Oleksandr Klymenko Official website
Interview | 478 | 10.06.2014

Oleksandr Klymenko: “We were planning to radically simplify the tax system before the end of this year”

In Mykola Azarov’s government Oleksandr Klymenko headed the State Tax Service, and since the end of 2012 – Ministry of Revenue and Duties (hereinafter – MinRD), which emerged after the merger of STS with customs. This allowed, on the one hand, to increase budget revenues, and on the other hand – to raise the level of services provided to business by agencies, says Klymenko. In less than a year after establishment of MinRD, it almost ceased to exist – former leadership was accused of numerous violations of the law, and the idea itself of combining the two services was recognized vicious. However, the declared fight against infringements has not yet led to an increase in budget revenues, and thus accusations of covering shadow schemes are groundless, insists ex-Minister. The idea of elimination of MinRD has not enjoyed support of businessmen themselves too. Now for the new authorities, who with the support of society have gained an opportunity to achieve declared objectives, it is important not to lose those positive things that had been done by the previous leadership of the Ministry, notes Klymenko.

— Assuming the office in late February, Prime Minister Arseniy Yatsenyuk said that you have left budget in deplorable condition, and absolutely everything was plundered. Can you tell me what really happened with the Treasury?

The new Cabinet of Ministers is at the stage of “the first envelope”. In order to avoid opening the second and the third ones, they need to carry out real reforms.

— For the new government it is really beneficial to depict the situation in such a way. Do you know whether an old anecdote, or a parable about three envelopes? When the old boss hands over administration to a new one and gives the latter his piece of advice: when somebody will scold you – open the first envelope. Inside it says: “blame everything on the old leadership”. The second envelope says – “admit your mistakes”. And the third one says – “prepare three envelopes”. So now, the new Cabinet of Ministers is at the stage of “the first envelope”. In order to avoid opening the second and the third ones, they need to carry out real reforms. Now the new government has all the opportunities to implement them: both, support of business and international institutions, and, virtually, monopolistic position in the halls of power. My team did not have such opportunities – there were various conventions, limitations.

But even despite these limitations, difficult situation in the country and in the economy, especially at the end of last year, we were able to ensure stable and timely receipt of tax and customs payments, both into the state and local budgets. In 2013 – UAH 196,6 billion of taxes went into the budget. Even against the background of economic decline it was 2,2% more than in 2012. Overall, during the period of my work as the Head of the State Tax Service, and then as the Minister of Revenue and Duties in 2012-2013 UAH 492 billion were transferred to the budget, and here we are talking only about the general fund. Plus UAH 51 billion of the Unified Social Tax since October 1, 2013, when the Ministry started to administer this tax.

I am being accused that I covered cash-out transactions in unimaginable amounts – tens, hundreds of billions of Hryvnia. It’s hard to deny that such schemes existed – they operate in all countries, and in Ukraine they appeared long before I headed the tax office. Business has always been looking for opportunities to pay less to the state. And in our country this “optimization” has so much engrained over the years that neither I nor anyone else could shut down these schemes in one day. I doubt that it will be an easy job to do for the current government as well.

Under my leadership over the Tax Service an entire system, which was responding to the so-called void transactions, detecting suspicious transactions in real-time mode was created. As a result, only in 2013 VAT payments to the budget have increased from UAH 3 billion to 7 billion per month, due to which, basically, the problem of VAT refund was solved. During the last two years, amounts of refund were higher than volumes of requests of enterprises; the state was gradually returning old debts to business. It is unlikely that such growth of tax collection would have been possible if I was doing exactly what I am being imputed.

—  Despite all the difficulties, the budget is now collecting even more revenue than last year. It turns out that spending was cut for nothing?

— Pay attention, by means of what payments are being collected. For example, in April this year the plan on taxes was executed by the Ministry only by means of current payments, advance amounts of income tax and overpaid taxes. Very often MinRD reimburses VAT in exchange for advance payments of income tax. Totally UAH 16,7 billion of taxes were collected in April, which corresponds the average monthly income since the beginning of this year. But during the first four months have been collected UAH 4 billion less taxes than a year ago.

Even if the Ministry is now conducting fight against conversion centers and tax pits, whereof they like to tell reporters, it finds no reflection in the budget revenues. As of May 1, MinRD discovered illegal VAT refund requests amounting only to UAH 257 million. This is a paltry sum! It turns out that in order to recover these insignificant amount money, compared to the total budget revenue, MinRD stopped the refund of VAT to everybody, having deprived businesses of so much needed working capital. And this will only lead to increased losses of Ukrainian companies, because of which they will pay less taxes to the budget. What is the logic of such actions? Moreover, debt of the budget to business is growing at a fantastic pace. As of May 1, the state owed companies over UAH 19 billion of VAT only.

