After opening books online, steel giant has easier time.
In Ukraine’s tough and unfriendly investment climate, notorious for heavy fiscal pressure on businesses, the top foreign investor is beginning to see relief after opening up its books for online access by tax authorities.
Such an unprecedented move, undertaken last June by ArcelorMittal Kryvyi Rih, the largest of Ukraine’s steel mills and owned by global steel giant ArcelorMittal, led to positive results, as the value-added tax (VAT) refund arrears to ArcelorMittal have decreased almost twofold.
Another break experienced by ArcelorMittal’s Ukrainian subsidiary comes in the forms of less pressure from tax authorities, as the number of tax inspections have decreased almost tenfold to virtually none.
Representatives of ArcelorMittal Kryvyi Rih remained tight-lipped about the details of their new level of dealings with the tax administration, pointing out only their overall satisfaction with the results. At the same time, critics point out that the relative success of ArcelorMittal might rather be an exception to the rule, describing it is a “showcase example” rather than a true indication of a thaw of the business climate, long-awaited by the business community.
In return for openess, tax checks on nation’s largest foreign investor decrease.
Ukraine’s notoriously cumbersome and non-transparent tax system is considered one of the main challenges in doing business in the country.
In the latest World Bank’s Doing Business report published in October it is named the third most complicated in the world, after Venezuela and the Republic of Congo.
The recently announced update on VAT refunds owed to ArcelorMittal shows significant improvement as well. The current amount of overdue VAT refunds to the steel mill stands at Hr 1.1 billion ($140 million).
While this amount might seem staggering to anyone not familiar with the peculiarities of Ukraine’s tax system, it does qualify as an improvement, compared to the Hr 2.3 billion ($290 million) of overdue VAT owed to ArcelorMittal as of early 2011.
This change in attitude towards the nation’s largest investor on behalf of the fiscal authorities is likely to be one of the results of the June memorandum, when ArcelorMittal granted the tax administration online access to the company’s books.
Such a measure, referred to by the tax administration as “horizontal monitoring,” allowed them to study the pricing mechanisms that the export-oriented steel company uses, namely the difference between the export price declared in Ukraine and the final price paid by the end consumer.
Alla Savchenko, president and seniior partner of BDO in Ukraine.
This allows tax officials to make sure that no transfer-pricing schemes, siphoning the profits out of the country by exporting the goods to offshore jintermediaries at prices a little above cost, takes place. Experts believe this method is widely used by Ukraine’s oligarch-owned steel, chemical and grain businesses to minimize the taxes they pay inside the country.
In addition, the online monitoring system allows tracing the cost structure of the goods being exported to make sure the prices of raw materials are not inflated, also for tax minimization purposes.
In return for such openness, tax authorities promise a decrease and gradually a complete absence of planned or unplanned checks of the companies, allowing them online access.
According to informed sources inside ArcelorMittal, in 2011 tax authorities visited them only four times and just once since the June memorandum was signed. In comparison, in 2010 ArcelorMittal was subject to 24 tax inspections.
With all the optimistic news coming out of ArcelorMittal, experts are wondering just how is easy it would be to replicate the steel giant’s relatively successful tax experience and whether oligarch-owned companies would dare to open up their books as ArcelorMittal has.
Not so, in the opinion of Alexey Khomyakov, counsel at Asters, a Ukrainian law firm. In his opinion, the tax authorities simply handpicked the companies and established with them exemplary “showcase” relationships. In addition to ArcelorMittal, Russian oil giant Lukoil-Ukraine and the largest Ukrainian grain trader Nibulon participate in the horizontal monitoring.
When, according to Khomyakov, some of the other large exporters wanted to join in, they ran into difficulties, as the local tax offices simply didn’t know how they are supposed to implement the system, as “horizontal monitoring” is not covered and explained by any legislative norms or mechanisms.
“This is more about establishing good relationships,” Khomyakov said. “The criteria of who qualifies for this are not clear.”
Such lack of legal backing of online monitoring poses a few potential risks to the companies which might consider it as an option. According to Khomyakov, one such potential problem is the leaking of sensitive information about the company’s finances and costs to the competitors, which becomes much easier due to the legislative vacuum regarding online monitoring.
Another problem, Khomyakov said, is the near impossibility of appealing decisions made by the authorities on the basis of such online monitoring, as well as the lack of legally binding guarantees that openness of the businesses will yield the same positive results, such as the decreases of VAT arrears and number of inspections, as it was the case with ArcelorMittal.
As Alla Savchenko, president and senior partner of BDO in Ukraine, a member of a leading international network of accounting and consulting firms, pointed out, the main challenge of horizontal monitoring might be in the sentiments businesses in Ukraine have towards the tax authorities.
“There is no corresponding level of trust between the tax inspection and the taxpayer,” Savchenko said. “Ukrainian business is simply afraid of their new initiatives.”
Kyiv Post staff writer Vlad Lavrov can be reached at [email protected].
