Instead of casting a wider budget revenue net, authorities squeeze their biggest source of potential revenue.
Ukrainian customs, tax and financial monitoring authorities are stepping up pressure on businesses of all shapes and sizes in a bid to meet tough revenue targets.
Business owners say the pressure is unjustified and will hurt the recovery from a sharp recession.
However, top government officials – including Customs Service head Ihor Kaletnik – say they are justified in cracking down on fraud and other forms of tax evasion.
Customs Service head Ihor Kaletnik
“It’s no secret that businessmen reduce the declared value of goods in order to pay less to the state budget.”
– Ihor Kaletnik, Customs Service head.
“It’s no secret that businessmen reduce the declared value of goods in order to pay less to the state budget,” Kaletnik, the Customs Service head, said.
The impetus for boosting revenue and clamping down on alleged evasion is clear.
Ukraine is struggling to fill state coffers in order to meet conditions set by the International Monetary Fund in exchange for a $15.2 billion line of credit. Prime Minister Mykola Azarov, former head of the State Tax Administration, is leading the tax-collection drive.
The crackdown is rippling through Ukraine’s economy – from the largest manufacturers and exporters, to some of the smallest ones.
Metallurgy and agriculture giants this week, specifically, protested against the tightening grip of the state Customs Service.
The Customs Service announced Sept. 16 that they were initiating a criminal case against Arcelor Mittal’s steel plant in Kryviy Rih, one of Ukraine’s largest steel mills.
The criminal case alleges attempted customs evasion when importing 67,600 tons of coal worth almost Hr 203 million. According to the customs service, ArcelorMittal cleared the coal at customs for only Hr 107.5 million.
“ÀrcelorMittal Kryviy Rih suppliescoal to Ukraine via a big international trader on a long-term contract. We have already made supplies according to this contract this year, previous supplies were cleared by the customs service without any remarks. We have not changed supplier or coal grade since then.”
– Anna Honcharyk, ÀrcelorMittal Kryviy Rih spokesperson.
ArcelorMittal denied the allegations, claiming that the customs declarations represent the fair value of the imported coal, and the customs service has suddenly changed its position.
“ÀrcelorMittal Kryviy Rih suppliescoal to Ukraine via a big international trader on a long-term contract. We have already made supplies according to this contract this year, previous supplies were cleared by the customs service without any remarks. We have not changed supplier or coal grade since then,” said company spokesperson Anna Honcharyk.
Similarly, grain traders are complaining that their ships are being prevented from sailing due to government efforts to contain inflation. Volodomyr Klymenko, president of the Ukrainian Grain Association, said September 17 that over twenty cargo ships were currently unable to sail.
“Nobody understands according to what principles ships are being cleared to sail or not,” Klymenko protested.
But smaller businesses are also feeling the pinch.
Car sellers say a new law will force their firms to monitor transactions and could scare away clients, while other merchants are apprehensive about whether a new tax code will slash tax breaks.
Bogdan Prots, a car dealership director, said a new law that entered into effect on Aug. 21 transformed dealerships into “fiscal organs” that will have to report clients’ transactions to the tax authorities.
The law on money laundering requires companies to report individual customer transactions of Hr 150,000 and more.
Prots said this could frighten off customers. “It’s a shock,” he said. “Car sales in August were in fact down 9 percent on a cataclysmic 2009, and now this.”
The government, however, has its reasons. And, when it comes to grain exports, some of them may be legitimate.
Government officials have expressed fears of a surge in food prices, which would be unpopular and also could lead to a spike in inflation that exceeds parameters under the IMF agreement.
Throttling grain exports through bureaucracy is one way to reduce food price inflation without infringing on commitments made to the World Trade Organization.
“The grain market was untouchable, to put it mildly, for a long period of time. And there was everything going on you could imagine: Exporters declared one class of goods as another, one class of grain as another.”– Ihor Kaletnik, Customs Service head.
Kaletnik, the head of the Customs Service, is also accusing grain traders of exporting high quality grain as lower quality in order to lower customs payments, thus justifying the protracted process of clearing grain for export.
“The grain market was untouchable, to put it mildly, for a long period of time. And there was everything going on you could imagine: Exporters declared one class of goods as another, one class of grain as another,” Kaletnik said.
Kaletnik said five criminal cases had been opened against companies who had provided false information to the customs authorities. But he denied there are any current holdups for grain exporters.
Kaletnik admitted that customs were behind their plan in terms of budget revenue generation, running at 85-90 percents of targets, but attributed it to less imported natural gas.
Budget analysts have long said that government revenue targets are overly ambitious.
In its memorandum with Ukraine in July, the IMF openly questioned whether the government could fulfill its financial goals. According to the agreement, any shortfalls in planned revenues must automatically translate into spending cuts. With the year drawing to a close, pressure is mounting.
Adding to the pressure is the legacy of the previous government under Yulia Tymoshenko, which extracted extra revenue from businesses by collecting taxes in advance and not reimbursing value added taxes to exporters.
While measures to crack down on tax evasion are justified, the extent of Ukraine’s shadow economy and the state’s reputation for venality mean that such measures inevitably impact business confidence as a whole.
As car dealer Prots said: “You can say that ‘honest citizens have nothing to fear from such measures.’ But when 50 percent of the economy is informal [in the shadows], then everyone has something to be worried about.”
Kyiv Post staff writers Graham Stack and Maria Shamota can be reached at [email protected] and [email protected], correspondingly.
