Yevhen CHERNETSKY: “The way small and medium entrepreneurs resolve their problems is indication of the business climate’s ‘temperature’ in this country”

“The court in Ukraine exercises tax control rather than administers justice.” It is the conclusion the KM Partners law firm announced at the 1st Judicial Forum of the Association of Ukrainian Jurists. The firm’s clients – big, predominantly European, business – have had far more problems with the Tax Administration lately. Infractions have been found where everything was all right a year ago during a routine inspection. Lawyers are saying this must be the start of the “budget-filling program.” For it is practically impossible to appeal against a Tax Administration “verdict.” The only way is perhaps to turn to the High Administrative Court, but only very few truth-seekers will do so after going through the seven circles of hell. Jurists claim that businesspeople more and more prefer to settle disputes “amicably” on the spot with the tax inspector.

Almost five billion budgetary hryvnias have been spent in 2012 on funding the judicial sector. It is taxpayers’ money. So what is business paying for if it does not trust courts? To get an answer to this and other no less important and acute questions, The Day turned to Yevhen CHERNETSKY, chairman of the non-governmental organization Entrepreneurs’ Rights League.

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The lawyers of one company made what we consider an interesting analytical report at the latest judicial forum. It claims, among other things, that Ukrainian courts exercise tax control rather than administer justice today. Administrative courts are so much overloaded with tax-related cases that one judge can only find 22 minutes (!) to study a case. This is just enough to leaf through (sic) one volume of the case. But there may be a dozen of them…

“What the lawyers are saying is the tip of the iceberg. About 90 percent of the conflicts with the Tax Administration are being settled ‘amicably.’ If it is not a political scheme, any inspector who has come to an enterprise to look into some infractions usually suggests settling the case ‘on the spot’ without taking it to higher instances. Indeed, big business has more possibilities to ‘resolve’ the conflict with taxmen out of court. For big capital is very much capable of solving any problems. However, small and medium business does not have these chances. And the way small and medium entrepreneurs resolve their problems is, in my opinion, indication of the business climate’s ‘temperature’ in the country. We are working now with this very sector.

“In general, administrative justice is a very interesting topic. The latest analytical research, recently published in the Ukrainian media, shows that nine out of ten tax dispute cases in Ukraine are settled in favor of the state. While administrative courts settle about 72 percent of claims in other matters, the claimant – usually an enterprise – loses 92 percent of tax dispute lawsuits.”

Do jurists comment on these figures in any way?

“There is an official attitude in Ukraine to the definition of administrative justice. It is very easy to find it. The official website of the High Administrative Court of Ukraine points out that ‘the top priority of administrative justice is to protect the rights of a citizen, not the state, which is supposed to enhance trust in Ukraine’s judicial branch of power.’”

But statistics show an entirely different situation…

“It is not only about statistics. I am strongly convinced that one can hear extremely interesting things in an off-record chat with any judge. We discussed statistics with nine out of every ten judges we talked to and asked them to explain what this meant. The answer was usually very simple: we defend interests of the state, and filling the budget is in the interests of the state. Courts are unofficially instructed to make ‘right’ decisions, although this runs counter to the very principle of administrative justice.

“Yet, like many other civil servants, our judges have utterly forgotten that they are supposed to work in the interests of the ordinary people who pay taxes and, hence, provide them (judges) with salaries.”

You said that small and medium entrepreneurs more seldom settle their conflicts with the tax authorities “amicably,” for they have fewer levers to do so. But when we speak of such a thing as bribery, does it really matter what your commodity turnover is? You just pay the inspector a “kickback” in proportion to your earnings…

“There is no the scale of charges you are speaking about. And the ‘amicable’ settlement of a conflict is not necessarily a bribe. Big business can afford to employ fulltime professional lawyers. And this very often saves the enterprise from ‘excessive attention’ of the controlling bodies. By contrast, a small or medium entrepreneur cannot afford to have a lawyer, especially a high-skilled one, on the staff. It is too expensive for him or her.

“And, in general, every contact with the law-enforcing and supervisory bodies of Ukraine is particular in its own way. For example, in case of a routine inspection, auditors often suggest making a deal about the amount of fines to be paid – they will put this down in the report in order to meet the planned targets, and entrepreneurs accept this, for they understand that if they do not make a deal, the auditors will find more infractions. Our law is so imperfect that even if you are eager to go by the book, you’ll find it impossible to follow all regulations and instructions.

“When the law-enforcing or supervisory bodies come to conduct an unscheduled inspection, they quite often expect to receive a reward, and in this case the situation depends on the entrepreneur himself, on the extent to which he or she is legally and morally prepared. There have been quite a few instances of intimidation and threats. For example, we are closing your store, workshop, etc. And if the entrepreneur knows the powers of a specific body, he or she can resist it effectively. But if they don’t, then… There’s another important problem here – legal knowledge of our businesspeople.

