Ukraine’s tough investment climate – which includes one of the world’s most nightmarish tax systems -- seems to be much more manageable for big and powerful players.
This is what at least one of them, the top foreign investor in Ukraine, can claim after winning a major court battle with the tax authorities.
The ruling by the Dnipropetrovsk Administrative Court of Appeal from June 26, cancelled a tax notice to ArcelorMittal Kryvyi Rih totaling nearly Hr 453 million ($57 million).
This whooping amount makes the dispute one of the largest in Ukraine’s history and consists, according to the tax authorities, mainly of value-added tax refunds and the resulting tax credit. Representatives of ArcelorMittal, however, would not comment on the court case.
On July 11 head of Ukraine’s tax service, Oleksandr Klymenko, pledged to abide by the ruling. “Another issue is whether the tax service agrees or disagrees with this, yet we will implement the court’s decision,” he said.
The latest positive tax news for ArcelorMittal comes months after the steel giant reported fewer tax inspections and an almost twofold decrease in VAT refunds owed. As of February, that figure stood at Hr 1.1 billion ($140 million). These improvements are generally attributed by the company representatives and experts to a June 2011 decision to allow tax authorities virtually unlimited access to the company’s books online.
The system, called “horizontal monitoring” by the tax service, allows them to study pricing mechanisms used by this export-oriented company, to ensure that no transfer pricing — namely exporting to offshore intermediaries at prices little above cost, takes place.
In addition, such monitoring helps tax authorities trace the cost structure of exported raw materials. Experts believe that many of Ukraine’s oligarch-owned steel, chemical and grain businesses are using such complicated price-transfer schemes to minimize taxes paid inside the country.
While experts in the legal field find many positives in the ruling in favor of ArcelorMittal, they are far from being overly optimistic as to whether it signifies any real change for the better in the country’s investment climate. After all, they say, even the steel giant’s own tax problems are far from over.
Serhiy Piontkovsky, managing partner of the Kyiv office of Baker & McKenzie, an international legal firm, noted the general improvement in ArcelorMittal’s dealings with the tax authorities, but advised not to jump to conclusions. “There are other issues, pending court cases, and a major tax inspection in June whose results are not yet known,” he said.
Yet, Piontkovsky still thinks that the recent win by ArcelorMittal does mean a lot for the country’s business, as many believed such things wouldn’t be possible given Ukraine’s notoriously non-transparent courts, especially in cases involving fiscal authorities.
Alex Frishberg of Kyiv-based law firm Frishberg & Partners, meanwhile, sees the court ruling as a belated and likely doomed attempt by the government to minimize the negative trend in investment, amid its systematic failure to ensure stable VAT refunds.
“I believe that [President Viktor] Yanukovych government simply cannot afford to reimburse every business in Ukraine their 20 percent,” Frishberg said. “So it’s safe to presume the VAT refund to ArcelorMittal is a showcase ruling, designed to pacify potential foreign investors who are justifiably reluctant to do business in today’s Ukraine.”
Kyiv Post staff writer Vlad Lavrov can be reached at [email protected]
