Tax Collectors Want to Count Expenses But Entrepreneurs Disagree

On April 18 Vadym Kopylov, addressing entrepreneurs just after returning to the State Tax Administration of Ukraine (STA) from Naftohaz Ukrayiny, defended indirect methods of assessing the incomes of individuals and organizations. This was the subject of round tables conducted at a one-hour interval at the State Committee of Ukraine for Regulatory Policies and Entrepreneurship and at the Ukrainian Union of Industrialists and Entrepreneurs (UUIE) devoted to indirect methods of assessing taxpayers’ liabilities.

Very much has changed in the entrepreneurial community since tax inspectors first said it was necessary to apply indirect methods to taxpayers. Today, entrepreneurs place far more trust in this variety of financial activity and agree to discuss the mechanism of introducing it. According to Oleksandra Kuzhel, chairperson of the State Committee for Entrepreneurship, indirect methods comprise a positive thing for business: there will be fewer inspections, and we will thus come closer to Western standards, where entrepreneurs have almost no contacts with tax inspectors. Nonetheless, it is the main state body in charge of entrepreneurship that does not accept the draft cabinet resolution on approving these methods, while all the other ministries and departments have accepted it. UUIE, a non-governmental organization, also raises basic objections: Leonid Rubanenko, chairman of this organization’s Kharkiv regional branch, believes the methods should not be subject to cabinet approval because, in his opinion, the government has no legal powers to do so. “Verkhovna Rada must consider a draft law which sets out a clear procedure of applying indirect methods,” he said.

This is not the first time that a draft procedure is being referred to the State Committee for Entrepreneurship. The committee believes that the latest updated version of the procedure is not ideal either, because it runs counter to the Constitution of Ukraine provisions about natural persons. The procedure envisions that if an individual fails to document or refuses to grant information on the sources of his incomes, the tax service will assess the amount of expenditures that exceed the declared income and include this into the tax basis, i.e., resort to indirect methods. According to the State Committee on Entrepreneurship, indirect methods can only be applied to natural persons after all of them declare their proprietary (real estate, transportation means, or corporate rights) and financial state on conditions of a tax amnesty. “We do not oppose the application of indirect methods to natural persons, but the first thing to be done is amnesty. This will create the same conditions for all,” said the committee chair Ms. Kuzhel.

Mr. Kopylov justified the introduction of indirect methods by the fact that many enterprises have been deftly hiding some of their activities recently under the guise of natural persons, i.e., working in the shadows and paying no taxes. Nor is it difficult to guess another reason why the STA is so active: tax-related state budget revenues in the first quarter of 2002 only amounted to 90% of the target. The STA deputy chairman assured the entrepreneurs that nobody was going to trace the contacts of all members of their families: the only question is to indirectly gather information about the forms and scope of entrepreneurial activities of a natural person. However, these words failed to appease the entrepreneurs. More often than not, they said this was “not a procedure but, at best, an instruction for the tax collectors.” “All our bureaucrats are used to working under an instruction, not by methods. Even if a document is well-written, there are dozens of local clerks who will interpret it in their own way. The procedure must be thoroughly detailed, so that it is clear to both tax people and entrepreneurs what is required of them,” noted Yury Lozovsky, vice-president of the Union of Small, Medium, and Private Businesspeople of Ukraine. Therefore, by all accounts, it is too early to expect indirect methods to materialize in Ukraine.