Archive for January 16th, 2012

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Azarov – State Tax Service to reduce number of inspections by 50%

January 16, 2012

What is a risky company?

Apparently there are companies that  belong to a “risk category” in Ukraine.  What defines that category remains unclear, however the Prime Minister and Head of Tax Inspectorate Olexandr Klymenko claim to know.

Between them they have agreed to target the Tax Inspectorate’s time and energy at such companies.  Good news if you don’t fall into that category as the chances of a visit become far less.  Bad news and possibly harassment, if for some reason you happen to be in the risk category which remains publicly undefined.

What risk are we talking about?  A genuinely risky entity such as Naftogaz with its CCC investment rating,  persistent opaqueness and political interference, or the risk that a company is not paying its dues and manipulating the system to avoid proper taxation?  A company that works in legally grey areas?  One in politically sensitive areas?  State accepted intermediaries?  Environmentally questionable?  Simply opaque?  Off-shore?

The perception of State pressure without a public definition of what is defined as “risky” by the Tax Inspectorate and government really seems quite necessary to avoid the perception of State repression in the future.

Given the figures cited by Azarov it can’t be that many entities to which it applies as almost every company here manipulates the system one way or another on a daily basis and Azarov is talking about no more than 6000 companies in Ukraine if we logically follow this quote by him on the subject:

“We agreed that if the State Tax Service conducted 20,000 planned inspections in 2010, about 11,000 in 2011, then in 2012, they have to work exclusively with those companies that belong to the risk category, and this will at least halve the number of inspections.”

Now as a supporter of minimal governmental interference in business, prima facie such a statement is good news.  Particularly so as I, by any stretch of the imagination could not be placed within the “risk category” relating to any interests I have in Ukraine.  If I was to look on such announcements as the State accepting the business community in Ukraine is really quite adult and responsible and therefore do not need micromanagement over tax affairs, I should be even more pleased.  I am yet to make such a decision over such an ill-defined and elastic statement though.

However, as a supporter of the State being responsible for certain basic provisions for all members of society which obviously are financed by tax, such as a basic education, basic medical care, fire services, policing, libraries and all the other things taken very much for granted, will such announcements of targeted tax inspection encourage the vast majority of businesses to be more creative in avoiding their tax liabilities knowing they are very unlikely to be visited?

If so, what will be the net result in tax revenue and the eventual causal effect to the basic facilities provided to society?

Maybe there will be no change even if tax revenues decreased.  After all the Ukrainian civil service probably employs at least 30% more people than it needs to, so if tax revenues decreased, government borrowing did not increase to cover the gap, then the public service wage bill would have to be cut by default to balance the books.

One wonders how the foreign government volunteering its experience in tax collection and civil service administration is faring in its negotiations with the Ukrainian authorities.  Is it any closer to starting this consultative process with Ukraine?  To be honest I have not seen the diplomat from that nation recently to ask what progress, if any, has been made.

Nevertheless, prima facie, I tend to fall on the side of this being a good thing whilst proclaiming the caveat that the law of unintended consequences may well provide a counterproductive result to the State coffers or offer up the perception of State bullying towards specific entities.

It is though, time a Ukrainian government started to treat Ukrainian society as an adult to adult relationship and not parent to child as has been the case for far too long.

Let us hope that the restricting of State inspections from any source to entities which fall into the “risk category” only,   whatever those parameters are, will become the norm rather than the exception if adult to adult engagement with the business community is what really drives this policy.

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