Unprecedented analysis: government lobbying of certain groups interests and VAT fraud (Value Added Tax) is a major threat to Ukraine’s fiscal security

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At the beginning of the year a presentation of an unprecedented analysis results  took place in Kyiv, which for the first time in the history of Ukraine demonstrated the great risks and threats to Ukraine’s fiscal security. A  specialists team  has been working on this study since July 2020, and these developments should form the basis of the risks strategic analysis of threats spread  to Ukraine’s fiscal security, followed by the calculation of the first forecasts for managing these risks.

“In the recent Ukraine history, this is the first such research to assess the threats, risks and vulnerabilities of the fiscal system in various areas – identification of threats to fiscal security, their rating and ranking, as well as assessing external factors and the ability of fiscal actors to prevent these threats. The purpose of the study was to prepare the ground for the introduction of a risk-oriented approach in the activities of regulatory and law enforcement agencies, which are the basic institutional elements of the fiscal security system, – said at the presentation the main initiator of the study Ukraine Association Taxpayers President, European Taxpayers Association Vice-President, Ukrainian Business Council Supervisory Board Member, Ukrainian Board State Tax Service Member Grigol Katamadze. – Scientists, representatives of public services who once worked in customs, tax services and legal sphere, business joined our work. For about a month, we worked on 500 different questions that formed the basis of our research. We conducted research during July-October this year. The number of participants was about 7,000 people. Representatives of the State Tax Service (SBS), the State Customs Service (LCA), the State Fiscal Service (SFS), the Tax Police, and many representatives of small, medium, and large businesses joined across the country. In fact, the whole Ukraine is represented in this unprecedented research”.

Grigol Katamadze (in the center), Vyacheslav Nekrasov (left), Alexander Koristin (right)

A large group of experts from the Ukraine State Tax Service took part in the global work – 5,324 representatives of the State Tax Service out of 25,000 employees of this body took part in an anonymous social survey. In this regard, the head of the State Tax Service Oleksiy Lyubchenko said during the presentation: I hope that this idea will only develop and improve the methodology itself. It will be no less important to simplify the findings of such studies so that they are clear to as large an audience as possible”.

The study covered all Ukraine regions, but without the occupied Crimea

The expert group identified 243 threats in the field of fiscal security. The key threats are all categories of researched names of VAT fraud (Value Added Tax) and lobbying of government officials of interested individual groups and companies in promoting favorable tax and customs conditions (preferences) for them. Independent introduction of value added tax is considered by threatening representatives of the Tax Police (64.69% of respondents), State Customs Service (61.83%) and the State Tax Service (61.67%). Legal business is also viewed by this phenomenon – 58.76% of the attempts of this category. Dishonest lobbying by the authorities of the interests of individual entrepreneurs is of first concern to the State Customs Service (64.27%) and business representatives (64.18%).

As for the positive feedback, the least threat to business is information attacks on discrediting the fiscal system (37.63%), the State Tax Service and the Tax Police – manifestations of corruption in the fiscal sphere (40.43% and 45.60%, respectively).

Key items

Experienced experts have included 11 categories in the list of key items in the field of fiscal security. Among the already mentioned “VAT fraud” (Value Added Tax) (average among all surveyed 61.96%) and “Lobbying by government officials of certain groups of companies” (average 59.44%), a serious problem for fiscal security is also considered “Smuggling, customs values understatement  ​​and other customs rules violations” (average 59.28%), as well as  “Minimization tax payments scheme” (57.63%) and “Shading of individual business enterprises ”(55.88%).

According to the SFS (Ukraine State Fiscal Service ), participants consider the key threats to be “Criminal prosecution avoidance for tax offenses” (average 52.14%) and “Targeted activities of organized crime  in the fiscal sphere” (44% 36). In the first category, the most threatening business is the a criminal prosecution avoidance for tax crimes through conspiracy with prosecutors (56.30%) and by counterclaim (55.31%), and traffic police – through corruption conspiracy in the courts (53.27 %) and a counterclaim (54.51%). The imperfection of the investigative system, namely the bureaucratization of procedures for approving investigative actions in criminal proceedings, is considered a threat by 60.36% of the Tax Police.

In keeping with the State Migration Service, respondents consider the key threat to “Targeted activities of organized crime in the fiscal sphere in relation to customs duties” (average 45.52%). Experts are most concerned about violations in the oil and gas industry (average 55.48%), fuel resources (53.97%) and forestry (53.61%). Smuggling is considered to be the second problem (59.28%). Here, 63.57% of all respondents consider the threat timber smuggling and timber materials, and 62.45% – amber. Tobacco smuggling is considered a threat to the country’s fiscal security by 57.52% of all respondents.

Pressure on business is considered a problem primarily by businessmen themselves, as well as representatives of the State Customs Service. 51.44% of businessmen who took part in the survey believe that the threat is unreasonable blocking the registration of tax invoices/adjustment calculations. Another 51.24% called the threat of the so-called “planned budget revenue provision” at the expense of a conscientious taxpayer, and 51.18% – unreasonable inclusion of the business entity in the list of “risky” taxpayers.