“Our organization has set itself a goal to help entrepreneurs study standard-setting documents and, what is more, know their rights. And if an entrepreneur is unable to effectively resist abuses on the part of the auditing bodies, we are ready to help them defend their rights.”

Could you describe, on the basis of your experience, the business rights violation situation in Ukraine? In what fields do most of the violations occur? What has changed in the past few years?

“There have been more inspections by the law-enforcement bodies, followed by the instigation of criminal proceedings on various ‘far-fetched’ charges, such as use of unlicensed software, tax evasion, fraud, etc. More often than not, they open a case based on a real fact and then, as part of this particular case, they try to question and search a wide circle of entrepreneurs.

“There is also a very complicated situation in the customs clearance of goods. So much has been talked, written, and promised about this! But the problem still remains.

“In general, there are so many specific problems in every region that it is too difficult to outline them in a few words. Ukraine is closed to investments today. Entrepreneurs have lost the hope that courts will protect their rights in disputes with the state because the abovementioned negative tendency is all too evident.”

You said “Ukraine is closed to investments today.” Please explain what you mean.

“Ukraine stood a colossal chance in 2002-07. Investors viewed us as part of Eastern Europe which had already shown more than one success story – suffice it to recall Poland. So everybody was keen on capturing this emerging market: investments were coming, banks were being bought for big money, subsidiaries were being established… But, as time went by, we failed to show the expected growth. Today’s Ukraine is the country of a failed success story for the investor.

“What private capital needs first of all is cost-effectiveness and stability. The international investor is very little interested in such things as political system, freedom of speech, and even human rights. It is only profitability and easiness to do business that he cares about. Ukraine can offer neither the former nor the latter. Nobody believes now in ‘Euro integration’ as a growth story, while business conditions are too difficult. The risk premium is very high. Ukraine’s securities are sold on the market at 10 percent per annum, whereas the actual basic rates of the developed countries are close to zero. Ten percent is a financial assessment of Ukraine’s risk.

“Any international investor discounts the effectiveness of his investments by the risk and does not consider risk as profit – it is called risk premium. In plain words, if an off-office center produces 14 percent per annum in Ukraine and 7 percent in the US, the investor will find it more profitable to invest in the US because the net profit for the US will be about 7 – 0 = 7 percent per annum, whereas it will be 14 – 10 = 4 percent for Ukraine. It is a rough estimate, but it convincingly shows how hard it is for Ukrainian entrepreneurs to attract investments.”

And what about the Ukrainian IT industry? It is reportedly very lucrative for investors.

“The Ukrainian IT sector does not belong to Ukraine. The bulk of the market is controlled by international outsourcing companies. It is a huge problem.”

Ukraine is the world’s fourth largest IT outsourcing country. We should have at least two Facebooks and Googles of our own (in terms of the company’s value and size). But what do we have? The highest price at which a Ukrainian IT company is sold is fewer than 50 million dollars.

“Yes, high-skilled programmers are Ukraine’s asset. But they are very mobile people, and many of them leave this country every year. It is more profitable to work abroad – at least, the tax burden is not so heavy. Kazakhstan, Russia, and Belarus introduced special conditions for the IT sector long ago. This was also to be done here. But the law that regulates IT development was ‘castrated’ after the president had vetoed it – the main privileges vanished from the text.

“IT is for Ukraine an opportunity to dash forward. But I doubt that this opportunity will be seized. The problem is absence of conditions for venture capitalism. Ukrainian IT startups get registered abroad. Mobile enterprises without physical assets, the founder’s mere idea, and a few computers are the IT specifics. It is impossible to physically limit or force one to register where there are high taxes or juridical risks (absence of an agreement between the shareholders, management options, convertible debts, etc.). Those in power must learn the specifics and adjust the law or, otherwise, see Ukrainian IT companies carry their financial success to offshore zones. I wonder, for example, in what jurisdiction Google bought the Ukrainian startup Viewdle for 38 million. Surely, not in Ukraine…”

You studied at one of the most prestigious British universities and then decided to get back to Ukraine. Why?

“It is comfortable for me to live in this country – my family and my roots are here. Having lived in Britain for four years, I clearly understood this without any rational explanation. But time showed that I had made a right decision. My education furnished me the possibility of a very rapid career growth and personal development in Kyiv.”

Obviously, living, building up your business, and starting a family in Ukraine, you cannot remain indifferent to what is going on in this country – all the more so that you have a good education and the experience of living in a well-developed society. Could you share your own views of how to pull this country out of the “quagmire”?

“Ukraine is a young state – it is a 20 something, a ‘teenager’ in fact. This needs time. Social responsibility must give birth to civil-servant and corporate culture. The rule-of-law principle must be brought into action and make everybody equal before the law. All we, ordinary Ukrainians, can do is show our own interestedness and understand that everything depends on us. I am calling upon everybody to visit polling stations.”

You have already shown your interestedness by supporting the Den Library’s project “Armor-Piercing Political Writing.” Could you tell our readers what you got as a result?

“It is the readers who should get something. I will get a special satisfaction from their comments.”