Oleksandr Klymenko Official website
Interview | 1720 | 25.04.2014

Oleksandr Klymenko: “Encashment systems cannot be defeated in one day”

After the interview with the new Head of Tax authority Ihor Bilous, Forbes addressed via Facebook to his predecessor in the chair of the State Tax Service. Oleksandr Klymenko agreed to answer the same questions in writing.

 – The new Cabinet of Ministers announced disestablishment of the Ministry Revenue and Duties. How do you think, is this decision right, and why the backtracking to two different services occurs?

– I think the decision to separate Ministry is a system error. It hurts me a lot to hear today, that creation of the Ministry of Revenue and Duties was dictated by some personal motive. I want to say at once that in this case, there was also a personal motive in creation of similar services in England and similar trend in the EU in general. Perhaps, there are also “families” there, who want to take control over something. This is my first point. Second one – I’m sure that under conditions of such a steep dive, in which Ukraine’s economy finds itself, reverse reorganization of the fully formed agency will require significant time and resources.

– What advantages and disadvantages do you see in separation of the Tax and Customs Services?

– Any organizational perturbations now, threaten not only with the loss of tax and customs budget revenue, but also with a significant enhancement of risks and unpredictability of situation for business. If the Ministry [of Revenue and Duties] was such a corrupt agency, as they say today, then why during the past year budget revenue was increasing, the problem with the VAT refund was solved, electronic reporting was being implemented on a large scale? What do we see today? Neither Tax office, nor Customs office have reached this year real revenue level of January-March 2013. Moreover, in comparison with the previous year, budget short-received 10,7 billion UAH, businesses was under-refunded  4,8 billion UAH of VAT. This is no fault of the new leadership, and in particular, Igor Bilous. He has never worked in the system before, and of course, it is hard to make sense of it all at once.

And there have always been a lot of men of ability – in quotes – around the Ministry. And as soon as weak spot appeared, they took advantage of it, and did it very quickly.

– How do you estimate, from a professional point of view, the first steps and statements of the new Head of the Tax authority?

– I understand how hard it is to work now for the newly appointed leaders of the Ministry in current situation. Economic collapse, weakening of business activity, and, at the same time, very high expectations of businesses and citizens. Plus, certainly, there is a factor of political pressure. In many ways Bilous and other executives have become hostages of the situation.

At the same time, let’s recognize that the new Head of Tax authority has “inherited” innovations, that have been already implemented, and, de facto, ready-to-go solutions for carrying out further reforms. These are both electronic reporting, and service centers, working over all country, and the up-to-date monitoring center to fight shadow economy.

By the end of the year, we have already had prepared projects of the customs of the future, reforms on reduction of the number of taxes, introduction of general declaring, postponing customs value determination procedures at the stage of post-audit. He even got            contract in force with PricewaterhouseCoopers. With specialists of this company, a step by step clear five-year plan for implementation of tax and customs innovations has been developed, which would be just silly not to take advantage of now.

– The new Government declared that it knows everybody, who were involved in VAT plundering, and then sounded figure of 280 billion UAH. How real such estimates are in your opinion? What operations and companies may be spoken about? Did you know something about this earlier?

– These figures – are the veriest nonsense, they are spinned out of thin air. Yes, when I headed the Tax authority, encashment systems existed, they have so deeply rooted in practice, that one could not just come and defeat them in one day.

But we immediately took action, we have created a whole system that responded to so-called worthless transactions, identified suspicious transactions in online mode. It was a strain on resources of both cash-out-offices, and fictitious VAT.

As a result, VAT payments to budget have increased from 3 billion to 7 billion UAH a month. And due to such VAT increase, we basically solved the problem of refund of this tax. Over the past two years, we managed to ensure a tendency, when the amount of refund exceeded requested amounts; the State was gradually repaying old debts to business.

Exceedance of refunded amounts over the declared ones, following the results of the 2013, reached 107%! We paid special attention to small and medium-sized businesses, where refund usually makes up to 1 million UAH. As the Minister, I always kept this issue under personal control. And we have managed to break the situation.

– In Tax authority, they claim that they have already got a list of conversion centers. How could this list appear? Do you think there was really such a scale of abuse?

– If they have this list, why don’t they respond, don’t take any action? Just last year, we have eliminated 60 “converters.” And the new leadership presents elimination of two cash-out-centers as a result of their work during these past few months. If indeed there was a will to fight the “converters”, the results, I think, would be more impressive. And now – it’s just a PR campaign. There are all necessary tools for such fight – in the monitoring center one can clearly see where are the transits, where are “tax pits”, where are worthless transactions. Why don’t they use this data? Probably, there is simply no political will for this.

– What part of business, in your view, used conversion centers?

– It is probably better to ask this question to business. As you understand, it was very unlikely that they came to me and reported about it. From what we have recorded, about 1% of all registered businesses came in sight of monitoring center as risky. Just last year, they have increased the VAT payment by 1,5 times.

– What do you think of the proposal of the new head of Tax authority, about implementation of the mechanism “pay and rest calm”, according to which companies that worked with “doubtful” counterparts, will have to pay now a fixed rate of their turnover? 

– Very contradictory. I sincerely doubt that today companies will line up to the tax office and say: before I was doing cash-out, but today I am honest and good, so please, take the money.

Firstly, Ukrainian legislation hardly has adequate legal mechanisms.

Secondly, not in a single country, the tax amnesty had, in fact, had results, expected by the government. For this purpose one needs to create appropriate incentives for business. From what we have today – it’s just an increase of the tax burden on business without any mechanisms, stimulating development.

