Vested in­ter­ests wage fe­ro­cious fight against VAT trans­parency U

Kraine’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 ha­rass

Kyiv Post Legal Quarterly - - Contents -

have seen bil­lions of hryv­nias stolen from the state bud­get, ei­ther in tax eva­sion or straightup 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.

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 not per­fect as well. 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.

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