Customs officers  are confused by the blocking of economic activities of enterprises in this category, due to inappropriate coverage of office equipment, financial and economic documentation (51.13%) and unreasonable introduction of materials into the ERDR (50.53%). For representatives of the State Tax Service and the Tax Police, other problems in planning activities at the enterprise are considered unlimited for the registration of tax data registration – 40.83% and 41.47%.

In the Tax Police and the State Tax Service, the unjustified formation of a VAT tax credit determines the greatest threat in the category of “VAT fraud” (62.2% and 56.5%, respectively). Thus, business representatives and customs officials consider the independence of VAT (Value Added Tax) refunds to be a threat (54.25% and 59.03%, respectively).

“Schemes for minimizing tax payments” are considered to be no less serious problems for fiscal security. On the one hand the SFS (State Fiscal Service), 62.38% of participants in the description believe that they threaten in this category the use of legal entities with marks of fictitiousness and/or “fictitious individuals”. 60.79% of participants from the business side and 57.66% from the State Customs Service believe with the help of non-resident enterprises registered in offshore zones and countries with low tax burden. The State Tax Service is more concerned about changes in the range of goods in the supply chain (54.2%).

In the category “Lobbying for power with tax and customs preferences”, all expert groups issued an indisputable majority of the Verkhovna Rada of Ukraine. In the same body of organized protection of the danger to fiscal stability see 69.38% of respondents customs officials, 62.45% – the State Tax Service, 62.15% – business and 59.81% – the SFS (State Fiscal Service). In general, the representatives of the State Customs Service saw the greatest threats to fiscal security in this category. In the Central executive bodies 61.81% of customs officers see a threat, 60.58% – in law enforcement agencies, 61.33% – in the courts, 62.37% – in lobbying the interests of big business, 65.13% – in lobbying the interests of monopolists ; 62.08% – in the implementation of criminal schemes, 60.8% – in preferences for criminal groups.

In the category “Illegal extraction of nutrients” for all obvious threats groups  from the shadowing of viruses and subsequent exports of wood. This is the opinion of 70.97% of the surveyed business representatives, 69.85% – customs representatives, 66.33% –  State Tax Service and 61.21% – Tax Police. Illegal mining (amber, granite, sand, oil, gas, etc.) is considered a threat to fiscal security by 71.22% of businesses, 66.96% by customs officers and 64.52% by traffic police. Also, customs officers see a significant threat of illegal emissions of air pollutants (66.16%) and illegal discharges of pollutants into the internal arteries of countries (69.46%).

No one rejects the use of corruption in the fiscal sphere. But the problem is more obvious for business and employees of the State Customs Service than for the State Tax Service and the Tax Police. According to the results of this research, the control over the criminal scheme by law enforcement agencies determines the greatest threat in the fiscal sector 61.7% of surveyed customs officers, and 60.26% – entrepreneurs. Promotion of controlled persons to power – 61.86% of customs officers and 60.7% – businessmen.

Traffic police officials believe that the lowest level of corruption can be observed among the leadership, which demonstrates high loyalty to the illegal actions of subordinates. Only 35.56% of taxpayers see a threat here. Another 37.66% see a threat in bribing employees of fiscal authorities.

Among the threats of macroeconomic nature are attempts to name primarily labor migration, from the work of the labor force abroad. This is the opinion of 70.4% customs representatives, 66.48% State Tax Service, 65.84% businesses and 61.14% Tax Police. The second such problem is trying to determine the level of the shadow economy – 64.55% of all groups. In third place – the legacy of production in the country – 63.52%. Also concerned about the reduction of the official labor market (62.02%), the activities of “conversion centers” (59.26%) and labor relations with employees without legal registration (58.75%).

The study also provided selected categories with an opportunity to identify measures that they felt could improve the fiscal security situation in Ukraine. The method of access to the best foreign practices received the most positive responses: technical equipment (62.56%), slightly less (61.72%) – attracting international technical and financial assistance for technical re-equipment of the system. And business and representatives of the SFS noted the need to create a single law enforcement agency in the economic sphere (62.94% and 68.72%).

“For the last few years we have been developing a concept for combating economic crimes,” said Vyacheslav Nekrasov, advisor to the Chairman of the SFS (Ukraine State Fiscal Service), adviser to the President of the APPU (Ukraine Taxpayers Association), candidate of law, associate professor, the research team member . – We toured many European countries, where we not only studied their experience, but also presented our work. The fundamental difference between our actions and what is happening in the law enforcement system of our country is that we try to implement the so-called ILP model in the activities of law enforcement agencies, the key basis of which is the so-called intelligence analytics, or simply – analytical things. The key task of analytics – in fact, it works both on prejudgment (allows not only to provide a tool for law enforcement to understand what is happening in the environment we are studying today, and to predict the consequences) and gives an understanding of how to deal with threatening phenomena. For us, the main thing is how to react and overcome phenomena. The shadow economy is a phenomenon, crime is also a phenomenon, crime in the economy is a phenomenon. It was important for us to show how the system should work. We have studied the positive experience that exists today and heard from people involved in the implementation of analytical platforms in law enforcement agencies, in fact: if intelligence analytics does not affect the management decision-making system, it loses its meaning as such. Therefore, our task was to show how strategic management in control and law enforcement agencies should be built”.

“Expert: When establishing the Financial Investigation Service, the appropriate investigative authority should be clearly determined”


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