Ministry staffer, requesting anonymity because of a lack of authorization to speak publicly, said that Nasirov’s removal allowed the ministry to overhaul the VAT system. Nasirov had been blocking the proposal, the source said.
The move has been met with applause from the business community, in part because it has cut down on the SFS’s practice of demanding bribes in exchange for the return of a legitimate VAT refund.
Statistics released by the business ombudsman show that the amount of VAT-related complaints to the Finance Ministry and SFS more than halved between the second and third quarters of 2017, the time period that the reform went into place.
Neskhodovskiy said Myroslav Prodan, the official who has been acting SFS chief since March, was linked to Prime Minister Volodymyr Groysman. The prime minister, in turn, needs Danylyuk in his cabinet to create the political image of being a reformer.
Twist and shout
After the register went into effect in April, the next step was to launch an automatic system for blocking fake VAT refunds, another massive source of corruption.
The most popular scheme that the change was meant to block is called “skrutka” — a twist.
Under that scheme, the importer of a given good will pay the VAT tax upon the item’s entrance into the country. The same vendor that paid the VAT tax will then sell the item somewhere in Ukraine for cash, with no legally viable receipt generated from the transaction.
The importer of the goods then has an unfilled VAT credit form left over from the import. Many private businesses then resell the VAT credit slips to other businesses or use them for other sales that are subject to VAT, illegally lowering the amount they owe to the state.
“Most of the big street markets in Ukraine are used for this scheme,” said Neskhodovskiy.
The Finance Ministry began to implement an automatic blocking system of these fake VAT refunds in May, but was quickly met with various forms of opposition.
Businesses that profited began to retaliate by attempting to overwhelm the system, and in some cases by representing to the Ukrainian press that they were legitimate enterprises being unfairly denied their tax credit.
The amount of companies filing for fake VAT refunds spiked, with Danylyuk saying in October that the rise was in part because the “skrutka” scheme is “A big, politically covered business.”
Danylyuk’s system itself was far fom perfect.
Around 0.4 percent of businesses affected by the change were wrongly blocked from getting tax refunds by the system. While that percent is small, the issue affected as many as 1,000 different companies.
On Dec. 7, the Finance Ministry withdrew the automatic blocking system from use until 2018. The decision was initiated by Nina Yuzhanina, head of the parliament’s committee on tax and customs policy. Yuzhanina, a former accountant for Roshen, was behind draft law No. 7115, which advocated for going back to manual VAT refunds, citing mechanical issues.
Faking it
Danylyuk has faced a series of attacks that have increased in their severity.
Prosecutors are looking into the minister’s time as an investment banker in London. He is suspected of evading his Ukrainian taxes while there. The case has raised eyebrows, given that a double taxation treaty exists between Ukraine and the United Kingdom.
Other attacks have attempted to humiliate the 42-year-old politician.
On Nov. 30, an anonymously run Facebook page called “nemovchi” (don’t keep silent) accused Danylyuk of sexually harassing a colleague via a series of Facebook chat screenshots.
The images — which had fonts and image sizes different from those used by Facebook — also used a picture of former PrivatBank employee Viktoria Strakhova as the avatar of the alleged accuser.
Strakhova said in her own Facebook post that the messages were faked, saying “apparently, not only do the opponents of the finance minister have chicken brains, but also certain sexual deviations.”
“The whole exchange is a photoshop,” she added.
Budget cudgel
Other elements of the VAT system remain open to political manipulation.
One outwardly mundane but extremely fraught example is the VAT on agricultural oil.
On Dec. 7, the Rada canceled the VAT on exports of unprocessed agricultural oils in a stated bid to increase value-added production in Ukraine. The change goes into effect March 1.
But the move has led to an outcry from some producers, who argue that the move unfairly benefits companies that can launch value-added agricultural oil production within three months.
“If this was really a local production strategy, the government would be implementing a full, official plan,” said Taras Vysotsky, director general of the Ukrainian Agribusiness Club. “But when there are only two months given, there’s a sense that this was done to support certain producers.”
Vysotsky added that it will lead to “direct losses” for much of the industry. “Unfortunately, yes, it’s being used as a weapon,” he said.