At customs too, everything is not so good, as its new Head, Vitaly Naumenko, assures. Only in April the budget short-received UAH 549 million, and only during four months the shortfall, in comparison with last year, — has already reached impressive UAH 2,5 billion. Even if there is any progress in fight against smugglers, it is impossible to identify it, given the figures of budget performance.

—  Do you have any information about how taxes are being collected now in the war-struck  eastern regions? After all, it is a convenient excuse not to pay.

— With pain in my heart I am watching what is happening today in Donbas and in the south-east as a whole. People are confused; they are living in constant fear for their lives, for their future. But even now, under such extremely difficult conditions, entrepreneurs in these regions continue to conscientiously fulfill their civic obligations and are properly filling not only state budget, but also local budgets, which is just as important. For example, during four months of 2014, budget received UAH 8,3 billion taxes from enterprises of Donetsk region,  UAH 2,6 billion from Luhansk region, almost UAH 4 billion from Odessa region and UAH 6,6 billion from Kharkiv region.

The task of the new President – is to solve problems of the eastern regions in the first place. One cannot burn everything down with napalm there and turn the region into ghetto.

In this situation, the authorities’ responsibility is to support them. Not to speak the language of ultimatums, but to create conditions for payment of taxes, even under such difficult conditions. I believe that the task of the new President – is to solve problems of the eastern regions in the first place. One cannot burn everything down with napalm there and turn the region into ghetto. It is necessary to give people guarantees of safety of their lives, solve economic problems, make it clear what will happen to their property, their business, provide jobs, resolve the situation with payment of taxes.

—  The new authorities, almost in the first place, decided to re-divide MinRD again into two administrations that existed before the Ministry. But now the decision is postponed. Do you know what exactly is happening there?

— Probably, the statement about partition of the Ministry was made in the revolutionary ardour. Now, having soberly assessed the situation, the government decided to retain existing structure. Whatever the format – a Ministry or State Service – a joint agency will work more efficiently than separated tax and customs offices. This is both, common database, and promptness in decision-making, and common approach to servicing taxpayers and subjects of foreign economic activity (importers/exporters).

—  Is there any real benefit from the merger of tax and customs administrations? Have you calculated what is the monetary effect – for budget, for business?

—  We have already discussed figures, but it is not the main thing. The main thing is that we were structuring the Ministry as a customer-oriented service, we were constantly working on introduction of innovations for business and citizens. Over the past year, due to coordination of work and optimization of functions, we have ensured that taxpayers spent less than 100 hours on execution of their duties. The time of customs clearance of cargoes was reduced to an average of 1,5 hours.

We have introduced large-scale electronic services. Payers have forgotten what is to stand in queue, were receiving qualitative services at our servicing centers.

We have introduced large-scale electronic services. Payers have forgotten what is to stand in queue, were receiving qualitative services at our servicing centers. For the first time practice of preliminary electronic declaring was introduced at customs. UST reporting has also been translated into electronic form. Two years ago nobody even thought about it.

Last year, we conducted a survey of businessmen and 60% of respondents positively evaluated implementation of reforms. I very much hope that these innovations will be preserved and will not be scuttled for the sake of revolutionary practicability or the fight for positions.

— Now the business is lobbying postponement of terms of control over transfer pricing: something like they do not have time to prepare. Is it true that they do not have enough time or they simply do not want to? How did preparation to implementation of this provision go when you were in the office?

— Adoption of the law on transfer pricing was not a surprise for the business. We have discussed its introduction since December 2012. And after its adoption we have held consultations and joint trainings. The business had an opportunity to prepare themselves to implementation of this law both at the level of organization, and morally. The Ministry, for its part, had also elaborated all the necessary reporting forms, instructions, and formed lists of sources for prices comparison. Finishing touches were only left. We could have been guaranteedly ready to putting the law in force by the 1st of May, if there had been a political will to do so. So, the words that taxpayers did not have enough time to get ready – is just a convenient excuse to cover up the reluctance of big business to operate legally.

It is understandable why oligarchs opposed adoption and entry into force of the law by all means. Last year, when Verkhovna Rada finally adopted new rules, despite the many attempts to vote them down, the volume of export operations through offshore decreased by seven times, even though the volume of exports its declined much less. Budget started receiving money, and business has become “cleaner” in its operations. Now all these processes actually went conversely. The head of customs office of the Ministry recently said that in April, imports via offshore has risen to 23%. And this is not an accident, but a direct consequence of postponement of the law. Business relaxed because there is no control.

—  Who, in your opinion, will benefit more from postponement of the law on TP? Who, for example, lobbied such postponement during your time in the office?

The postponement of terms means that in the first half of a year the national budget will not get a penny from the introduction of new rules. However, the change of penalties means that the draft law may be considered dead.

