ArcelorMittal opens up to state tax authorities
As tax authorities continue to pressure businesses in order to boost government revenues, at least the nation’s largest investor says that life is looking brighter - although the road to progress for one of the nation’s largest taxpayers was a tough one.
Andriy Maximov, in charge of taxes at ArcelorMittal Kryvyi Rih, the largest of Ukraine’s steel mills and owned by global steel leader ArcelorMittal, says that tax inspections at the giant steel mill have dramatically decreased since the firm decided to open all of the company’s books online to the government. Officials can now access virtually any data or document on the company’s activities instantly.
Specifically, tax authorities are interested in the pricing mechanisms that the export-oriented company uses, namely to see the difference between the export price that ArcelorMittal declares in Ukraine and the final price that the consumer pays.
The goal is to minimize transfer pricing schemes, often used by businesses to funnel profits to offshore zones were the tax burden is low. Using such methods, exports are made to offshore entities at prices little above cost -denying the host government of a lot of tax revenue.
Experts say the practice is widely used by Ukraine’s oligarch owned export-oriented steel, chemicals and grain businesses. According to the State Tax Service, exports to offshore jurisdictions and Cyprus - an offshore tax haven - totaled $250 million in the first half of 2011.
"Historically, it’s considered that steel enterprises can abuse their pricing schemes [to avoid taxation], but we are completely opening up," Maximov said. "We are doing this to let the authorities know that our export price is almost the same as what the final consumers are paying."
In a veiled challenge to other steelmakers still dodging taxes, Maximov
said: "Personally, I don’t think everyone [in the steel industry] is ready to work on these conditions."
Besides earning a reputation as an upstanding corporate citizen, ArcelorMittal also gains by decreasing the burdensome of frequent and exhausting raids by tax authorities.
Maximov is cautiously optimistic about the results that his company has achieved so far after signing the June agreement with state tax authorities. Since the agreement, tax inspectors have visited the company only once. It is also a sign that authorities are satisfied that no tax dodging is taking place.
The state’s new voluntary way of working with ArcelorMittal and large taxpayers, referred to as "horizontal monitoring" is meant to bring more transparency — and revenue - to the process of tax collecting in Ukraine. Currently, tax collection in Ukraine amounts to a game of hide and seek. Companies routinely hide revenue,
citing the nation’s heavy regulations and burdens, while the tax inspectors harass them with inspections in a bid to collect as much as possible.
At the moment, at least three other large enterprises - the largest Ukrainian grain trader Nibulon, Russian oil giant Lukoil-Ukraine and German wholesale-retail giant Metro Cash & Carry - are doing the same as ArcelorMittal. In return for such transparency, the tax authorities promise a "considerable decrease, and, eventually, a complete absence of either planned or unplanned checks."
Such humanity comes at a financial cost.
According to Maximov, his company is expected to pay more than $ 1.1 million in extra consulting and operating expenses to ensure that ArcelorMittal fully complies with the new conditions. That means horizontal monitoring is not for everyone. But it may work well for big firms mat don’t want to cheat on taxes.
"A company shall be prepared not only for the full disclosure of its business and transactions incurred, but it also has to have the adequate internal controls," he Maximov said.
Pavel Moroz, senior manager in Ukraine at Ernst & Young’s tax and legal department, assisted ArcelorMittal on the new tax project. The main benefit that he hopes to achieve is the elimination of any potential disputes and disagreements with tax authorities.
Atthe moment,howeverArcelorMittal’s tax blues are far from over.
As Maximov says, the government still owes ArcelorMittal around $275 million in value-added tax refunds. In addition, since the beginning of this year, ArcelorMittal paid $375 million in taxes to the state and local budgets, nearly $150 million of which was paid in advance.
Maximov is, therefore, cautious in calling the new phase of his company’s relationships with tax authorities a success. Too many issues remain unresolved.
"Honestly, we can’t make any conclusions yet," Maximov said. "The only positive result so far is having less tax checks."
Oleksandr Makarov, an analyst at Kyiv-based investment bank Dragon Capital, is skeptical about the new system. Makarov thinks the best way to fight transfer pricing is implementing indicative prices, based on the world stock exchange, and to force all exporters to abide by the same rules. Instead, Makarov said, the tax authorities want to keep their powers - arbitrary and otherwise - over businesses.
"One gets the impression that the system works as follows: first create unbearable conditions [for business], and then offer to solve the problem by giving extra powers to the state authorities," Makarov said.