The catastrophic lack of funds in the state budget is pushing Ukrainian parliamentarians to seek emergency ways to quickly fill it. However, lawmakers haven't sought new, effective solutions, opting instead for the easier, more well-trodden path. As has become tradition, alcohol producers have been the first to be hit. The new bill, "On Amendments to the Tax Code (regarding increasing excise tax rates) No. 1474," proposes increasing excise tax rates on beer, wine, vermouth, spirits, and hard liquor, effective January 1, 2015. At first glance, this seems correct and logical, were it not for a few serious "buts."
Excise tax rates on alcohol and spirits have already been increased three times in the past eighteen months. This figure was raised from UAH 45,87 to UAH 70,53 per liter of 100-percent alcohol. The new bill proposes doubling this figure to UAH 104,50. As a result, the excise tax on a half-liter bottle of vodka will increase from UAH 14 to UAH 21. Consequently, the price of the product on the store shelf will increase significantly. For the average consumer, such a sharp price increase, coupled with declining incomes, will likely prove unaffordable, experts say. Already, there are well-founded opinions that this latest legislative change will be devastating for the industry. Legal producers will be forced to either curtail production or go underground. As a result, instead of a fuller treasury, the state will receive even fewer royalties and, in addition, thousands of unemployed professionals.
There's another way to fill the budget through "robust deductions"—a painless and logical approach for the industry, yet one that lawmakers stubbornly ignore. The media has repeatedly raised the issue of the catastrophic failure to pay VAT by some spirits producers. This topic has been covered, in particular, by the websites "Ekonomicheskaya Pravda" (Daniil Nesterov, "Where is the Vodka VAT Disappearing?") and "Informatsionnoye Resist" (Are the Family Schemes to Rob Ukraine Still Operating?). The authors conclude that even in wartime, alcohol companies are underpaying colossal sums from the state budget—not tens, but hundreds of millions of hryvnias! As is well known, VAT optimization is a national pastime in Ukraine. However, during a period of military conflict in the country, such machinations cannot be viewed as anything other than a threat to national security.
Detecting VAT fraud is actually not that difficult. For example, if a company pays excise tax, it's fairly easy to calculate the amount of VAT received by the state budget. If potential profit is excluded from the calculation, the excise tax paid will be a 5:1 ratio to VAT (export sales reduce this ratio – Ed.). Based on this formula and excise tax payment data, alcohol market players should have paid UAH 767 million to the budget for the first 10 months of 2014. However, the actual amount turned out to be half the estimated amount – only UAH 375 million. Tax authorities are reluctant to answer the question of where the almost UAH 400 million that should have gone to the state budget went.
According to the State Fiscal Service, 59 documentary audits of strong alcoholic beverage producers were conducted this year. As a result, nearly UAH 70 million in additional taxes and penalties were assessed, including UAH 48,8 million in VAT. However, as the calculations above suggest, the scale of the underpayments is far greater. This is also confirmed by tables showing VAT payment optimization by vodka producers, which have already been published in the media on numerous occasions.
As the data above shows, the leading VAT underpayment to the state budget is the National Vodka Company, better known to Ukrainian consumers for its vodka brands Khlibny Dar, Perepelka, Kozatska Rada, Celsius, Bayka, and Pervaya Gildiya. In the first eight months of this year, the company paid UAH 37 million in VAT to the budget, instead of the estimated UAH 177 million. This begs the question: where did the UAH 140 million in VAT go? Of course, there's also exports, which reduce VAT liabilities. But why then do other companies (for example, Nemiroff and UDC), equally well-known importers of spirits, have underpayments to the budget close to zero or even recorded overpayments? It appears that the National Vodka Company received a large tax credit from the state.
It's worth noting that the lion's share—30–60%—of the National Vodka Company's tax credit is generated by Alkogolnye Traditsii LLC, which is registered... in Horlivka (in territory occupied by militants!). This was reported by Ekonomicheskaya Pravda (Daniil Nesterov, "Where is the vodka VAT going?"). Interestingly, unlike many Ukrainian producers who have been barred from entering the Russian market, Bayadera still supplies its products to Russia unhindered.
National Vodka Company and Alcohol Traditions LLC are parts of a single holding company, the Bayadera Group of Companies, which also includes Bayadera Logistic LLC, Koblevo LLC, and several other companies. One can't help but suspect that creating affiliated entities like Alcohol Traditions LLC is the simplest way to optimize VAT.
How does the affiliated structure scheme work? Simply put, to reduce VAT payments, production costs must be increased. This is most often accomplished through expensive marketing or advertising services, which are provided by the affiliated company. As expenses balloon, so does the tax credit—the amount by which the VAT is reduced. As a result, the state receives only a tiny fraction of the amount it should have actually received.
Under this scheme, funds underpaid to the state are reinvested in brand promotion, allowing the company to thrive in the advertising market and sell products at prices significantly lower than those of its competitors.
At the same time, Bayadera is indeed investing in advertising at a level that, even in a market as advertising-intensive as the liquor industry, is unjustifiable from a common-sense perspective—even given the intense competition. Nearly 200 hours (!) of commercials for Khlebny Dar, Kozatska Rada, Bayka, and Perepelka vodka have filled virtually every radio station in the country.
Who pays for radio broadcasts?
The sale of liquor in Russia, the registration of a company in Horlivka, and the underpayment of 140 million hryvnias in VAT to the state budget (and this is only for the first eight months of 2014), as previously reported by the online resource "Information Resistance" ("Are the family-run schemes to rob Ukraine still in operation?"). Why is the leadership of the State Fiscal Service of Ukraine ignoring such facts?
After all, if the tax evasion scheme is indeed in place, its scale could indicate behind-the-scenes collusion between the owners of the National Vodka Company and senior tax officials. And that's truly disturbing.
Why does Bayadera Holding continue to supply its products to Russia, conduct payments through the DPR, and what the 140 million hryvnias were used for? These are questions that require further investigation not only by the State Fiscal Service but also by the Security Service of Ukraine.
Now let's return to the topic raised at the beginning of the article—the increase in excise taxes. Will those who are evading millions in taxes pay more into the budget due to the increased excise taxes? No, they won't. The main tax burden will once again fall on those businesses that currently play by the state's rules, rather than their own. And, of course, it will also fall on ordinary consumers. When you buy a bottle of a brand lauded on the airwaves, you'll pay both the excise tax and VAT in full. But whether this money will reach the state treasury is a question...
Dmitry Rusin, The mirror of the week. Ukraine
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