— It’s not so much about postponement of control terms as about reduction of fines. This radically changes the situation. The postponement of terms means that in the first half of a year the national budget will not get a penny from the introduction of new rules. However, the change of penalties means that the draft law may be considered dead. Let’s calculate: UAH 50 million – is the amount of a transaction, which is subject to control, – multiplied by 5% – we get UAH 2,5 million – amount of fine from one operation for failure to submit reporting about it. After changing the law, amount of the fine was reduced to UAH 122 thousand. This over 20 times less.

The question arises herewith, what is more profitable for a large corporation: to pay these 122 thousand – only if the violations are recorded, and yet a light-fingered inspector may just dismiss it – or to disclose information on the withdrawal of 50 million Hryvnia to offshore companies without paying taxes in Ukraine?

I strongly believe: motivation function of fines will be fulfilled only when their size is consistent with the principle of rationality. Now it is easier to pay the government a modest fine and to quietly continue underpaying millions. Therefore, one may talk about fight against tax evasion through offshore as much as he wants – with such approach this fight will remain on paper. The tax and customs services will have no tools to control and eradicate this phenomenon.

Who benefits from it? Those companies that carry out transaction amounting to over UAH 50 million and that are accustomed to use offshore companies to shift profit from Ukraine. I think, it is unnecessarily to call names, they are known to all.

—  Last year, you mentioned that MinRD was planning to sharply reduce the number of taxes and to simplify administering of the tax system. Why such an idea has arisen? How were you preparing to its implementation?

— We really started serious work on reduction of the number of taxes, because there is a real demand from public and business. A clear concept was developed of how to reduce the number of taxes from 22 to 14 by eliminating those of them, whose administrative costs exceed budget revenues. There was an important limitation: tax rates should not have been increased. One might be able to make all of this practicable during 2014. Unfortunately, we didn’t have time to do it during my time in the office.

In addition, we were developing change in Section III of the Tax Code – regarding income tax – which would allow bringing together financial records, accounts and tax returns, and simplification of tax administering. A reform of determining the customs value – shifting this procedure to the stage of post-audit – was also initiated. We have developed all of these projects together with business, together with international auditors. Unfortunately, we didn’t have not enough time to implement them.

I sincerely hope that the new leadership of the Ministry will not give up these sensible ideas. I know that development of the new Tax Code is now underway. But how much more can we reshape the tax system? It has become a practice: the new government comes; they say that the tax system is terrible, and begins to introduce their brilliant ideas. As a result, the tax legislation changes almost every year, and under such circumstances it is extremely difficult for business to operate. If we want investors to be willing to work in our country, we need a consistent tax policy rather than shock therapy each and every year.

— What fate awaited VAT – one of the most problematic taxes in terms of administering and corruption capacitance? Is it possible to ever get rid of it, or there are certain forces interested in its preservation?

— Discussions about whether Ukraine needs VAT or not, have been lasting, probably, ever since the introduction of this tax. We were developing different options of its restructuring. There was even an option of its complete replacement with the turnover tax or its joint application, but this idea was abandoned. As I understand, the new leadership OF MinRd does not see any alternatives to VAT either.

It is logical. First of all, it is impossible to get away from VAT if Ukrainian economy is going to be incorporated into the European market, where this tax is dominant. Moreover, in Europe, many countries have increased VAT rates in recent years, and some of them – quite considerably. Secondly, the turnover tax, which would have been paid independently of transactions results, could have become quite painful for business, especially for low-margin business. That is why VAT, in my opinion, is optimal provided its qualitative administering. The future of our tax system is in indirect taxes, which is the VAT.

Another question is – how to make mechanisms of its administering as transparent as possible. Here, there is also no need to reinvent the wheel. In the first place – it is an automatic refund of VAT. By the way, in January 2014 it reached a record of 70%, and it started descending. We also were ready to introduce the status of a “payer with a positive history”, which would have accelerated the procedures of reimbursement even more. As I understand, this initiative was abandoned by the new leadership.

VAT administering can be improved without extra efforts, the main things are – political will and continuous control on the part of society and business. For example, concerning introduction of VAT bonds: it is necessary to answer a lot of questions before introducing this tool. Will there be a list of banks that will be issuing them? Will companies abruptly increase credit, or not? Where are the guarantees that this tool will not be used by companies and banks, associated with the new leadership, in order to obtain illegal benefits? After all, while all public attention is drawn to elections and the ATO in Donbas region, one may arrange all sorts of “whirlabout” with VAT and no one will notice. It is not right.

— You were personally accused of favoring high-ranking smugglers, including companies associated with Sergei Kurchenko, Alexander Yanukovych. How fair are the charges? And are there any changes in customs today?

— This is all unsubstantiated insinuations. It is not a secret that customs has always been a state within a state, where a lot of private interests were intertwining. When this service was incorporated into the Ministry at the end of 2012, we spent a lot of effort to bring discipline there, to automate the work, to minimize human factors, where it was possible.

