Tax war and tax peace

The struggle against the shadow economy has always been a newsworthy topic in Ukraine. Now it is especially acute, as evidenced by a stunning press conference with Anatolii Brezvin, head of the State Tax Administration (STA) which took place in April. Wielding facts and figures, Ukraine’s chief tax collector argued that the central budget is losing billions of hryvnias, illicitly earned by shadow businessmen who employ various tax evasion schemes. In view of considerable public interest in the struggle against shadow business, the editors are revisiting this subject.

Practically every week we hear about the discovery of another money laundering center, illicit production facility, and so on. The impression is that the scale of Ukraine’s shadow economy is still considerable.

Yanushevych: It is hard to assess its actual scale. The National Bank of Ukraine has its statistics, and the State Financial Monitoring Committee (Derzhfinmonitoring) and the Ministry of Economy have their own. Independent analysts offer different figures. But it is common knowledge that the shadow economy is a field of endeavor aimed at obtaining superprofits without paying taxes; sometimes these profits are of criminal origin.

One of the systemic resolutions of this problem is the adoption of the Tax Code, which will create a transparent system of tax administration and allow tax laws to be interpreted in a uniform manner.

Yanushevych: At the same time one cannot neglect the possibility of combating this phenomenon by law enforcement means. After all, even under the best, most liberal legislation there will be people for whom their lawful incomes will not suffice. A lenient attitude toward them may have destructive consequences, so the tax authorities are waging an uncompromising struggle against those who break the law. Since the beginning of 2007 over 100 money-laundering centers have been exposed, through which 4.5 billion hryvnias have passed. Thousands of current businesses that have used their services have been established. Illicit schemes for currency transfers abroad (4.5 billion hryvnias) have been uncovered.

I’d also like to point out that the results of the tax authorities’ struggle against the shadow economy are not simply arithmetic. They have a direct bearing on the well- being of our pensioners, disabled citizens, teachers, physicians, all those toward whom the state has obligations. Crimes exposed in the taxation sphere are vivid proof of the staggering sums the budget is losing because of shadow businesses. That is why we are declaring war on all those pseudo-businessmen.

You mentioned illicit schemes for transferring currency abroad. Would you be more specific?

Yanushevych: Our money laundering unit spotted certain banks whose foreign exchange accounts were being used to siphon billions of dollars out of Ukraine, all tax-free. As a result, our budget is suffering heavy losses.

When we started to deal with this matter seriously, it became clear that we were up against well organized centers offering their customers to transfer money abroad “without any problems.” They included securities dealers, banal transit and fictitious firms, even entire businesses registered in different countries.

Yanushevych: Here is the pattern they’re using. A nonresident company brings a small investment to Ukraine, several thousand dollars as a rule. Then this nonresident company raises its investment profits to hundreds of millions of dollars by buying and selling securities on a buy-small/sell-big basis. Moreover, with the help of certain judges and their rulings these malefactors are exempted from compulsory payments to the Pension Fund of Ukraine when they buy hard currency. Last year the PF lost 617 million hryvnias this way.

Which banks are involved in such schemes?

Yanushevych: We know of some 10 Ukrainian banks to date. These are so-called medium-sized ones that have nothing to do with prestigious systemic banks. We are collecting and processing data, but that’s just the beginning, trust me.

What patterns are most popular with people who are starting out in the shadow business?

Yanushevych: I would divide them into four groups. First, there are those who use bogus firms in order to reduce the taxes payable to the budget. Second, fake export transactions to dupe the budget into paying VAT refunds. Third, import transactions at understated prices so as to avoid VAT and other payments during customs clearance. Fourth, the illicit transfer of money abroad, as I have mentioned.

Which regions of Ukraine are the furthest into the “shadows”?

Yanushevych: The activity of shadow businesses does not depend on geography. What matters is how much they can get out of it, so shadow business is most active in regions with considerable economic potential.

Shouldn’t we start combating the shadow economy by updating our legislation?

Yanushevych: Yes, a number of aspects of the struggle against money laundering aren’t sufficiently regulated in legal terms. This includes the banking sphere. Some bank managers are hiding behind bank secrets, relying on the mind-your-own-business philosophy, thus allowing their clients to evade taxes. In the United States, for example, an individual who withdraws more than 10,000 dollars from his bank account is immediately noticed by the Internal Revenue Service, financial intelligence, and the police. No one questions this because it is standard practice for the authorities to monitor suspicious transactions. Also, it is required by the Financial Action Task Force. By the way, not all of the recommendations of this influential organization have been implemented in Ukraine’s legislation. A bill to this effect is in parliament, submitted by Derzhfinmonitoring, and it has been slated for a repeat first reading. We hope that our MPs will have the time and desire to finally consider and adopt this extremely important document.

We keep talking about adopting harsh measures to combat the shadow economy. Shouldn’t we use the carrot, not just the stick? Shouldn’t there be an economic incentive to encourage businesses to step out of the shadows? When will the tax amnesty take place? Do you think it will get our economy out of the shadows?

Yanushevych: The bill legalizing tax-evasion income has been coordinated with all ministries and agencies. On April 1, 2007, a state committee chaired by First Deputy Prime Minister Mykola Azarov resolved to submit this bill and the Tax Code to the Cabinet of Ministers. After it is approved by the government, it will be forwarded to parliament.

As for getting the economy out of the shadows, I would like to stress that the tax amnesty is just one of the tools to solve this problem — and far from the last one. Of course, we are pinning big hopes on the tax amnesty. Using your analogy, it is a very tasty carrot. We have businesspeople who own big money and property that haven’t been taxed on time or in full. The state is offering them an opportunity to legalize all their income by paying only three percent of their total value. The law further guarantees their immunity. I think that this, too, will help improve our taxpayer morals and will increase the percentage of voluntary tax payments to the state budget.