Constitutional Court strips joint ventures of privileges
On February 5 the Constitutional Court of Ukraine ruled as lawful the parliament’s resolution to cancel tax and customs privileges for enterprises with foreign investment. The verdict on the suit filed by the Cabinet of Ministers was passed 11:3.
The privileges were approved in 1992 and new ones were added to the list in 1993. The law guaranteed their validity for ten years. Foreign investors got advantages in licensing and certification as well as the right to reimbursement of VAT on the goods imported for their own use. The law resulted in mushrooming joint ventures with foreign companies, the purpose being tax evasion. Great amounts of money could thus be saved on foreign trade transactions. Those who didn’t use this scheme on profitable markets simply lost in the competition. This particularly concerns the Ukrainian market for oil products.
In February 2000, Verkhovna Rada decided to cancel the privileges and passed the law On the Elimination of Discrimination in the Taxation of Subjects of Entrepreneurial Activity. The law declared equality in taxing Ukrainian enterprises and joint ventures. But until the ruling, foreign investors continued to appeal the law in courts. Their appeals were mostly satisfied on the grounds that the 2000 law did not directly abolish the 1992 law. Also, the courts often referred to international agreements ratified by Ukraine that declared support for foreign investors.
The creation of artificial joint ventures by way of pumping capital abroad and back was spotted by the National Security and Defense Council. NSDC Secretary Yevhen Marchuk did not rule out politicians’ involvement in this scheme. “What has been going on with joint ventures deserves a special study,” Mr. Marchuk said. Apparently, such a study is only now being made. The presence of a lobby in the parliament, which supports the interests of joint ventures, was proven in March 2000 by the fact of collection of 53 signatures under the demand to rule the abolition of privileges as unconstitutional.
Meanwhile, the customs privileges have cost the treasury over UAH 1 billion [about $188 million] annually. In fact, this was what made the Cabinet of Ministers appeal to the Constitutional Court. Earlier, the court had been requested to interpret the relevant laws by foreign investors and the group of 53 members of parliament. But the court declined both appeals arguing that the issue was not within its competence. The cabinet managed to formulate the inquiry so that the court had no chance to dodge the issue. The inquiry demanded “an official interpretation of the legal norms on state guarantees for protection of foreign investment and their correlation with the law of Ukraine On the Elimination of Discrimination in the Taxation of Subjects of Entrepreneurial Activity.
Studying the “correlation”, the judges approached President Kuchma and former Verkhovna Rada Vice Speaker Viktor Medvedchuk requesting them to clarify the issue. “Both presented arguments indicating that the privileges should have lost validity two years earlier,” said Constitutional Court Judge Volodymyr Ivashchenko. While the court was considering the cabinet’s inquiry, the parliament made amendments to all the normative acts which granted joint ventures franchises, and the president signed them on January 4. Specifically, courts were not allowed to restore the privileges of enterprises with foreign investment.
In order to prevent a sharp rise of prices for oil products as a result of the abolition of privileges, Prime Minister Anatoly Kinakh has set up an ad hoc commission of major oil traders. Prices for gasoline rose 8%-15% in January in various regions. “Now all must pay,” says First Deputy State Secretary for the Economy Ministry Ihor Shumylo. Now, according to him, the companies that have used court verdicts to evade paying taxes for the last two years cannot demand VAT reimbursement.
The Constitutional Court’s verdict is final and may not be appealed. Ihor Shumylo does not rule out, however, that the lawyers who work for joint ventures may well find some loopholes in the text of the court’s decision also. “We’ll have to wait a little and read the document carefully,” says the First Deputy State Secretary for the Economy Ministry. But it is almost certain that the case is over.
