Investors Strike, Tax Collectors Work, And Tax Code Is Being Improved

I remember Prime Minister Anatoly Kinakh saying on the eve of the elections that the VAT is a tax that destroys the economy and then reiterating in a Day interview that this opinion would be reflected in the new Tax Code now being drawn up. Mykola Azarov, chairman of the State Tax Administration of Ukraine (STA), is also certain that the VAT is one of the most acute problems of Ukraine’s tax system. But Our Ukraine leader Viktor Yushchenko (his government was the first to stop returning VAT payments to exporters, which, as well as the inflation tax, made it possible to pay pension arrears), who reportedly dislikes the VAT, is nevertheless convinced that abolishing the latter “would be a great mistake in tax policy.” Our Ukraine’s headquarters explained Mr. Yushchenko’s opinion on this matter to Interfax-Ukraine last March: “Of paramount importance in tax policy is its ideology, so imposing or lifting a tax would slow down fiscal policies for several years on end.” It follows from this that the Kinakh government’s attempts to streamline tax laws could run into stubborn resistance from the market fundamentalists often referred to as “ambitious reformers.”

Yet, it is so far unclear when the parliament will begin debate on the Tax Code and what additional amendments to it the government will propose. Meanwhile, VAT problems continue to draw blood each day. Addressing a cabinet meeting last Wednesday, Premier Kinakh admitted that the value-added tax situation is “very unbalanced, especially as far as making up for the balance of payments deficit.”

That same day, representatives of the ISTIL mini-foundry of Ukraine announced in Kyiv that the US-based ISTIL Group corporate board was suspending production “due to failure of the state to repay the VAT.” In a letter to President Leonid Kuchma, the foreign investors (who contributed over $86 million to the purchase and retooling of the enterprise and implemented new continuous steel casting and rolling technology) say they “cannot afford to incur VAT-related losses caused by the great delays in payment and a 25-30% discount.” The investors emphasize they “have spent their liquidity reserves to subsidize the Ukrainian tax system,” with the state running up a UAH 23 billion VAT debt to this enterprise.

Meanwhile, the state seems to be more concerned today about altogether different ruinous aspects of the VAT. Incidentally, VAT privileges account for four-fifths of all tax privileges. STA Tax Police Chief Gen. Viktor Zhvaliuk said they had spotted 1170 unjustified requests for UAH 540 million in VAT compensation in the first quarter alone and opened 256 criminal cases over illegal VAT compensation.

STA Director Mykola Azarov has recently announced that almost half of VAT revenues were used in the first quarter to compensate exporter payers for this tax. In seven oblasts, compensation has greatly exceeded VAT revenues, with VAT payers’ debts accounting for 70% of the total tax arrears in this country. According to Mr. Azarov, it is around the VAT that serious criminal schemes to loot the state budget are centered.

In a word, all sides of this tax conflict take a dim view of the VAT administration system in Ukraine: for example, the STA complains that courts often fail to hand down rulings in its favor. ISTIL also distrusts Ukrainian courts and is preparing to file a suit against Ukraine to an international court in Washington. Meanwhile, the presidential decree On Measures to Increase Effectiveness of the Foreign Investments Consultative Board of Ukraine, adopted to improve conditions for foreign investors, among other things specifies that this body should draw up expert recommendations for the prevention and out- of-court settlement of disputes between investors and the state. Still, asked by The Day, ISTIL First Vice President Farouk Siddiqi said his firm had not yet been involved with this body. This seems to be right because, if guided by its experience, the firm would have found it difficult “to promote the increased investments of foreign capital in the economy of Ukraine” the decree requires.

The ISTIL story is not uncommon: domestic enterprises suffer no less from the failure to repay the VAT. And while foreigners have their governments to come to their rescue, our entrepreneurs have no one to help them.