Q&A with Oleksiy Lyubchenko, deputy head of Ukraine's Tax Administration, who was sometimes evasive, other times shockingly blunt.
For obvious reasons, most Ukrainian citizens, foreigners and businesses in the country try to avoid having contact with officials from the State Tax Administration.
But the Kyiv Post was eager to get the tax administration’s official line on what are often sensitive issues, including interpretation and implementation of the new tax code. In this Kyiv Post interview, Oleksiy Lyubchenko, deputy head of Ukraine’s State Tax Administration, was sometimes evasive, other times shockingly blunt.
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KP: Let’s start with a key question in the minds of many companies working in Ukraine. When will the government start refunding value added tax to exporters on time and in full?
Oleksiy Lyubchenko: A balance is needed between the interests of the state and business. A company applies for the refund, a huge refund. That’s all it demands from the state of Ukraine. On the other hand, this company gives something back: taxes, pension fund and social payments, salaries and payroll taxes. So, generally the situation around the country is positive.
KP: Sounds wonderful, but what about the fact that some companies got no VAT refunds last year at all?
OL: We have 2,000 businesses applying for VAT refunds every month. We owe everyone, more than half to the steel industry. We are in a situation of constant deficit in terms of finances and doubts as to the transparency of VAT process overall. In order to refund VAT to a company, its suppliers actually have to pay this VAT in the first place.
Today, we have suspicious VAT requests in the order of Hr 100 billion. A company has to prove its right – through our inspection, or court, if necessary – in situations which look fictitious. How can you refund VAT if it was never paid to the budget in the first place?
KP: But the tax administration claims that starting in mid-March, VAT will be refunded automatically within 26 days after application if a company meets certain criteria. How difficult will it be to meet this pledge?
OL: The toughest criteria [to qualify] will be exports in the order of 50 percent of output, or more. The difference between a tax credit and tax due should not exceed 10 percent.
Another very important factor is the level of wages. -Average wages at a company should be at least 2.5 times higher than the minimum wage. It has to have at least 20 employees on staff and the adequate production facilities … and, of course, no debts on tax payments.
We really want to stop all this talk about kickbacks [for VAT refunds]. We will have a chat with companies and give them advice. If you are on the automatic VAT refund list, you will be getting it back for sure. If something happens – call the hotline number on our website. Anonymity is guaranteed. And we will kick [the violators’] heads.
KP: So, you are calling businessmen not to give bribes, but where is the guarantee that the process of making a decision whether a company meets the requirements for automatic VAT refunds is transparent?
OL: Lawmakers have answered your question. Take, for example, registration of tax invoices. If the tax administration hasn’t done this during one day, it’s automatically considered registered. This principle of silent consent is not that bad, I think.
KP: Let’s take a real life example. Ruukki, a Finnish company which produces roofing in Ukraine, has still not received Hr 35 million in VAT refunds for last year.
OL: The treasury probably didn’t have enough money. I remember this case. I see the problem. They have been transferred to a different department. If all is approved, they will get the money by the end of this month.
[After making a few phone calls about the Ruukki case, he added]: Well, they seem to have such an unprofitable business. It smells really bad. If a company asks for Hr 1 and pays Hr 1 as profit tax, they get refunds every month – 100 percent. If they pay back at least 70 percent, they also get refunded immediately. Even if half of the refunds are paid back as profit tax, they get VAT on a priority basis. Thanks to your intervention, we will try to give them Hr 17 million by the end of the month.
Ruukki, a Finish producer and supplier of metal-based products, has made a major mark on Ukraine. It has invested heavily into the country, building domestic production. Its metal siding and roofing products are used in construction of prominent buildings across the country, including wholesale-retail stores Metro Cash & Carry, Furshet and Auchan. The brand new airport terminal (above) being built just outside Kyiv in Boryspil will also heavily display Ruukki materials. Given such a big role, you’d think Ukrainian authorities would treat the investor well. But Ruukki claims it has not received Hr 35 million in VAT refunds for last year. The amount is tiny compared to the total overdue VAT refunds owed to businesses by Ukraine’s State Tax Administration. Still, it is damaging to Ruukki’s business in Ukraine and symbolic of tax headaches businesses face in the country. (Courtesy)
KP: So, will Ruukki get their VAT refund or be subject to inspections?