After the merger of services we started the process of changing Heads of regional customs offices. It posed a challenge.

After the merger of services we started the process of changing Heads of regional customs offices. It posed a challenge. There were many factors which, unfortunately, did not depend on me as the Head of the Ministry. Yes, I will not deny, there were people whose appointment to the position contained a political component, and who were clinging to their seats not only with arms, but also with teeth. We needed time to prove their professional incompetence.

That said, sometimes resistance at the regional level reached epic proportions. Accusations of protection of smuggling schemes and corruption sounded in my address. It was a cross-fire: on the one hand – criticism of business, which faced those schemes, imbedded by some superiors at the local level. On the other hand – strong resistance of those, who used these schemes and did not want to give up their positions.

For example, in the Odessa region, where the largest ports of Ukraine are located, and where corruption, due to this, was reaching colossal proportions, we launched a complete scanning of all cargoes in the port. The contents of each container were displayed on screens in the Monitoring center. Accordingly, the possibility of substitution of customs declaration on the spot, undervaluing and any other forms of abuse has been ruled out. These scanners were purchased long ago, but they were idling for many years without operation. We have repaired the equipment, started to operate it. Also, we started to widely use electronic locks for transit cargoes.

Yes, automation was being sabotaged; equipment was being repeatedly rendered inoperative. But we did not give up. We planned introduction of the remote control, automation of processes at all customs offices. When the decision is being made by a computer and not by a person, corruption risks are significantly reduced. What do we see now? Automation is actually stopped, old principles of work are returning. In the very same Odessa, scanning is not carried out now; electronic locks are being used more and more seldom.

Now it is a unique situation. Society has a significant request for the fight against corruption. The majority of Ukrainians want illegal enrichment mechanisms to be stopped. The new authorities, enjoying such a support of their nation, is well-placed for such work, they have time, which I did not have. They have to take advantage of this resource to the full.

—  How would you describe the purpose of the work of MinRD under your management? Have this purpose changed now?

If you remember, back in the Tax Service, the main purpose of our work that we have selected – was transition from the fiscal agency to a customer-oriented service. What do I see now? A clear focus of the agency on execution of the plan, fiscalization.

— We have developed a clear mission and vision for the Ministry. We were looking at the function of filling the budget only as a result of improved administering of tax and customs payments, creation of favorable conditions for business. We were building our relationship with business in such a manner as not to be a controlling body in the first place, but to be reliable and predictable partner. If you remember, back in the Tax Service, the main purpose of our work that we have selected – was transition from the fiscal agency to a customer-oriented service. What do I see now? A clear focus of the agency on execution of the plan, fiscalization. Even the name of the reformed Ministry – the State Fiscal Service. In other words, partnership is out of the question.

It is clear that the government today is under huge pressure on the part of IMF. Who will deal with servicing, when such a loan is at stake? During two years we were repeating like mantra, that tax and customs revenues should not be approved by a plan at the beginning of a year, but should be adequate to the current macroeconomic indicators and should grow solely by means of elimination of shadow economy, and not by means of creating additional burden on business. Both, experts and opposition politicians agreed with us. Today, we see not just another plan of the government, but a plan, imposed on Ukraine from abroad.

In this situation interests of investors have become secondary. Meetings with them continue to take place, but this dialogue has become a formality. A striking example – adopted version of the tax amnesty, which originally apportions blame on business and requires it to prove that it is not involved in any schemes. Today all mechanisms are created in order to enable tax authorities to safely and quite legitimately put pressure on business, which is now vulnerable like never before. And it will become even less protected if the Service of Financial Investigations is created. No business-ombudsman of EBRD will help. It is painful to look at everything that is happening, when under slogans of improvement business is just being driven into a trap.

— Who, in your opinion, is now really taking decisions in the Ministry? How strong is lobbyism of oligarchs, public politicians, and other powers of influence?

— I do not know who makes the decisions. Judging by the chaos that is going on there, there is no single decision-making center there. At this, leaders of the Ministry realize that they are in the position of placeholders; they can be removed at any time when the tax and customs offices will become a bargaining chip in creating a parliamentary coalition. That is why, apparently, there are no serious results of reforms.

In general, I do not envy the current Head of MinRD, Mr. Ihor Bilous. He is not a man of the system; it is difficult for him to understand all the specifics of work, to maneuver between various interests. Additionally, such a great burden of responsibility before both, the government, taxpayers and the staff. However, if you pledge, don’t hedged you say you are a mushroom, so into the basket you go! Ministry – is not a private corporation, where in case of manager’s abortive decision only its shareholders will suffer. Welfare of the whole country depends on the quality of work of the Minister of Revenue and Duties, and because of the poor management, millions of taxpayers and the state will come off a loser.

Link to source: Сapital.ua

Photo: Capital.ua

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