Mykola AZAROV: Just say no to bribes

Nobody likes the tax collector, but taxes are, after all, the price we have to pay in order to live in a civilized state and society. Here the thankless job of heading the State Tax Administration has for some years been headed by Mykola AZAROV, whose interview below shows that he recognizes the existence of such problems as corruption in his service and the need to relieve the tax pressure on small business. Alas, it is not the tax man’s prerogative to decide what the state should spend however much on, but it is his job to find the wherewithal to pay for it. With this in mind, we offer our readers the following interview that Ukraine’s publican-in-chief graciously granted The Day.

The Day: The Tax Code is still to be enacted in Ukraine. Why? Who is interested in this procrastination?

Azarov: I don’t think there’s any intrigue or undercurrents or something holding it back. Perhaps the reason is that the Verkhovna Rada has been practically incapacitated for the past several months. It is politicized so much these days, it is no longer capable of functioning normally or dealing with vital issues. Yet the new code will be heard in the second reading on April 18. An excellent decision! If it is really deliberated and approved in principle, we’ll have an opportunity to work on it, so it can be finally enacted even as soon as September or October. In that case it will take effect as of January 1, 2002. Anyway, we have reason to believe that Verkhovna Rada has set itself definite time limits. In other words, there is hope.

The Day: It’s good to know that you are not only taking part in this work, but also trying to act effectively together with business structures. The State Tax Administration’s agreement with business leaders impressed everyone. Still, certain businessmen continue to voice distrust of the tax authorities. How would you describe the level of corruption among the tax people?

Azarov: The entrepreneurs you’ve just mentioned are not the only one we agreed on cooperation with. Add here the Ukrainian Association of Industrialists and Entrepreneurs. We set up joint task forces to handle all regulatory documents and bills. The UAIE vice president is a full-fledged member of Ukraine’s Board of the State Tax Administration, meaning that he takes part in its activities; through him UAIE can now have all issues raised by big businesspeople solved quickly and at the highest level. As for the business associations you’ve mentioned, these are mostly small and medium businesses and we agreed on setting up a public board at the State Tax Administration. It is being formed as an advisory body, but we attach great importance to it. We would like it to handle a lot of regulatory documents concerning small and medium business taxation and relationships between local tax administrations and business structures. For example, I just signed a directive, and it is being registered with the Ministry of Justice. The relevant STAU department head assures me that the document won’t make it any harder for the small and medium business, yet I would like hear this from the businesspeople themselves. It may take longer to enact the document, but prior consent from business quarters will allow us to avoid mistakes.

Azarov: Also, frankly, this does not mean that we will agree to all their proposals. At the same time, I’m sure that a reasonable compromise can always be achieved between the interests of state economic and financial oversight, on the one hand, and business interests, on the other, and that’s what we are doing now. My personal experience in settling disputes shows that this is really so. A compromise can be found when the interests of the state come first. At a meeting with people from small and medium businesses I broached the subject of corruption and its level at the tax authorities. I think — and objective experience shows it — that this problem is being solved and the situation is improving. I proceed from the number of complaints, referrals, and punishments. Compared to what we had three or four years ago, the statistics show definite progress. Yet there are two parties to the process, and I said so at the meeting with leading entrepreneurs. There has to be give and take. If there is no giving party the taking one will continue to dwindle. I suggested that the businesspeople give no bribes in the first place, because it is a criminal offense after all and an immoral humiliating act; it means identifying oneself with a criminal, and so on. And this is at a time when we have a mechanism — and it’s operating — with the help of which you can always bring the extortionist to account. There is a round-the- clock telephone hotline in every city; anonymous reports are accepted, you can speak using the voice of the woman next door or cover your mouth with a handkerchief, so long as you provide information, identifying the extortionist. This information will be simultaneously conveyed to two independent departments, the anticorruption one and the internal inquiry inspectorate. This information will be checked, as it may turn out erroneous or deliberately misleading, meant to get even with a tax officer, using us. Among the methods used to verify and possibly refute such discrediting information we single out inspection reports. If a report is duly executed, signed, sealed, numbered, and entered into our main computer, it can’t be tampered with, no one will be able even to add or delete a coma, let alone facts or figures, so the probability of corruption is regarded as very low. We won’t expose such an officer to ungrounded accusations. If a report turns out unregistered and still on the desk — I mean when a document can still be changed either way — the appropriate agencies will step in and duly record an act of extortion. But, of course, this can only happen if we are informed. Also, a signed statement containing facts places the authors under our very serious protection. We will watch and protect him, especially if his information is confirmed. Anyone who tries to get even with him will be severely punished, if he keeps his job after checking the complaint. The corruption law does not always provide for criminal responsibility, but if any actions can be classified as vengeance the punishment will be the most severe.