OL: Afterwards, they will get inspections, of course. We will search for their profits in a couple of months.
But let me tell you something else. Last year we fulfilled the tax revenues budget plan for the first time in four years. We will do everything possible to execute this year’s plan to the full extent. This is what we will refund VAT with. We are performing this job.
How do you like Hr 100 billion of VAT not paid to the budget during the last three years? Every year Hr 33 billion went into the shadow economy. Somebody was really enjoying this situation. Enjoying very much! That’s why they have the money to pay for all this noise and complain that they are being kicked.
KP: So, should business be afraid that unplanned inspections will increase?
OL: We have to decrease the number of inspections. As for the planned ones, we have statistics: 47,800 in 2009, 43,100 in 2010. As for the unplanned inspections, last year we had 25,000 of them. The reasons [for conduction unplanned inspections] are clearly outlined in the Tax Code.
Firstly, one reason arises when companies don’t respond to our inquiries. Also, everything that has to do with VAT refunds requires unplanned inspections. Because, when we ask companies questions, they give us all sorts of irrelevant documents. Other reasons include liquidation, reorganization of companies, and, finally, investigations and court cases.
It’s no secret that our function is to control. We divide taxpayers into categories. Depending where you are, that’s how much you are loved by the controlling organs. If a company deals with dubious enterprises, has fictitious owners, front man companies and so forth, then in 99 percent of such cases we have tax evasion.
By the way, the new tax code does not change guidelines for unplanned tax inspections.
KP: Should taxpayers be relaxed when it comes to fines for violations? A provision in the new tax code envisions that fines during the first half year – a period granted for taxpayers to get accustomed to the new rules – stand at just Hr 1.
OL: Everybody started dreaming about using this provision to their benefit. Let’s say I, as a taxpayer, have a declaration and need to pay Hr 2 billion but made a mistake and say here is Hr 1. Some people think they don’t have to submit tax declaration at all. This is wrong. The idea was as follows: the accountant makes a mistake in calculation somewhere and the fine is Hr 1. You can make any mistakes that you want, but by July 1.
There is one nuance: if you want a VAT refund. We have to check your application each month. There is no other way. If we find something wrong, you get fined Hr 1. Then, let’s assume, that during the next application, in March, you make another mistake. You again get fined Hr 1. But in August, the fine will be 75 percent of the total violation. This is really one area that many people should think very well about when applying for VAT refunds. It might turn that you owe taxes, rather than deserving a VAT refund.
KP: And how much VAT you do refund?
OL: In January and February, Hr 2.5 billion was refunded. On average, we refunded Hr 3.5 billion each month.
KP: Many entrepreneurs complain that they have to pay taxes for non-existent violations, and tax inspectors explain this citing requirements set by their superiors.
OL: We don’t have any planned sum of fines that need to be collected. When such situations arise, you have to report them to us. Now is a very convenient time, with reforms under way. People will be fired [for such violations].
KP: What about alleged demands by tax officials for businesses to pay taxes in advance? ArcelorMittal complained this week about it.
OL: Probably, there was some condition given to them. Probably, the tax administration in Kryviy Rih has the right to impose such conditions.
We are just administrators implementing laws. We are given the mechanism. We work with it. If the wheel is a square one, and we are told to keep pedaling, then we ask legislators to adopt changes.
KP: What about the new Tax Code? Is the wheel round or square?
OL: It is oval-shaped.
Kyiv Post staff writer Kateryna Panova can be reach at [email protected]
