You're reading: Leading foreign businessman faces probe by tax authorities

One of Ukraine's wealthiest and most influencial expatriates, Bohdan Batruch, is under investigation for tax fraud. He denies any wrongdoing and says someone is after his businesses.

Just as leading Ukrainian film distribution company B&H was working on getting new Hollywood action flick Battleship ready to hit local movie theaters, its owner and CEO, Bohdan Batruch, found himself in the middle of a real-life drama.

Batruch, an ethnic Ukrainian born in Poland, said around 15 tax police officers raided the Kyiv offices of B&H early on April 5. The firm is an official distributor of United International Pictures, Paramount, Dreamworks, Walt Disney and other major Hollywood film studios.

While Batruch was out of the country at the time, the authorities showed the employees their IDs and told them that they have the right to confiscate everything. It was a similar scene that day at Le Doyen Studio, a Ukrainian-language dubbing company also owned by Batruch. In both cases, the visit from tax police lasted the entire working day.

Batruch, whose $83 million net worth in 2010 was estimated as third highest among expats in a Kyiv Post ranking, said 31 computer, 35 boxes and 15 sacks with contracts and other company documents, as well as two servers and 28 hard disks, were seized.

Company lawyers weren’t allowed into the site during the search at the B&H office. Batruch said tax police broke into one of the safes where B&H employment paperwork was kept and confiscated it.

While tax authorities claim that their actions are the result of an ongoing criminal case involving large-scale tax evasion, experts smell foul play. Citing Batruch’s leading position on Ukraine’s dubbing market, they describe the tax raid as “state raidership.”

Yet, officials at the state tax administration categorically denied any wrongdoings on their part. As Mykola Kovtunenko, spokesman for the Kyiv State Tax Service put it, they are simply doing their job.

“There is no politics in this case whatsoever,” Kovtunenko said. “Even though the court case [according to Batruch] is being heard at the Higher Economic Court, nothing prevents us from doing the investigative work. Read the Tax Code and the Criminal Proceedings Code yourself.”

Batruch’s Le Doyen studio dubs an estimated 60 percent of nearly 170 movies shown in Ukraine annually, one third of which he also distributes. The Kinopalats chain of cinemas has 15 venues throughout Ukraine that he controls fully or in part.

The behavior of tax authorities led the Polish-born movie distributor to seek parallels with ancient history. The still unraveling episode reminds him of the Tatar invasion of the 13th century.

“Genghis Khan, when his treasury was empty, would send his soldiers to run around to seek for gold, while being allowed to enrich themselves too,” Batruch said. “Not much has changed [in Ukraine] since that time.”

B&H’s current tax tensions center on last year’s June decision by tax authorities that the company owes the state more than Hr 18 million ($2.25 million) in value-added tax for movie reels they imported over the previous three years, plus a nearly Hr 5 million ($625,000) fine.

The company, in turn, claimed that this VAT should be considered a tax credit to be offset against the VAT received from the movie tickets sales. B&H sued the tax authorities and won in the lower court, but lost the appeal.

The case is currently being heard by the Higher Economic Court. But after getting an appellate court ruling in their favor, authorities received grounds to open a criminal case regarding the alleged unpaid VAT. That’s bad news for Batruch.

Ukraine’s legislation is notoriously unfriendly to the interests of investors and opens room for abuse by authorities as well as private raiders seeking to shake down business rivals. With an ongoing criminal case now in motion, authorities have carte blanche to raid and freeze his business, seizing virtually any documents and equipment.

Batruch is optimistic about winning the case in higher courts and seems especially pleased that some equipment taken last week has been returned. But lawyers specializing in tax-related disputes do not share his optimism.

The position of tax authorities is that since B&H didn’t buy the films they brought to the country, they have no right for a tax credit.
Dmytro Savchuk, an associate at Ukrainian law firm Lavrynovych & Partners, says he cannot understand on what grounds the appeals court ruled in favor of the tax authorities.

Recently, similar rulings in VAT-related disputes are becoming more common, he added. “The ways the courts rule [in VAT credit cases] tends to change depending on how badly the state budget coffers need revenues,” Savchuk said.

Alexey Khomyakov, a tax counsel at Kyiv-based Asters, suspects political pressure, not sound legal argument, is more at play. “From the case materials and all the pressure on the company, one can say this is a classic instance of state raidership,” Khomyakov said. “The main question is: who is the puppet master pulling all the strings?”

Batruch avoids talking about the possible masterminds behind the tax probes. He is shocked, however, that Le Doyen was also inspected by tax authorities even though it’s not even mentioned in the ongoing court battle. Batruch has his own opinions as to what could be motivating the probes, but prefers not to discuss them publicly.

But the main lesson he has learned from his clash with Ukraine’s taxmen is that being completely transparent is definitely not the best idea for doing business in Ukraine.

“From the very beginning I should have done everything using Cyprus or other jurisdictions. Nobody registers everything in Ukraine and under his own name,” Batruch said. “But I really thought I had nothing to hide.”

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