I understand that investors are keeping their heads down and wait for Presidential elections. But it is far from certain, that after elections, Ukraine suddenly becomes investment Mecca. For this purpose it is necessary to work long and hard, fast decisions and shock therapy won’t work here.

– In recent years MinRD used practice of collection of advance payments into the budget. How do you estimate efficiency of such practice? What was the amount of overpayments when you left the office? What do you think of the solution of a new leadership to continue this practice, but in smaller amounts?

– I would not say that now advance payments are charged by smaller amounts. For example, in March, it had been collected nearly 11 billion UAH of overpaid profit tax from taxpayers, which is an absolute record for the last two years.

No matter what the new leadership of the Ministry says, a 2013 income tax declaration campaign is actually messed up. If we compare its results with the year 2012, more than 3000 enterprises filed declarations with zero results. 17% more taxpayers provided reporting, declaring income at the level of expenditures.

Nearly 2000 companies have lowered gross revenues by 65 billion UAH and showed unprofitability. Perhaps the new Government hopes for tranche from the IMF, because they are turning a blind eye to such hole in collection of taxes. But all of us understand that IMF money is a borrowed resource which should be returned. And therefore unbalancing of inland budget revenue system– is actually a criminal negligence.

Oleksandr Klymenko about ukrainian tax system

– Do you agree with the fact that many businesses in Ukraine are uncompetitive at current tax burden? Is it so rewarding to change the UST rate? And how?

– High level of salary taxes – is a systemic problem that we have seen, and over solution of which we have thought in the past two years. All those, who will claim today that they can immediately, from scratch, reduce the UST rate – are just populists. Such step would lead to a huge deficit in the pension fund, which can be bridged with nothing. But it is necessary to reduce it.

There can be no quick decisions, a comprehensive approach is needed, de-shadowing of population incomes, abandoning the practice of salaries in envelopes. On the one hand, it is growth of the tax culture of society. On the other hand – on the part of the State – creation of appropriate incentives. We provided all this in the reform on general declaration of income, according to which, we’ve suggested expanding number of the persons, declaring their income. Such reform, I am sure, will provide necessary compensators for gradual reduction of individual income tax and of a unified social tax. And it will allow reducing burden of both employers, and hired employees.

It was planned that at the first stage, about 3 million citizens will have to necessarily declare their income. For comparison, last year in the framework of acting declaration system, 700 000 Ukrainians reported their income and property. This year, by the way, declaration of income of citizens does not have the most optimistic indices – only about 250 000 people have submitted their declarations, and declaration campaign comes to an end already on May 1. If I were a Tax authority leadership, I would pay attention to this moment.

I am glad that Ihor Bilous supports introduction of general declaration, and I hope that it will not be shelved. I really believe that Ukraine needs it.

– During you time, what were the criteria of performance evaluation of an inspector?

– If you mean notorious plans of penalties, which should have been allegedly collected by auditors, I had never tasked anyone to do this. Minimum interventions in work of legal business, and at the same time –maximum effect for the budget from those who defraud the revenue, were set as our goals.

In general, performance criteria for all employees of the Ministry were the same – we had implemented a clear personnel strategy, each employee worked according to KPI, understanding his/her objectives, evaluation criteria, responsibilities and growth.

– The new Head of Tax authority supports adoption of the Law on Transfer pricing. How do you treat this draft law? Why during the last few years it has not been finally adopted? At what level do you estimate increase of revenues due to its adoption?

– Wait a minute, this is not draft law, but the adopted Law, that has already come into effect! On the 1st of May, enterprises will already have to submit the first reporting on transactions with related parties.

And this Law was adopted at the initiative of the Ministry. When we were developing and adopting it, we experienced a very serious pressure from lobbying structures, associated with oligarchs. Representatives of some oligarchs even passed me proposals with the fabulous sums of money, for me to abandon the idea. It is ridiculous, of course, but if you remember, the draft law was being considered in a debating chamber for three hours – such enormous the resistance was. The new government’s entire tax reform package took less time.

This is truly revolutionary Law for Ukraine, which will provide tax service with tools to control whether all taxes have been paid by large business, when exporting goods to offshore, during transactions with related parties. Earlier this simply didn’t exist in the legislation.

Only preventive effect of TP allowed reducing exports to offshore by seven times last year. Imagine, how revenues will grow after the Law comes to full effect, if the volume of transactions with related parties, on a conservative estimate, amounts to 265 billion per year? I believe that reporting should be        deferred in no case, no matter how beneficial it could be for individual oligarchs.

– How do you estimate the initiative of introducing electronic excise, what the effect may be?

– Sound idea, we have worked on it in the Tax Service, and then in the Ministry. I’m glad that the new government liked it. But again, a decision on this matter should not be taken in haste. I studied this issue very carefully. One can wake me up at night, and I will tell how, for example, Codentify is different from Sipra. We have conducted multiple meetings with businesses, discussing options of introduction of electronic excise stamps.

Ministry specialists have carefully studied the experience of their implementation in other countries. Tobacco companies, of course, are lobbying their system, alcohol producers say that it is costly for them. It is necessary to proceed, first of all, from interests of the State and its citizens, and consciously evaluate how to implement it, and why separate companies are so insistently lobbying these systems. In the matter of excise policy, I believe, it is necessary to look for a balance of interests of citizens, business and the State. As, in principle, in any policy.

Link to source: Forbes

Photo: by press-service of Oleksandr Klymenko