BRUSSELS – Ukrainian companies have avoided paying around $520 million in profit taxes on iron ore exports per year, according to a new report presented in the European Parliament on Sept. 24.
Add in other losses from exports of steel, agriculture products, and other commodities, the amount of taxes unpaid to the Ukrainian state budget could be as high as $3 billion per year, the report’s authors said.
The report, presented in the European Parliament with the support of European United Left/Nordic Green Left group (GUE/NGL, a left-wing political group made up of socialist and communist political parties), is to be presented in Kyiv on Oct. 4.
Entitled “Profit Shifting in Ukraine’s Iron Ore Exports,” the report concludes that Ukrainian exporters are avoiding the payment of large amounts of taxes through transfer pricing – shifting the attribution of incomes and expenses between related companies or branches of a single corporation in order to reduce their overall tax liability.
Ukrainian iron ore exporters shift profits to “offshore companies,” located in jurisdictions abroad with much lower levels of corporate taxes, the authors of the report concluded. This allows them to substantially reduce their tax bills, but also starves the companies in Ukraine of profits, meaning there is no money to pay their workers higher wages.
The report’s authors, trade experts Alexander Antonyuk, Tommaso Faccio and Zakhar Popovych, told the Kyiv Post after its presentation in the European Parliament that it had been commissioned by Ukrainian trade unions representing workers at iron ore exporting companies.
The unions question company management claims that they lack money to improve workers’ salaries and improve working conditions, the report’s authors said. They said the work on the report had been conducted by a small team of international specialists.
Report authors, Antonyuk and Faccio, said the team had discovered a mismatch between the value of the products exported and the amount of tax paid on them by trawling through customs, pricing and exchange rate data.
“We analyzed the data on the export of iron ore from Ukraine by all the main enterprises of the country for three years – from 2015 to 2017,” the authors said.
“Our research is unique because it is based on an analysis of each export transaction. We analyzed the daily price of ore on the international markets, the daily prices for transportation from Ukraine, which is an essential factor in pricing, and the daily exchange rate.
“Based on this data, we found a difference (in the price of exported ore) with world market prices, and found that, on average, they are 20 percent understated. This is the main result. According to our estimates, the profit shifted out Ukraine (usually to ‘offshores’) through the export of iron ore is $520 billion per year.
“This is a huge problem. And that’s why we have some big questions for Ukrainian legislators, the fiscal service, and the government as a whole.”
The report’s authors said that if this under-invoicing is applied to the whole of agricultural, iron ore and steel exports, the profit shifting could cost the budget up to $3 billion per year in lost tax revenues – money that could replace the macro-financing aid Ukraine receives from the EU, which is funded by EU taxpayers.
Two of the authors, Antonyuk and Popovych, stressed that the report does not claim the exporters are breaking any laws: “In our report, it’s clearly written that profits are shifted abroad. And this is the most important problem. No matter whether it’s legal or not, because of the withdrawal of this profit, there’s a huge hole in the Ukrainian budget, which must be covered by IMF loans or macro-financial assistance from the EU. But even if it’s legal, then (for companies) to shift profits away from Ukraine now, in such difficult times, is simply immoral.”
Profit shifting is not a uniquely Ukrainian problem, and is not limited to the iron ore sector alone, the report’s authors said. The report only analyzed the iron ore sector, which is a relatively small part of Ukraine’s total exports, they said. But if one assumes that the average 20 percent under-invoicing discovered applies to other sectors of Ukraine’s exports, such as agricultural exports and steel, then one arrives at the $3 billion annual figure of losses from profit shifting.
However, this conclusion is only an extrapolation from the data from iron ore exports, and not based on hard data, the report’s authors stressed.
Nevertheless, they recommend Ukrainian lawmakers review recent legislation introduced in Ukraine to deal with transfer pricing, and look into whether the tax authorities and government need to introduce stricter controls on export transactions.
“Resolving these issues would significantly increase fiscal payments to the state of Ukraine and would make profitability of the Ukrainian mining companies higher. This, in turn, would allow increasing very low wages of Ukrainian miners which are currently the lowest among all iron ore producers globally,” the report text concludes.