However, I will not idealize the situation. Regrettably, there are transgressions in our department. I think that such sad phenomena will continue as long as the tax administration remains on its current payroll, but we, of course, can and must reduce them to a minimum. Incidentally, corruption is also present among the tax authorities even with highest salaries. Ukraine has of late been branded, primarily for political purposes, as a country where everybody takes bribes. Personally, I consider this far from true. Our mentors and critics should pay more attention to what’s happening at home. We will get over this ourselves, acting consistently and persistently, as the domestic economic situation improves.

“THE LEGAL SPACE IS MEANT FOR PEOPLE, FOR LEGAL ENTITIES THAT WANT TO OPERATE LAWFULLY.”

The Day: Can one do business in Ukraine without breaching the tax laws?

Azarov: Over the past several years we have assumed maximum understanding toward the taxpayer. For example, we have a document prohibiting levying fines for making mistakes in tax returns if such mistakes are obviously inadvertent, like arithmetical errors explained by poor knowledge of the tax laws. If the taxpayers agrees to correct them, there will be no liability. We spent a long time working out the so-called payments bill and covered all such contingencies. Any equivocal statements in the new law are to be interpreted to the taxpayer’s benefit. Any misunderstanding caused by the law being ambiguous about something and allowing various interpretations must be regarded by the tax authority as serving the taxpayer’s interest. We also introduced the notion of tax compromise. This is when the parties, after analyzing the taxpayer’s actual financial status, find and agree on an optimum manner in which to pay the tax without worsening that status. In this sense the tax legislation is adjusted so that the taxpayer can continue to operate without fearing the tax administration or tax police. Naturally, the legal space is meant for people, for legal entities that want to operate lawfully. The law expands this opportunity, making it possible to do business without breaching any of the tax laws, given a reasonable approach based on compromise. Yet there are always those believing that the law was written for others, not them. No matter how far we go in lowering the taxes (and I think that they must be lowered), approximately 90% of the taxpayers will do normal business and pay their taxes of their own free will, with three or five, maybe ten percent, remaining convinced they can act contrary to the law. Just as there will be a certain percentage of spoilage, hard as we try to keep our goods clean; there are individuals among the tax personnel. I see my task as an administrator in reducing to the minimum the negative part of the human factor. For example, we have a clause saying that any complaint filed with the appellate department suspends the tax authority’s enactment for a month, so the appellate department can investigate the matter, as its main task is to monitor the legality of tax people’s conduct. If this investigation does not clear up any dispute, a court of law will step in. I want to make something clear now. We see our main objective in creating normal mechanisms allowing the taxpayer to find his bearings and operate in the legal space, reducing to a minimum the possibility of conflicts. There are special factors balancing the tax inspector’s authoritative functions and the taxpayer’s possibility to protect himself and receive legal support from the tax authority.

The Day: Often the tax rates make doing normal business impossible.

Azarov: Our experts are working on proposals and bills practically lifting small business taxation for some five years. Of course, there are problems. Every employed person must contribute to social insurance and pension funds, for he may well need this money someday. I think that the state could do without the small business income tax; it won’t lose much here, and this will mean considerable saving by discarding the administrative support of the tax. Meanwhile people will be able to make some extra money. We will return this tax by raising other taxes and this will increase market demand and lead businessmen out of the shadows.

“UESU’S SCOPE OF OPERATIONS EXPORTING MONEY IS UNPRECEDENTED”

The Day: How is the situation with the Slovyansky Bank? Is there evidence linking it to Vice Premier Yuliya Tymoshenko while still in office?

Azarov: The bank proved especially active when Yuliya Tymoshenko was in the government. At the time the bank made practically no large-scale transactions. However, I will not go into detail just now. All I can say is that the criminal investigations of a number of actions has been completed, the defendants and their lawyers are familiarizing themselves with the documents in the case. Of course, this doesn’t mean that the large-scale criminal case has been solved. It’s just that a number of acts of wrongdoing have been investigated, yet a lot of incriminating evidence was unearthed in the course of investigation, concerning the bank’s activities abroad and various mechanisms of exporting capital, never returning foreign currency proceeds, carefully constructed patterns of virtual settlements, when the bank took on charge very big nonexistent sums of foreign exchange loans and paid the interest in real, not virtual currency. We detected the countries where this money was directed. This evidence is being thoroughly examined, but this takes time. Pavlo Lazarenko, for example, is in his third year in US prison, with investigation constantly underway, and still no trial. And this in a country where everything is in the hands of the omnipotent law. Our People’s Deputy Zherdytsky was arrested in germany a year ago, and no one is surprised that the investigation is continuing. And here we are being accused of taking so long investigating our own cases. I agree, but it takes so long because we are up against people who are far from simple; they are excellently prepared and educated, they know international law, and they work out topnotch schemes. Hunting them down, considering every detail, is more than difficult. Years will pass before we can prove their criminal intentions and return the money they stole — or at least raise the matter of returning this money abroad. In fact, even broaching the subject became possible several years ago also because our experts had gained experience in international relationships; we created structures possessing excellent databases and having contacts with a number of countries, and this helps us detect money unlawfully sent from Ukraine. I can assure you that our [professional] level is such that it is much better to honestly declare one’s incomes in Ukraine and pay the tax, working for oneself and for Ukraine, than take one’s capital abroad.

