You're reading: Bunge raids highlight problems with aggressive customs, tax authorities

Recent tax raids of the Odesa branch of Suntrade, a subsidiary of global grain trading giant Bunge, spooked investors and highlighted the constant problems that foreigners face when doing business in Ukraine.

While Ukraine remains a promising destination for agribusiness investments, massive red tape, bureaucracy and shakedowns by the authorities are a constant hassle that can cut into profit margins and patience of a business. In particular, businesses complain state services, particularly tax and customs, are treating them as cash cows and harassing them with incessant inspections..

One of the loudest recent examples of the problems faced by companies came when Bunge unveiled the Odesa office of its subdivision Suntrade was raided by tax authorities on Aug. 28. According to the company, the agents confiscated documents, computers and personal items of employees in connection to an ongoing investigation. They also seized the company’s VAT refunds and costs for transactions with allegedly suspicious companies. This amounted to around Hr 3.3 million ($400,000), a Bunge spokesperson told the Kyiv Post.

The state tax service has brought two cases against Suntrade, for large scale tax evasion and property misappropriation and embezzlement. The company is appealing against these cases.

The state tax service couldn’t be reached despite multiple attempts to reach officials for comment.

Whatever the verdict, usage of such hardline tactics by local authorities is a common problem for companies, experts say. But the phenomenon of so-called chain audits, whereby any company that has done business with someone is suspected of wrongdoing, is also a problem.

According to Viktoriia Fomenko, an associate at Salans law firm, these chain audits are a major basis for unscheduled investigations. However, in these cases, authorities are only allowed to audit the transactions carried out with the suspicious entity, Fomenko said.

“If some violations were in the audit of a taxpayer, you can only be checked with respect to (transactions) with this taxpayer, not everything else,” Fomenko said.

Customs audits are a whole different beast, however, because officials have the administrative power to stop customs clearance. Just checking goods in a customs laboratory can easily cause a month of delay during which companies are powerless. “You do not have any power to appeal because they do it in a legal way,” Fomenko said.

According to Taras Koval, a lawyer at Gide Loyrette Nouel and a former tax manager at Bunge, the problem is a lack of accountability on behalf of the authorities. Previously, they were held accountable for 5 percent of the losses caused through ungrounded inspections, he said, but now no such provision exists. Moreover, budget shortfalls mean tax authorities will fight hard against value-added tax refunds, he added.

“If there is no responsibility, they may act as they want. To protect themselves, companies are losing time and money. This is, actually, the Bunge case,” Koval said.

“It’s a waste of time and waste of money. That’s why we in the legal profession advise that either you use the same practices as the tax authorities, by going to court, to the prosecutor’s office, to the government, or you negotiate [a settlement] with the tax officers,” Koval advised.

For all the problems, there are some improvements on the horizon.

A recent study by the European Business Association, a Kyiv-based business advocacy, showed an improvement by polled companies in working with customs authorities. Only 3 percent of companies experienced post-customs checks in the first half of 2012 compared to 23 percent in previous six months. The time it takes to get customs clearance fell slightly, from 2.8 days to 2.5 days.

“The results of the (survey) can be summed up by the phrase: ‘everything is relative.’” noted Alexander Lazarev, co-chair of the EBA customs committee.

While problems remain, “three months have passed since the customs code’s adoption and we can already see some perceptible changes,” Lazarev added.

Kyiv Post editor Jakub Parusinski can be reached at [email protected].