Experts disagree that tax-dodging offshore companies less popular

Exports of Ukrainian goods through offshore companies fell by 90 percent in the first nine months of this year, according to the State Fiscal Service, dropping to $334 million.

British Virgin Islands, a jurisdiction known for the lack of transparency, remains the most popular offshore destination with Ukrainian companies, attracting almost half of the cash flow that goes to the tax havens.

The governments hopes the decline is because of 2013 legislation to crack down on tax-dodging transfer pricing schemes.

The law will get even tougher, Prime Minister Arseniy Yatsenyuk said on Dec. 11. “In the framework of the law about transfer pricing we are implementing the scheme, where tax avoidance by big companies through offshore or any other schemes will be closed. We support big business but demand that big business pays taxes honestly and transparently.”

Former Minister of Revenues and Duties Oleksandr Klymenko, who oversaw taxation policy during the era of ousted President Viktor Yanukovych, sees the reduction of offshore exports as his personal accomplishment as the law was passed during his cadence.

“The budget started getting money and business became cleaner in its operations,” he told Capital, a business daily in Kyiv.

However, experts say it’s not that Klymenko is such a do-gooder. Things are a little bit more complicated and the companies might have found a way to take their revenues to the offshores bypassing the eyes of Fiscal Service executives. There are not many reasons to believe the service really pushed the companies to report their profits in Ukraine.

“I believe that law about transfer pricing had only indirect impact,” says Pavlo Demchuk, an expert on transfer pricing with EY, an audit firm. “Maybe somebody got scared. But general economic slowdown was another reason.”

Prevention of tax avoidance is something the Fiscal Service should do, but this is not the case, he adds.

The Fiscal Service, though, is likely to take a rather friendly approach in treating those who bet on offshores to enjoy bigger earnings. “I stand for the growth of exports in any direction – either through the offshores or not,” said Igor Bilous, chief taxman, on Dec. 5. “The main thing is that the taxes are paid to the state budget.”

A classical tax-evasion scheme involves selling products cheaply to an entity registered in a country with low taxes, like Cyprus or British Virgin Islands. Then such an entity re-sells those products to a de facto client at a market price and reports the transaction under local laws, paying lesser taxes. Goods don’t need to be transported physically to the offshore but go directly to those who purchase them. Therefore, the Ukrainian budget gets taxes from only the first, unrealistically cheap sale price.

Transfer pricing law is applied to the transactions made at suspicious prices and, if wrongdoing is proved, the company might be obliged to pay more taxes.

However, the law does not include some important issues, Demchuk of EY says. It doesn’t require disclosure of the full supply chain – from producer to the end customer – while the sources that the law prescribes to turn to to get the relevant market data, do not provide all the needed information.

Moreover, due to flaws in the law, interaction with foreign tax authorities remains quite poor, while more effective definition of tax base and recognition of revenue are needed, expert adds.

With globe’s business giants, like Apple or PepsiCo, using offshore schemes to please their shareholders with better profits and, therefore, larger dividends, the argument about tax evasion remains moral rather than legal. The European Commission’s concern about the issue usually doesn’t go beyond statements of condemnation.