The Day: Your critics maintain that the Slovyansky case is a political one.

Azarov: What party does this bank belong to? Of course, there is nothing political about the case. That’s an axiom. It’s just that the UESU’s scale of operations exporting money is unprecedented (and Slovyansky was the key element of this financial empire), even compared to the Pivdenkombank [Southern Commercial Bank]. And they are not the only such smart operators in Ukraine, but all the others are of lower standing, much lower. We could not let such a large-scale money- laundering and exporting operation pass unnoticed. Watching them don sheep’s clothing, I want to pose this simple question: We have established that 504 million was in the bank accounts of Pavlo Lazarenko and his accomplices, so what kind of financial structure in Ukraine could remit such staggering sums in 1996-97? The answer is obvious.

THE BIGGEST MONOPOLIES AND ORDINARY CITIZENS ARE EQUAL AS TAXPAYERS

The Day: What about Naftohaz Ukrayiny’s tax history and People’s Deputy Ihor Bakai’s role?

Azarov: I am not interested in Ihor Bakai as an individual, expert, and so on. I am interested in a system that makes it possible not to pay staggering amounts to the budget. We say that it is the duty of every citizen to make payments to the budget. The same applies to our biggest monopolies and largest enterprises. There is a separate budget item relating to Naftohaz Ukrayiny, yet the company fails to carry out the tasks assigned it year in and year out, so this is a matter of special interest for us. Naturally, I have raised the issue before the cabinet and president, I tried to persuade them to make decisions which, in my opinion, would help the budget to be implemented in full. I proposed to make every Naftohaz enterprise a legal entity. These enterprises have thousands on payroll and they must be made responsible for their business performance. It cannot go on the way it is, when all money is accumulated upstairs, on a single account — as, incidentally, Yuliya Tymoshenko did in the energy sector while in office — and then manually allocated, being sent to different places, without anything going the budget way. That’s the reason for the conflicts with Tymoshenko, Bakai, and others. Even now we could get into a dispute with the NU management; it has its task organizing production, and I have mine. It is true, however, that it is easier to deal with him [i.e., the new NU president — Ed.] He is a man with an advanced statesman’s approach. Yet to find out why all that money was never paid to the budget, we need a documentary stock-taking inspection. So this inspection was carried out at Naftohaz Ukrayiny and showed that not all of the payment patterns were, mildly speaking, in conformity with our laws. As soon as the inspection was completed, the findings were submitted to the investigative department and one for what we call conflict examination. Their experts are studying the documents, checking for tax-evading patterns — in other words, criminal offenses. If they find any incriminating evidence, it is forwarded to the investigative department and the latter initiates criminal proceedings. In other words, everything is done in keeping with our procedures. A very sizable report was drawn up recently and handed over to the investigative department. I think it’s already with the criminal investigators who are entitled to start criminal proceedings on tax evasion charges. If the investigation comes up with criminal intent on the part of individual company executives, there will be individual criminal cases. I am not in a position to name any names now, as everything depends on the degree of wrongdoing and criminal intent. We are dominated by the so-called a priori approach, when someone is alleged guilty in advance and accused of, say, fraud. Yet the actual criminal intent can be established only after a long painstaking investigation. Gradually, the degree of guilt of the transgressors is revealed. I would not want to get ahead of the story or brand anybody. We will inform the public as the investigation’s progresses.

The Day: Suppose we get down from large companies to the family level. Can the state budget be designed so as to consider family interests in the first place, it being the primary cell of society, as we used to hear?

