Combating fake firms is ineffective because the law remains undefined

A meeting of the State Tax Police with several media representatives, The Day included, began on a sensational note: some Ukrainian firm managed to buy a Ruslan jumbo transport aircraft for over $10 million dollars from another Ukrainian firm, demanding that the state refund the VAT it paid to the seller. Almost all the documents required for a tax credit were submitted by the buyer, including an agreement on parking and guarding the plane in its airport of registration. The only missing thing was the plane itself. The police has filed criminal charges but the investigators are refusing comment on the case, referring to the secrecy of the investigation.

It is quite clear, however, that the leak about such a high profile case was orchestrated not merely to whet the media’s appetite. Head of the State Tax Administration department for combating fictitious entities and illegal VAT refunds Serhiy Mishchenko shed light on other interesting facts. Soon after the enactment of the law stipulating the mandatory presence of legal persons at the registration procedure with the STA, the number of bogus companies fell somewhat. This led to the emergence of a secondary market for bogus entities, with firms once created but presently idle selling briskly, as their buyers do not have to show up at the STA for registration. The number of such bogus companies has climbed to four thousand. Meanwhile, as stressed by the head of STA department for fighting fictitious entities, Ukrainian law merely defines the notion of a fictitious business, for which only its founders can be brought to justice. The Criminal Code does not include any definition of a fictitious entity, for which official malefactors, not the dummy managers, could be prosecuted. This leaves the tax police with no option but to shadowbox in both the direct and transferred meaning of this metaphor. Very often, Mr. Mishchenko complains, it is next to impossible to indict a bogus entity (an allegedly bogus entity, he corrects himself) that, in compliance with other entities, is out to minimize its taxes. Since the Criminal Code, much respected by our police, has nothing on bogus entities, investigators have no one to press damage charges against. And with no damage proven, there can be no criminal liability.

Meanwhile, according to tax police figures, the losses to the budget due to illegal VAT refunds runs into approximately UAH 4 billion. Consequently, Mishchenko continued, the state is left without money to refund VAT to such law-abiding entities as, for instance, the Mariupol-based Illich Steel Plant.

Responding to the natural (and traditional) question of what is to be done, Mr. Mishchenko simply says, “Improve the legislation,” citing his department and STA proposals in support of better laws. These proposals, however, have fallen on deaf ears, he complained. Under the circumstances, the tax police should find alternative ways in some cases bypassing legislation, which Mishchenko’s feels favors bogus and shadow entities more than law enforcement. Still, the tax police are close to investigating several high profile cases proving that clothespin sellers can milk the budget for mind-boggling VAT refunds. The police, however, remain silent on such cases, refusing to disclose the patterns and tactics used by miscreants. Tax police believe that, prior to the enactment of better laws, it will harm them to reveal such tested ways of illegal enrichment, making it possible to almost literally “build yachts from clothespins.”