The proliferation of tax-minimization schemes, some of dubious legality, is costing the Ukrainian state budget billions of dollars each year in lost revenue. Yet officials show no inclination to crack down on these offshore havens. Why?
Last September, two dozen people filed into an office in Palladium City, a new glass and steel tower near downtown Kyiv.
Dressed in business attire, they looked like any group of accountants or executives as they entered the eighth floor office of what seemed to be one of the few occupied suites in the building.
They were greeted by an employee who collected $140 and they were ushered into a large room which filled quickly.
How many people here already own an offshore company?”
- Ivanna Pylypiuk, managing partner with International Consulting Group.
A smartly dressed, young woman in her 30s walked confidently to the front.
“How many people here already own an offshore company?” asked Ivanna Pylypiuk, managing partner with International Consulting Group. There was silence.
“You don’t want to admit it,” Pylypiuk said, smiling.
Pylypiuk was the first of a number of speakers who explained over the next few hours how to set up offshore companies – the tool often used to avoid taxes and to hide ownership of assets.
Dmytro Chernyavsky, a Ukrainian-Russian businessman linked with training seminars on offshore tax-minimization strategies, shows off the new design of Kyiv’s Olympic Stadium that he managed in 2008-2009. (Dmytro Nikonorov)
The training, titled “The Offshore Schemes in Business: Everything Important You Need to Know Working with Offshores - Practical Advice,” was also attended by a reporter for the international Organized Crime and Corruption Reporting Project.
The seminar was advertised as a place where participants could learn how to minimize corporate and personal taxes, as well as hide money or assets offshore.
The seminar takes place in Kyiv and other big cities of Ukraine as often as once a week.
According to the seminar package, it was jointly organized by International Consulting Group, Tax Consulting UK and Aurora Consulting.
Judging from the attendance and the existence of competing seminars, these events are popular with business people. In Ukraine, taxes are not only expensive, but complicated.
A World Bank report in 2010 called Ukraine’s tax system the third most difficult in the world behind only Venezuela and Belarus.
This particular seminar was delivered in near anonymity. The participants were never introduced to each other. There were no “what to expect” sessions and a form was helpfully provided for participants to ask questions confidentially.
Pylypiuk emphasized that all the offshore schemes she and her colleagues were presenting could be purchased by the participants after the seminar. “Each one of you has the right for a free personal consulting session,” Pylypiuk told the rapt audience.
Learning to hide
Beware of the political instability and the new tax code, with its luxury tax.”
- Ivanna Pylypiuk, managing partner with International Consulting Group.
The seminar delivered as advertised by telling people the tricks of the offshore trade while scrupulously avoiding much discussion of what may be breaking the law.
Pylypiuk and others offered helpful advice – such as those involved in export and import operations had the most to gain in avoiding taxes, and that offshore havens were good for the wealthy, especially those with yachts and other high-end assets.
“Beware of the political instability and the new tax code, with its luxury tax,” she told participants.
Speakers recommended Ukrainians open companies in such exotic locales as Belize, Panama and the Seychelles and to combine them with fake fronts in the United Kingdom, Cyprus or Holland.
A middle-aged lady sitting in the front row interrupted Pylypiuk and asked how she is supposed to move money from Ukraine to the account of her offshore company.
Pylypiuk seemed amused by the question. “The offshore can accept any amount of money – transferred from a Ukrainian company’s account, another offshore company’s account or even from a suitcase of cash that you have, because the offshore company doesn’t have to report. There are lots of schemes, but I can only tell you the details in private, as cash transactions would be a criminal offense,” she replied.
The details were kept vague. The attendees were promised help later in their private sessions, but they are assured the process could be as simple as “an easy wave of your hand and the money is transferred to your [offshore] account,” Pylypiuk said.
“As long as you have the money in the first place, the rest would be easy.”
Other questions from the audience directly addressed tax evasion.
Offshore is the place where all the traces and connections disappear. The only authority that can get through to an offshore company with requests is Interpol, but you will be the one who will be responding to their request.”
- Viktoria Boyko of Tax Consulting UK/Aurora Consulting.
“If I have a supermarket chain, what’s the best way to import vegetables?” asked another participant. The answer, drawn on a whiteboard, was a classic offshore scheme. A company in the European Union acts as facade for a series of offshore companies connected to a licensed warehouse in Poland used for the importation.
