You're reading: Cherniavskiy: High tax unjustified in nation

Tax adviser: There is no social contract between state and citizens in Ukraine.

While Ukrainian businessmen are frantically trying to understand the realities of the new tax code, those who provide accounting and tax consulting services are capitalizing on the uncertainties of doing business in a nation with one of the most complicated and burdensome tax systems.

Such is the case with Dmitry Cherniavskiy, a partner with London-based firm Tax Consulting U.K., and former interim general director of Olympic Stadium, the main venue for the Euro 2012 soccer championship.

Cherniavskiy’s firm specializes in business accounting, financial reporting and tax optimization.

Last fall, the Kyiv Post visited one of the seminars, co-organized by Tax Consulting U.K., where business representatives were taught how to avoid problems with tax authorities and customs by moving most of the income earned to the offshore jurisdictions with “no taxes and no reports.”

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Cherniavskiy has no warm sentiments about the new Ukrainian tax system.

He said that the Ukrainian government simply does not provide enough public services – such as transparent judiciary, quality healthcare, and good education – to justify the high tax rates and fiscal pressures that it imposes on its businesses and citizens.

In his Kyiv Post interview, Cherniavskiy, son-in-law of Ukraine’s third richest man, Gennady Bogolubov, co-partner in the so-called Privat Group, talked about the challenges faced by Ukrainian businesses after the new tax code came into force.

He explained the chronic unwillingness of businesses to pay taxes in Ukraine and commented on the recent controversial events involving him.

Last year, the Security Service of Ukraine [SBU] and prosecutor general opened a criminal case on suspicion that Cherniavskiy gave out consulting contracts worth nearly Hr 428,000 ($53,500) for already completed construction work and services while he oversaw Olympic Stadium. Charges against him were allegedly dropped several months later.

Prior to that, the parliamentary commission investigating reconstruction of the Olympic stadium found that during currency exchange operations under Cherniavskiy’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 million).


KYIV POST: How is Ukraine’s business climate with the new tax code’s introduction?

Dmitry Cherniavskiy: It will be difficult to see anything positive in the way business reacts to the new tax code. The main thing about it is that it moves the country back in its development.

Look at how tax systems have evolved around the world. If there is an increase in corporate tax pressure, then personal taxes are getting more liberal. If personal taxes are getting higher, then corporate taxes should go down.

The second way is considered more progressive, as business should develop freely, expand its capital to third countries and grow. And it’s clear and logical that whatever owners and stockholders of a business earn, it should be subject to a high personal tax to result in the cleanest money possible.

In Ukraine we have a different situation. The authorities try to collect taxes wherever they can, basically on the basis of “tax whoever you can catch.” This is not to mention the political regime we have. We all understand that there are “untouchable” people and there are people who are even more “untouchable.”

And in such a de facto absence of clear rules, it’s natural that there are people who don’t pay taxes at all, or pay fewer taxes, or pay them according to some other criteria.

In the whole world, small business pays no, or very little taxes, [and only when] they have earned something. It simply has to earn something first! And the state should provide the benefits to justify and encourage paying taxes, such as political stability and social protection.

A businessman also has to see where the taxes go to, for example, good roads, well-developed communication and transportation networks, schools, hospitals. It doesn’t exist in Ukraine. In Ukraine, there is no such social contract between the state and its citizens.


KP: But fiscal pressure from tax authorities could be explained by the budget deficit, which, in part, results from the widespread use of offshore and tax-minimization schemes by big business?


DC:
Look, it’s not Ukrainians who invented offshores. It’s not Ukrainians who established the offshore jurisdictions, and it’s not that Ukrainians alone are using these schemes, some of which might be more than 100 years old.

What Ukraine did was to come up with a tax system that hasn’t really been reformed for the last 20 years, and its political system rather reminds of feudalism. There are some attributes of democracy, but it has nothing to do with real democracy.

Do we have independent courts in Ukraine? No. They weren’t independent during the previous government either, but today there is not even an illusion of moving towards establishing independent judiciary.

People often call offshore countries “banana republics.” But most of these so-called banana republics have the judiciary system established by the British, the Dutch, or the Germans, who used to have a protectorate over these countries.

So, funny as it is, the company registry of British Virgin Islands consists of more than a million companies. And one of the reasons for that is that local courts provide business owners the same legal protection in case of problems as they would in the United States, Canada or Germany. You cannot buy a decision there, like in Ukrainian courts.

