During the nine months of the last year, the Business Ombudsman Council recorded a reduction in the number of business complaints about unlawful actions of the state. Unfortunately, this trend was unstable – during the last quarter, the number of applications increased by almost 40%. The other council data is also disappointing – the number of complaints on the actions of tax authorities is record-breaking, that is, the taxpayers’ work approach did not change for the better, but on the contrary – became worse.
In total, during a year, the Business Ombudsman Council received nearly two thousand complaints. More than 60% regarding actions of the State fiscal service, 14% – actions of law enforcement officers, 7% – state regulators. Only 25% of the complaints were rejected by the Business Ombudsman Council because of non-compliance with the criteria for consideration, and only 13% because of the lack of justification, the rest were considered lawful.
Among the complaints to the tax authorities, the largest number refers to the blocking of tax invoices, tax inspections, and open criminal proceedings against business. The number of complaints, that refers to delays in VAT charge has significantly decreased. Complaints regarding the blocking of tax invoices were mostly received from the same companies, whose activities are considered to be risky at SFS. Therefore, we cannot state that all those blockings were unfounded. However, we can say that the SFS risk assessment system needs to be improved since a significant number of companies have got concerns about it. But, unfortunately, the number of complaints to other tax issues has increased. The business began to complain more about unfounded criminal cases, the termination of electronic reporting agreements and refusal to register VAT payers.
Business mostly accused the national police of the procedural abuses and inactivity. The number of such complaints increased by 30% in comparison with the previous quarter, and by 11% in the annual figure. Business has similar complaints to the prosecutor’s office, but the number of those, who are not happy with the work of the General Prosecutor’s office of Ukraine is being reduced.
The most complaints are filled by businesses, operating in such areas as wholesale, industrial production, agriculture and mining, real estate and construction, as well as private entrepreneurs.
In comparison to the previous quarter, the number of complaints in all industries, except for private entrepreneurs, has increased. The largest increase is observed in real estate and construction companies (+ 113%) and also wholesale (+ 71%).
As experts in Business Ombudsman Council state, a comparative analysis of the complaints submitted by companies from many industries proves that representatives of various fields have different problems in dealing with government agencies. Despite the fact that the subjects of complaints are usually almost the same, the level of pressure of state bodies is different. Wholesalers and distributors often complain about tax issues (72% of all appeals) and customs (6%). Agro-enterprises are more concerned with the actions of state regulators (12%), and real estate companies – with the actions of local self-government bodies (12%). In 2018, industrial producers became the subject of special interest of law enforcement agencies (17%). And, the highest proportion of complaints filed against law enforcement officers (18%) is among self-employed entrepreneurs.
The largest number of complainants (73%) consists of small and medium-sized enterprises. This is one of the answers to the question why Ukrainian small and medium-sized enterprises are so slow growing, and rarely turn into large systems focused on the broad market of the company. Small enterprises simply have no opportunities for growth because they systematically suffer from controlling bodies.
But there is some good news, too. Last year, 94% of the recommendations of the Business Ombudsman Council were fulfilled by the public authorities. In particular, it was found out that the electronic VAT administration system was processing the canceled tax invoices incorrectly. Their cancellation did not have to affect the registration limit, but for some entrepreneurs, it decreased. For business, it is a direct financial loss. To continue their activity, they were often forced to put additional funds on their tax accounts. Council inspectors have asked the SFS to correct the CEA error and change the formula. As it turned out, to deal with the problem, it is necessary to amend the legislation. As a result, after 18 months of negotiations, the state body has developed a mechanism for solving the problem and made the necessary changes that came into force in December 2018.
Also, in December 2016, the Verkhovna Rada of Ukraine adopted amendments to the Tax Code, which allowed companies to register tax invoices even having an adverse balance.
But SFS and the Ministry of Finance have almost failed to provide this opportunity to taxpayers because they have not developed the appropriate software. Within the framework of the Memorandum on Partnership with the SFS, the Council brought a corresponding complaint to the meeting of the tax expert group, and after the follow-up revision of the system, the authorities reported that the mechanism had been implemented. Now taxpayers have an ability to register tax invoices even having an adverse balance.
It’s great that the government is ready to respond to criticism and change. It is bad that it is necessary to involve third parties, in particular, Business Ombudsman Council. Unfortunately, there is no direct dialogue with business yet, there are no willing to listen to the complainants in the government. And it is a pity because the development of the economy directly depends on a business’s operation in the state.
Moreover, the pressure on business is one of the major factors in production shadowing. According to the latest data from the Ministry of Economic Development and Trade, Ukraine’s shadow economy’s rate is 32%. Yes, this is the lowest figure for the last ten years, but it’s still hardly can be called low. It is impossible to accelerate unshadowing process without easing the pressure on business.
Looking at the level of shadowing/unshadowing according to the type of activity, it immediately becomes clear that after the unshadowing in the mining industry and construction, which provided us with a record “low” shadow level, in other areas, the situation did not improve. On the contrary, the level of shadowing increased among processing industry, companies that provide financial and transport services, and firms engaged in real estate operations. That is, in the areas where regulation has improved, the amount of those who want to work “honestly” has grown, but in the areas where there are some troubles with the regulation – everything has become even worse.
Traditionally, the highest shadow level was recorded in retail trade – 49% of GDP. And if we count it with the services – the whole 55%.
The authorities triumphantly report on the number of detected violations. Thus, the tax and customs control units of SFS conducted more than 13 thousand inspections, which resulted in the taxpayers’ tax liabilities increasing by a total of UAH 9.5 billion. However, according to the data of Business Ombudsman Council, this additional charge is not always justified and may often be related to errors in the taxpayers’ work, the imperfection of their risk systems or e-administration.
Moreover, the private business is not the only one that forms the shadow sector, the state does not lag behind. Only the State Audit Service of Ukraine for a year conducted 890 scheduled and 220 unscheduled inspections of state bodies and enterprises, and in almost every case found some violations: with the use of state resources in the amount of about 1.6 billion UAH, and utilities – for the sum of almost 425.5 million UAH. In state-financed establishments and organizations, illegal and improper use of over 600 million UAH was discovered, that is almost half of the total number of violations. The most widespread violations were the sale of goods free of charge or at reduced prices, writing-off funds to expenditures without obtaining goods, the purchase of the bigger amount of works, non-transferring funds to the budget, illegal payments, and non-targeted expenses. That is, increasing the pressure on private business, the government is in no hurry to bring order to state-owned companies and money-managing bodies – the money is paid by business in the form of taxes. It is clear that the real sector does not want to pay more. There are no clear changes in public expenditure control, in improving public services. But there is quite clear pressure on business.
At the same time, unshadowing directly depends not only on control but also on the state’s ability to create favorable conditions for increasing business activity, creating a transparent institutional environment and a favorable business climate. And unreasonable claims of controlling bodies to entrepreneurs do not fit into this formula. Instead of working and developing, looking for new niches of production and new markets, entrepreneurs are forced to spend time and money on settling disputes with regulatory bodies, complaints, and legal proceedings. And this year the situation may become worse since the budget resource this year is limited as never before, the state is in dire need of money and has traditionally been looking for them in business pockets.
By Valentyna Yushchenko