“Offshore is the place where all the traces and connections disappear. The only authority that can get through to an offshore company with requests is Interpol, but you will be the one who will be responding to their request,” said Viktoria Boyko of Tax Consulting UK/Aurora Consulting.
During the lunch break, the lecturers got to know the attendees better, casually chatting with them over a cup of coffee. Very soon, however, the conversations got into specifics.
The Organized Crime and Corruption Reporting Project reporter talked with speaker Iryna Nesterenko, a lawyer with International Consulting Group.
He asked how he can avoid paying taxes on a consulting services contract with a U.S. company. “It’s possible,” Nesterenko replied, adding that setting up such a scheme would be difficult and expensive.
The seminars seem to be working. According to Ukraine’s State Tax Administration, offshore-related activities are on the rise. In the first half of 2010, there has been a 54 percent growth in exports to offshore companies, totaling $1.6 billion.
The most popular destination, according to tax authorities, are the British Virgin Islands, which accounts for 73 percent of all of the offshore trade.
I don’t know a single big business in Ukraine which is owned transparently and doesn’t use non-resident companies.”
- Yaroslav Lomakin, the founder of the Moscow-based consulting firm Honest & Bright.
Yaroslav Lomakin is the founder of the Moscow-based consulting firm Honest & Bright and the former head of the Kyiv branch of Tax Consulting UK, a United Kingdom registered firm and a co-sponsor of the conference. He has watched the offshore services segment grow in Ukraine as well as in Russia.
“I don’t know a single big business in Ukraine which is owned transparently and doesn’t use non-resident companies,” Lomakin said.
Lomakin’s description of Ukraine’s business climate is well illustrated by statistics.
According to the State Statistics Committee, Cyprus is the top foreign investor in Ukraine, having invested more than $9 billion, or 22.5 percent of all foreign investment.
Even more interestingly, Cyprus also is the biggest recipient of Ukrainian foreign investment.
Local companies invested $6.3 billion in the island country, or more than 93 percent of all outgoing investment.
Palladium City office center in Kyiv on Nov. 10. (Yaroslav Debelyi)
Martin Raiser, the World Bank director for Ukraine, Belarus and Moldova, says there is no precise calculations how much tax revenue is lost in Ukraine due to the widespread use of tax minimization and evasion schemes.
However, Raiser points out that in Russia, the elimination of the double-taxation agreement with Cyprus alone increased tax revenues by about 0.6 percent of gross domestic product, or nearly $7.5 billion.
According to expert estimates, in Ukraine the revenue lost because of the double taxation agreement with Cyprus could reach up to $ 3 billion a year – nearly 10 percent of the government’s approximate $30 billion in spending annually.
Closing tax loopholes is one of the crucial suggestions made by the World Bank in its recent Country Economic Memorandum. In Raiser's opinion, this would not only generate much needed additional revenues, but would also create more balance in the distribution of costs for making necessary fiscal adjustments.
“The point of closing these loopholes is not only to decrease the budget deficit, but also to make the big businesses benefitting from the offshore loopholes contribute to fiscal adjustment,” Raiser said, adding that most of the big businesses in Ukraine are using offshore minimization schemes, as they have an opportunity to do so legally.
To be honest, there is room for improvement.”
- Martin Raiser, the World Bank director for Ukraine.
At the same time, Raiser is skeptical that the new tax code would help change the situation for the better.
“To be honest, there is room for improvement,” Raiser said.
Lomakin, founder of the Moscow-based consulting firm Honest & Bright, said that with high taxes and a corrupt business environment in Ukraine, big businesses do not have many options other than to use tax optimization schemes. Only the political elite can create a favorable business environment for their companies, Lomakin said, while everyone else must use offshore companies.
The beneficiaries of the boom is the offshore services industry, which Lomakin said has become so sophisticated that it can adapt to any attempts by legislators to stop the tax minimization and evasion schemes. Lomakin estimates that a company that specializes in selling and servicing offshore companies can earn between $2 to $10 million annually.
At the same time, Lomakin doubts tax authorities can or will do anything.