Therefore, is it surprising that big Ukrainian businesses you have asked about have offshore subsidiaries in such “banana republics”? They do provide much better protection for business than in your home country.

KP: What is the right tax rate?

DC: There is a number written in the Torah and then re-written in the Bible and Koran: 10 percent. This is a psychologically comfortable number, no matter what your faith is. But since there is no one else between you and God, this 10 percent should be out of what you really earn.

Moreover, 10 percent of personal income tax after all the corporate taxes have been paid is not such a small amount. But all these 15, 20, 30, 40 percent profit taxes are so abstract. The verge between tax planning and tax evasion is really thin, especially in the absence of clear and comprehensive laws.

So, look what happens in Ukraine. The government cannot put pressure on large corporations. In most cases, it’s because they don’t want to do this. So, they catch whoever is not able to defend themselves – small and medium business – and start milking them like cows. But you cannot milk animals eternally. Eventually, they either start butting, or escape to better conditions.

KP: Does it mean that small businesses are increasingly seeking ways to optimize taxes?

DC:
There are two reasons why people are seeking tax advice [regardless of the size of business]. First, if a company wants to be clear and transparent, have no problems and work with legally established schemes of tax minimization. The second reason is when a bribe that you need to give your tax inspector exceeds what you can afford.


KP: What is the most popular question related to the new tax code?

DC: Mostly we are asked to explain its changes. There are lots of export-import related questions. So, they come to ask about the best ways of working with their foreign partners.

KP: But if a company is undergoing an audit, how does the widespread use of minimization schemes affect the company’s reputation with investors?

DC:
If a person or a company doesn’t want to pay taxes, they won’t pay, no matter what. Again, this is a decision everyone makes for himself. So, when such a person starts using a minimization scheme, he just doesn’t care what other people say. All he cares about is to bribe tax inspectors, so that they overlook this. Some decide to go transparent.

It could be for IPO [initial public offering] reasons, or to land a loan. In such situations businessmen prefer to have companies in European jurisdictions with very low corporate taxes, such as Switzerland, Austria, the Netherlands, Denmark, U.K., and, in some cases, Cyprus.

KP: Let’s change topic and go back to the events of last year, when the prosecutor general and SBU opened a criminal case related to your work at the Olympic Stadium. What happened back then?

DC: There was the change of political regime, which triggered a witch hunt. Back in 2008, I got excited about this project and accepted this offer, as I had some experience in the developing business in Russia. It was the biggest construction project in Ukraine’s history and it seemed to me very transparent.

Two years of work and you would see beautiful and impressive results. The stadium is now being built by others. I hope it’s built on time and with high quality, so that we host the Euro 2012 [soccer] tournament in Ukraine.

KP: What about the report of parliamentary commission which investigated the reconstruction? Have you read it?

DC:
If you look at the stadium’s budget at the time of this report and now, you will see that it’s about 2.5 times higher. So, when the next government decides to audit the reconstruction done by the officials now in power, there will be a lot of questions to ask.

As for the consulting contracts, UEFA [Union of European Football Associations] repeatedly stressed the need for hiring specialized consultants on the project. So, we sent invitations to participate to around 50 companies, around 11 of them responded. The list of these companies has been approved by the UEFA.

Then, British company Strategic Leisure and Finnish Poyry Architects won. The British and Finnish companies have an established reputation worldwide. These are not pocket companies owned by Cherniavskiy, or someone else. They won and UEFA accepted it. The investigation closed the case having dropped all the charges.


KP: Did Gennady Bogolubov, your father-in-law, interfere to help you with this criminal case?

DC: He has nothing to do with solving this problem, as there was no real problem. There was a fabricated criminal case that took too long to solve, due to political reasons. They needed a scapegoat, someone to blame for increasing the [Olympic stadium] construction budget.

KP: It is widely considered that the so-called Privat Group, co-owned by Bogolubov, is among the most active users of tax-minimization schemes, and that most of its companies are owned by offshore structures. Have you ever given business advice to the group? Or it just happened that you have the same business philosophy?

DC: I am sure you can ask him this question directly. My last name is Cherniavskiy and so is my wife’s last name. There are many people in the world who seek my advice.

Kyiv Post staff writer Vlad Lavrov can be reached at [email protected]

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