Poroshenko, after disclosure of his firm in Caribbean tax haven, promises renewed attack on offshores

“I am planning to present a significant reform that will make using offshore accounts in Ukraine impossible,” Poroshenko told reporters in Tokyo on April 6.

According to the Panama Papers investigation, Poroshenko registered a holding company on Aug. 21, 2014 under the name of Prime Asset Partners limited for his Roshen confectionery in the British Virgin Islands, a Caribbean tax haven.

After the story went public on April 3, based on leaks of documents from Panama-based Mossack Fonseca firm, Poroshenko denied he used the offshore for tax avoidance.

Offshore schemes of tax optimization deprive the country on average from $11.6 billion in state budget revenues per year, according to 2004-2013 estimates of Global Financial Integrity. That amounts of 25 percent of Ukraine’s state budget.

Taking into account the scale of the problem in Ukraine, Poroshenko pledged during his election campaign in 2014 to attack offshore schemes. He said the “amount of taxes and tax rates should be cut, all offshores should be closed up.” The coalition agreement in parliament, including the president’s large faction of 138 members, also pledged to create incentives for business to pay taxes in Ukraine.

Legal tax optimization

“A lot of citizens consider offshores illegal. In fact, offshore companies are the most legal of ways to minimize tax expenses and to build a smart, effective system of tax optimization,” says a website of Offshore LLC consultancy, which specializes on opening shell firms in 13 countries.

It is just one of many dozens of companies that show up in Google search if one types in “Kyiv offshore.”

As of April 6, one could open an offshore firm on Belize of Seychelles for $980 in 5-7 days providing only a copy of domestic and international passports of a beneficiary owner and an authorized person as a manager of the company. Both can be one person.

There the owner of the shell firm will enjoy confidentiality and he will be out of reach of the Ukrainian tax authorities and the National Bank of Ukraine.

In Ukraine, the non-resident firm registered in a tax haven is treated as an investor. This company pays 5-15 percent repatriation fee and no tax on the revenue at all if its country of residence has a double taxation treaty signed in Ukraine.

Mission impossible?

Oleksiy Khmara, head of Transparency International Ukraine, compared the president’s anti-offshore reform initiative to an eternal engine which everybody wants to have but no one knows how to invent.

“The best strategy against offshores is to conduct reforms in Ukraine,” Khmara told the Kyiv Post.

Offshores can serve as money vaults where businesspeople can safely store and withdraw money from any bank of the world. This is impossible to do in Ukraine where all financial institutions must comply with strict currency rules of the country’s central bank.

Firms in tax havens become intermediaries between buyers and sellers in international trade thus optimizing taxes and simplifying paperwork. Tax havens also help to reduce customs duties, for instance, when a shell offshore firm buys a piece of equipment for $1,000 dollars and imports it to Ukraine for $500.

However, Ukrainian high tax rates are not the only motive to take money offshore. It is also the corrupt and ineffective judiciary and law enforcement, as well as weak ownership rights in the country, which prompt businesspeople to secure tax havens that that use the British legal system and offer confidentiality.

So “doing business there is safer than in Ukraine where the courts are active participants of raider schemes,” Khmara said.

De-offshorization instruments

The National Bank of Ukraine and the State Fiscal Service have several instruments to prevent capital flight to tax havens, but none of them can counter the use of offshores.

Financial monitoring of the central bank can stop any transactions if it has suspicions that they are connected with money laundering. One also needs to apply to the National Bank for an individual license which authorizes purchase of securities abroad. But the shares of offshore firms are usually registered to a dummy stockholder, which makes this tool ineffective.

Another instrument to fight offshores is the legislation which obliges to expose final beneficiaries. The parliament adopted the necessary laws in October 2014, obliging all legal bodies to disclose their final owners.

The law proved effective in tracing the real owners of the Ukrainian banks. Those institutions which did not reveal the real beneficiaries behind offshore investors by April had their licenses called off.

“Only pressure can work,” Illya Neskhodovsky from the Reanimation Package of Reforms think tank told the Kyiv Post. The risk of losing a license should make structures functioning in Ukraine reveal their real owner’s names.

Another tool to stop money flight from Ukraine to tax havens is control over transfer pricing.

In order to do this, Ukrainian tax collecting authorities compare the revenue of international corporations received from transactions with their offshore counter-agents to the market prices. If any discrepancies are found, this means financial penalties for the company and that part of the corporation’s revenue anchored in the tax haven.

But the introduction of transfer pricing has been several times delayed since legislation for it was initially adopted in 2013. The filing of documentation for 2015 is now scheduled for May. However, experts say that due to the low threshold of controlled transactions of Hr 5 million ($193,800), the transfer pricing tax base is so broad that the number of reports can overwhelm fiscal services.

“A mere ban on work with offshores will not succeed, as there will be always countries where tax conditions are better than in Ukraine,” Neskhodovskyi told the Kyiv Post.

On March 21, two weeks before the Panama Papers scandal broke, the heads of the National Bank, State Fiscal Service and Anti-Monopoly Committee said they are planning to work out a common strategy for de-offshorization.

However, experts say that it is hardly possible to cut out offshore accounts in Ukraine without coordinated global action.

Kyiv Post staff writer Olena Savchuk can be reached at [email protected]