Billion-Hryvnia VAT Schemes of Oleksiy Liubchenko: Every Move Recorded

Billion-Hryvnia VAT Schemes of Oleksiy Liubchenko: Every Move Recorded

Who is responsible for the most popular VAT-evasion scheme and which companies take part in it

From January to May 2021, Ukrainian businesses, with the “support” of fiscal authorities, deprived the budget of VAT revenues totaling more than 12 billion hryvnias. In the widespread “skrutky” scheme, where imported goods, food products, and fuel-lubricant materials are documented as converted into agricultural products for export, at least 1300 companies participated. The editorial office obtained the full list of these enterprises and analytical reports on the amounts involved in the “skrutky” and illegal VAT refunds.

The “skrutky” scheme has existed for many years. Its essence is to combine a tax credit that arose from importing or producing goods on the shadow market (cash sales) with a tax liability that arises for payers who need to legalize “shadow” goods. Documents for goods sold for cash are “sold” to the “buyer” of the tax credit, and often incompatible goods are “combined” in the scheme: for example, a purchase of fuel and lubricants is matched with the sale of tomatoes. The actual “skrutka,” i.e., substitution of product nomenclature, takes place at so-called “transit” intermediary companies. However, both the “seller” and the “buyer” of the tax credit are full accomplices in the crime.

Many heads of the fiscal service, regardless of its formal name at a given time, did not even try to eradicate these manipulations. On the contrary, they always sought to gain control over them. In reality, the document-based transformation of some goods into others is quite primitive and one-dimensional. All manipulations are visible to tax analysts. Therefore, the untroubled existence of this method of tax evasion, costing billions of hryvnias every month, would be impossible without fiscal officials simply turning a blind eye. Clearly, not for free.

One can judge the sums circulating on this “market” and the potential size of the “commissions” corrupt tax officials might take at least from public statements and available documents. For example, former Finance Minister Ihor Umansky estimates the volume of skrutky at 60 billion hryvnias per year. According to a report by the temporary investigative commission of the Verkhovna Rada, which evaluated the tax authorities’ activities and investigated, among other things, the scale of the skrutky “market,” in 2020 participants in the schemes “skrutky” totaled about 27 billion hryvnias. Moreover, only in the period from May to December 2020 — when the head of the State Tax Service was the current First Vice Prime Minister and Minister of Economy Oleksiy Liubchenko — the volume of “skrutky” amounted to 19,6 billion hryvnias, or about 2,5 billion hryvnias per month. The maximum recorded by the commission was 4,3 billion hryvnias in November 2020.

The editorial office obtained documents confirming that in the next five months of Liubchenko’s tenure as head of the tax service the situation not only failed to improve but worsened. According to data collected by analysts, the volume of transit-conversion turnover for the period from January to May 2021 was 12,4 billion hryvnias. About 1350 enterprises were involved in the schemes’ operations. The largest numbers of such taxpayers were predictably concentrated in administrations in Lviv, Donetsk, Kyiv, Kharkiv, Odesa regions, and in Kyiv. The main product groups involved in conversion: imported goods, food products, cigarettes, fuel-lubricant materials. The primary output product group is agricultural produce intended for subsequent export.

Based on lists of companies participating in conversion and “transit” schemes, analysts drew conclusions about the key beneficiaries and organizers of such processes. In particular, the document mentions a Lviv entrepreneur whom some media call the “king of smuggling,” although he often presents himself as an “attorney.”

In Kyiv, analysts name Vyacheslav Strelkovskyi as the main beneficiary of the skrutky, who also regularly appears in publications about conversion centers and “cozy” relations with tax authorities. In the capital’s list of skrutky participants are AGR Group president Misak Khidiryan, Grainexpo EU CEO Sevak Chirkinyan, co-founder of LLC “Trading House Stolichny Jewelry Plant” Yuriy Karfik, and Igor Stakovichenko, who has featured in publications about conversion centers.

In Dnipropetrovsk region, those listed among the skrutky participants involved in Liubchenko’s schemes include hockey club “Prydniprovsk” president Serhiy Hrybkov, founder of Intercreditbank and several other businesses in Dnipro Volodymyr Tuhai, and entrepreneurs Mykola Kononov, Andriy Kuznetsov, Illya Nikitin (Combat group).

In Kharkiv region the chief schemer is named as Serhiy Yeskov (Digma group); in Volyn — Serhiy Mostynets (importer of cars and

spare parts). Among other regions, analysts identify Odesa entrepreneur Andriy Bobohlo as one of the key beneficiaries of the skrutky.

The document’s authors believe the situation with skrutky arose because of inaction by State Tax Service officials, since tax officers have a range of tools to investigate and prevent the formation and spread of dubious tax credits. This is also confirmed by the investigative commission’s report on skrutky. In several regions, more than half of the alerts about the need to respond to skrutky, as the commission found, are simply ignored. For example, in Lviv region tax officers “processed” only 20% of the beneficiaries of corrupt schemes, in Odesa — 33%, in Kharkiv — 45%.

Analysts also established a systematized operation for illegal VAT refunds from the budget. The most common schemes are VAT refunds to enterprises and organizations of public associations of persons with disabilities that are entitled to apply a zero tax rate; VAT refund schemes for transactions involving the purchase of goods (both imports and within the customs territory) that are subsequently not sold; and VAT refunds based on court decisions where the State Tax Service did not take sufficient measures to defend the state’s interests.

Recently the media calculated that Oleksiy Liubchenko’s short tenure as head of the tax service cost the state and taxpayers approximately $1 billion. The schemes and companies described above are only part of a much larger picture that law enforcement still needs to study and properly assess. Especially given how actively the official is promoting his candidacy for the future prime minister’s post.

Author: Ivan Boiko