Ukrainian business is losing interest in offshore

In the first half of 2014 Ukrainian business reduced the export of goods and services to countries and territories with a flexible tax climate by 11% compared to the same period last year. According to the State Statistics Service and the calculations of Capital, over six months Ukrainian companies supplied US $2.3 bn of goods and US $1.3 bn in services to countries, where corporate profit taxes are at least 5 percentage points lower than in Ukraine. The list of these countries was approved by the Cabinet of Ministers then headed by Premier Mykola Azarov in December 2013 to enforce the law on transfer pricing. Compared with the second half of 2013, the decrease was considerably higher at 18%.

By all signs

On the backdrop of the overall decline in the export of goods and services (8% compared with H1 2013 and 15% compared with H2 2013), Ukrainian companies abandoned the services of ‘safe tax havens’ more often than from export markets. The amount of supplies to the latter fell less than to the former — 8% versus 11% compared with January — June 2013 and 14% versus 18% compared with July-December 2013.

Director of Tax and Legal Consulting at KPMG in Ukraine Kostyantyn Karpushyn says this is the effect of the law on transfer pricing. As a reminder, the first version of the law, which took effect a year ago, obligated companies to submit their first reports on controlled transactions performed in the period from September 1, 2013 to December 31, 2013 by May 1, 2014. However, in May amendments were introduced to the Tax Code and now the first — or revised — report must be submitted by companies by October 1. «Due to this, companies began reorienting their supplies, excluding direct supplies to the jurisdictions on the „black list“ of the Cabinet,» the lawyer said.

In addition to that, the demand for low-tax jurisdictions has declined in Ukraine. «Companies in the east of the country were traditionally the main users of offshore jurisdictions due to the specific nature of their businesses,» says Director of the analytical group Da Vinci AG Anatoliy Baronin. Now, due to the military conflict, the blocking of Ukrainian export by Russia and the economic crisis in the country, they were forced to reduce export volumes and as a result the demand for offshore zones has decreased.

Furthermore, classic offshore zones — island states like the Bahamas, Antigua and Barbuda, Barbados, Sao Tome and Principe, Jersey, the Netherlands part of Sint Maarten and Jamaica disappeared from the offshore map for Ukrainian businesses this year.

In addition, Ukrainian businesses almost fully rejected the previously popular Belize — export of goods to Belize dropped from US $92.9 mn in H1 and US $81.8 mn in H2 2013 to US $154,000, while export of services was halved. «This is a consequence of the anti-offshore policy conducted by the countries of the Organization for Economic Cooperation and Development,» says Baronin. Instead, business is trying to work with legal and more respectable jurisdictions.

Overall, over the past year the share of offshore zones and low-tax jurisdictions in domestic export remained unchanged at around 10%. Among all countries that the former government of Ukraine classified as having too flexible a tax climate, the key recipients of goods from Ukraine are Moldova, United Arab Emirates, Bulgaria, Georgia, Cyprus, Uzbekistan, Morocco, Lebanon and the British Virgin Islands.

Karpushyn, however, believes that Moldova, Bulgaria and Georgia, for instance, do not deserve to be on this list. «Ukrainian companies, as a rule, do not use these countries for optimizing their tax payments. The issue is more about actual trade,» he explains. This means that among the genuinely low-tax jurisdictions, Cyprus and the British Virgin Islands remain the leaders.

Dodging the tax authorities

The other side of the effect of the black list on tax jurisdictions and the law on transfer pricing is the appearance of intermediate countries that are respected in the export chain. «For example, if earlier a company supplied products directly to Cyprus, now it does so through Poland,» says Karpushyn.

According to estimates of the former Minister of Revenues and Duties Oleksandr Klymenko, over six months of 2014 around UAH 133 bn went to countries with a privileged taxation regime through indirect export contracts, unlike direct contracts, which are accounted for by the SSS in its statistical data. This is UAH 19.7 bn or 17.4% more than in the second half of 2013. Moreover, Klymenko pointed out that the export to countries with a closed exchange of tax information has significantly grown: to Switzerland (by UAH 20.8 bn), Cyprus (UAH 2.4 bn), UAE (UAH 2.8 bn) and Luxembourg (UAH 0.8 bn). However, experts in this sector refuse to comment on the extent to which these figures are indicative of the real situation.