Business is crying foul over growing fiscal pressure as government scurries desperately for cash ahead of the Oct. 28 parliament election.
Companies report growing troubles with getting government to refund overpayments for value-added tax. They also say they are being strong-armed to buy state bonds and pay income taxes in advance, are being subjected to incessant checks and have problems carrying forward losses from previous years.
Tomas Fiala, president of the European Business Association and head of investment bank Dragon Capital, said the Tax Service continues its unlawful practice of not allowing companies to balance current profits against losses incurred in previous years, a common international accounting practice. He added VAT refunds are also paid late, only after companies pay other taxes in advance or buy state bonds.
A European Business Association study in May covering 117 companies showed that 77 percent reported demands by tax authorities to pay income taxes in advance. Half said they often received groundless information requests. Frequent inspections were also seen as a means of pressuring firms, 79 percent of which reported one to seven inspections in 2011.
These inspections sometimes lead to demands for bribes.
“During our last check the tax inspector asked for Hr 10,000, which is quite reasonable for a small firm like us. She said ‘I have to bring back something to work, cannot leave empty-handed.’ If we refused she would have checked all the documents and definitely found at least one minor mistake and issued a fine. It is much easier to just pay,” said the head of a supervisory board in a Vinnytsya-based firm who was granted anonymity to avoid further tax problems for speaking out publicly.
The Tax Service says the number of inspections fell 60 percent in 2011. Collectors also proudly declared, however, that taxes collected in the first 11 months of 2011 were 1.5 times higher than in the same period of 2010. According to the EBA, tax revenue accounted for 25 percent of the country’s gross domestic product in 2011, the highest level in Ukraine’s independent history.
Authorities deny the pressure. Tax Service head Oleksandr Klymenko said his employees simply suggest that businesses pay taxes in advance. “If a company wants to [pay in advance], they can do it… I spoke to representatives of many financial-industrial groups and they say it is good for them,” Klymenko said.
Paying income tax in advance may be legalized starting Jan. 1, 2013 if a bill passed by parliament on July 5 is signed by President Viktor Yanukovych. According to it, companies with annual revenue of more than Hr 10 million ($1.25 million) will have to pay income taxes in advance.
Vladimir Kotenko, head of the tax and legal department of Ernst & Young, says this law works in many countries and has been in practice in Ukraine up to 2003.
“However, in developed countries tax was based on the previous month’s income. While the law now says it is to be calculated based on income from the whole previous year,” adds Kotenko.
Serhiy Teryokhin, a lawmaker in the opposition Bloc of Yulia Tymoshenko action who heads the tax committee in parliament, says companies will experience trouble with refunds if advance taxes are overpaid, just like they report VAT refund problems.
“From a business perspective, the introduction of the advance income tax payment puts additional pressure on businesses,” said Sergiy Popov, partner at the Ukraine office of international auditor KPMG.
Not all in government think things are moving in the right direction with taxes. Economy Ministry Petro Poroshenko said “the practice of coming up with creative ideas to squeeze money from business” has to be stopped.
Ukraine is home to one of the most overregulated and complicated tax systems in the world, and it is getting worse, according to the 2012 Doing Business report by the World Bank. The country fell from 149th in 2011 to 152nd in 2012 in overall ease of doing business.
According to the report, it takes 657 hours a year to pay Ukraine’s 135 existing taxes, including five different income taxes.
But the state needs cash. The Euro 2012 football championship drained up to $13 billion, according to an Erste Bank report, while increased spending on social payments ahead of the Oct. 28 parliamentary election is eating up more. The president pledged Hr 16 billion extra spending for pensions, stipends and reimbursements.
Promises have been made, now somebody needs to pay.
Kyiv Post staff writer Svitlana Tuchynska can be reached at [email protected]