“The worst thing could happen, when they go to the office of such a consulting company and torture you to find out who bought a specific offshore, all they would get would be the name of a lawyer or some other intermediary,” Lomakin said. Besides, he adds, corrupt officials very often use the same schemes to siphon their own illegal incomes out of the country.
“They would not be cutting the tree branch they are sitting on,” he laughs.
Organized Crime and Corruption Reporting Project talked to Pylypiuk a few weeks after the seminar. She said her company is doing nothing illegal and only provides clients with instruments. It’s up to clients how they use them.
As to whether the schemes they recommend are illegal, Pylypiuk said that the tax authorities are aware of most of the schemes they are presenting, so there is no guarantee that they will always work.
We are only selling the instruments to clients. Whether they would play correctly, or use them for illegal purposes, is their own business. We don’t see and we don’t want to see this.”
- Ivanna Pylypiuk, managing partner with International Consulting Group.
Pylypiuk also said it is not their fault if clients use the firms they set up for illegal activities.
“We are only selling the instruments to clients. Whether they would play correctly, or use them for illegal purposes, is their own business. We don’t see and we don’t want to see this,” she said.
Pylypuik also denied her company would assist in moving a client’s cash offshore.
Lomakin, a former top manager of co-organizer Tax Consulting UK, claimed the same thing.
“Moving cash is purely criminal. I stay away from these clients, they stink! There is a million beautiful and legal ways of moving one million out of the country,” he said.
Both Aurora Consulting and Tax Consulting UK are linked to Dmytro Chernyavsky, a controversial Ukrainian-Russian businessman and a former state official. He could not be reached for comment.
A native of Donetsk, 39-year old Chernyavsky is referred to as the board chairman of Aurora. According to a news report on the official website of Ukraine's government, Russian Aurora Capital headed by Chernyavsky was registered as a daughter company of the Danish Holding Aurora Investment. Starting in 2003, Chernyavsky’s name is also affiliated with London-based Tax Consulting UK, as officially holding a position as vice president for Eastern Europe.
A database of Ukrainian companies from 2008 shows that the Ukrainian representative office of Tax Consulting UK is registered in downtown Kyiv at 24 Shota Rustaveli Street, office 19. The office of Aurora Consulting is located in office 17 of the same building. Both companies also use the same phone number.
In October 2008, Chernyavsky was appointed to be an interim director of Kyiv’s Olympic Soccer Stadium, which is undergoing a major reconstruction that estimates say will cost the government $500 million by the time it is done. The stadium will be the venue for the Euro 2012 final match. The government’s announcement of the appointment of Chernyavsky praised his corporate governance skills and experience, mentioning his involvement with Tax Consulting UK.
But in May, the Security Service of Ukraine and the Prosecutor General suspected Chernyavsky gave out a contract worth Hr 428,200 ($53,500) for construction works and services that had been already done and paid for. Earlier, the parliamentary commission investigating reconstruction of the Olympic stadium found that – during the currency exchange operations under Chernyavsky’s management – the state incurred losses totaling Hr 4.3 million ($543,000). It also questioned two other contracts for consulting services worth a total of Hr 12 million ($1.5 mln).
Yet, Chernyvasky’s troubles didn’t last long. In November, SBU closed the case against him, dismissing the charges.
Meanwhile, In July, he married Ekaterina Bogolubova, the daughter of billionaire Gennady Bogolubov, one of Ukraine's richest men. The ceremony took place in Vienna. The couple is reportedly residing in London.
Click here to view the chart "The biggest investors and top recipients in Ukraine" (Source:State Statistics Commitee)
Click here to view the chart "Exports to offshore countries" (Source: State Statistics Committee)
About the Organized Crime and Corruption Reporting Project
The Organized Crime and Corruption Reporting Project is a joint program of the Center for Investigative Reporting in Sarajevo, the Romanian Center for Investigative Journalism, the Bulgarian Investigative Journalism Center, the Center for Investigative Reporting in Serbia, the Caucasus Media Investigation Center, Novaya Gazeta, HETQ in Armenia and a network of investigative journalists and media in Montenegro, Albania, Moldova, Ukraine, Macedonia and Georgia.
More information can be found at: http://www.reportingproject.net.
Visit the Offshore Havens project website at: www.reportingproject.net/offshore
Kyiv Post staff writer Vlad Lavrov can be reached at email@example.com
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