Azarov: I think this is precisely the approach that should be adopted. It is the only possible mechanism of putting together the budget fairly. We must proceed from the actual possibilities of every family budget. This does not mean that an unemployed person’s family and that of a millionaire should equally participate in forming the state budget. It means that we must bear in mind precisely how much we can take away from the unemployed family and that of a millionaire. Then we must calculate how much this or that populated area can share with the regional budget. The current approach is the exact opposite. We determine the amount of state spending at UAH 36 billion. And then we think where we can get all that money. We determined the taxes and duties totaling UAH 32 billion. Then we try to figure out where to get the money we lack. The approach must be different. We have 12 million families in Ukraine, and their incomes vary. We must take nothing away from all those low-income families. On the contrary, we must keep the state purse open for them and add to their meager budgets, otherwise people won’t survive, and there will be no buying capacity of the population sufficing to develop the economy. Then we have this category of the population and that. This can pay so much and that even more, and so on. If we see that we lack funds not only for a new pavement in the capital, but even for teachers’ salaries, we must reconsider everything, start from scratch and figure out who we can take more money from. In other words, we must achieve a balance between social and family budget expenses, meaning that we will spend every public kopiyka after counting seven times. Say, the state administration is to have a UAH 700 million budget. If we proceed from the family budget we may come up with just 400 million. We will have to make do with it and never spend a kopiyka unless we absolutely have to. The same applies to the other government structures. After we bring our disbursements into conformity with our capacities we will discover that we must cut on our spending, not just to pretend to. That’s what they do in countries with a well- adjusted budget process. They never spend more than necessary, saving every cent. When visiting Greece we were served two cups of tea and several biscuits and the host signed the check. Ever seen anything like that here? The president has on several occasions a ban on all stand-up buffets. Of course, it’s peanuts [compared to other expenses], but small brooks flow together forming a river, in our case the state budget. To take the family budget into account in the first place, we must be rigidly economical. Instead, we have an unprecedented scope of unproductive state disbursements. We invest nothing in knowledge- intensive sectors, yet PR expenses are soaring. We cannot afford them, so we shouldn’t spend money on them. Every effort must be made to increase the population’s buying power, raising living standards, and developing this country. That’s where we must channel the proceeds of the reallocation of social production income. In that case every investor would see that this country has learned to economize and would be strongly encouraged to invest. The economy needs an impetus, and when it starts working it will attract additional money itself. Where the government thinks about the population and building the domestic market, the budget is formed starting at the family level. In Ukraine, exports grow while the domestic market is shrinking. This is an absolutely abnormal phenomenon. If we can send abroad so much, we should be living in a small paradise. Well, we are not, meaning that we must think about our own development and our own people.

PRIVATIZATION AS THE LAST CONFIDENCE RESOURCE

The Day: What do you think of paying people that lost their Savings Bank deposits, using privatization proceeds?

Azarov: Let me remind you that in 1995 I initiated the clause about compensation for individual savings deposits. At the time we proceeded from our budget capacities, and, of course, the amount of such compensation was very small. Today we have one last chance to repay these debts, using our privatization resources. It is currently channeled into the financing of general budget expenses. I think this wrong. This money must be used to repay people’s savings, for part of this money will return to the state budget by way of consumer taxes, as consumption is growing and partially transforms into accumulation, which will work for the economy in some or way another as bank credit resources. Hence, rather than waste privatization proceeds as state budget spending, I think it would be more effective to use this money to increase public consumption, as this would be more productive for the state, for the development of this country. We still have approximately UAH 100 million worth of privatizable property unsold and the government debt to the savings depositors is about the same amount. Theoretically, all privatization proceeds could be channeled into repaying this debt. Naturally, this would require a mechanism equally allocating this money. In addition, we could give those depositors government securities guaranteeing either privatization proceeds or an interest in government projects. Why not let people make some money using such securities? We do have profitable state enterprises. Until we sell all public property, there is still an actual mechanism of compensating such deposits. Yet the further we go, the more difficulties we will encounter. But if we don’t do this, ten years from now there will be no way to pay such compensation. But if we do so, ten years from now we will have either paid all this money back to the depositors or their inheritors. I am not trying to paint an ideal picture and I won’t say that everybody will be satisfied tomorrow, but this can be accomplished if we solve the problem consistently and persistently. If the state solved this task it would be able to create a powerful stimulus in the future for new bank depositors and convince them of the stability and reliability of the banking system and deposits. Only then would people see they could trust this state.

“NO MATTER WHAT THE VICE PREMIER OR ANY OTHER MINSTER SAYS, WE HAVE TO KEEP SILENT, OR DO WE?”

The Day: Viktor Pynzenyk said recently that the government agencies have no right to provide any information different from official data issued by the government.

Azarov: I didn’t hear that statement and it’s hard to comment on it. I just want to formulate my own view on the problems of information. Without doubt, any central executive authority must file legally established accounting reports with the cabinet. If we collect taxes we are responsible for the figures we provide to the government, for all these figures are properly checked and coordinated with the Treasury, National Bank, and so on. We forward these statistics to the relevant bodies of the state according to the list we have. What kind of equivalence can there be if all the government agencies receive the same information? How can there be any differences? Besides, no one is keeping track of such information. This is perfectly obvious. Yet, if we return to the September conflict, it was caused by the vice premier’s [i.e., Yuliya Tymoshenko’s — Ed.] statement saying that the fuel-and-energy complex had paid such-and-such amount to the budget. Where could she have possibly got that statistic from? We pointed to a different amount that was the actual one. The premier corrected us, saying we had acted improperly, outside the government. I stood corrected by the premier, but how am I to understand the situation for the future. No matter what the vice premier or any other minister says, we have to keep silent, or do we?