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What powers does the government lack to fight the shadow?

10/ 12/ 2021
  According to the latest data from the Ministry of Economy, the share of the shadow economy in the first half of 2021 (compared to 2020) remained unchanged and amounted to more than 30%. And this is only what official data says. The shadow hinders the development of transparent businesses and the state. After all, the shadow of 6 industries alone causes the shortfall in the state budget totaling 155 billion UAH. These concern such industries as apparel and footwear, fuel, alcohol, tobacco, consumer electronics, jewelry. Last year, for the first time, the European Business Association held an event From Shadows to Transparency where it emphasized the need to fight the shadow as it is not a solution to put more pressure on transparent business every time. A year has passed, but as we can see, the situation has not changed much. So this year the EBA held the event for the second time to provide updates on the situation.  https://www.youtube.com/watch?fbclid=IwAR3WRf019EfbOz__oL9ZENxAAABTTsv_AEj6runX9G8u7ixUAMFITwlL-tI&v=xOG1wbFnVwc&feature=youtu.be&ab_channel=EuropeanBusinessAssociationUkraine%28%D0%95%D0%92%D0%90%29 Volodymyr Kotenko, Chair of the EBA Tax Committee, talked about tax novelties. He stressed that fair taxes are likely to be difficult to administer as they require details. However, the transparent business pays them as it is aware of its social responsibility to the state and the need to comply with legislation. However, when there is a shadow nearby that does not pay these taxes, working conditions become unequal and legal businesses have a number of questions to ask. Lately, it seems that the legislation is being written to further regulate the legal business which already works by the rules. This is how initiatives such as draft law №5600 emerge – at a time when there is an urgent need not for regulation of what already works, but for eradication of what degrades the country, namely the shadow. It is worth noting that quite often in meetings with the authorities there are phrases that one or another body lacks the authority to fight the shadow. So, the rhetorical question arises: what powers does the government lack? And who but the authorities can possess them? The next part of the discussion was dedicated to smuggling and customs operations. Oleksandr Lazarev, Co-chair of the EBA Customs Committee, stressed that there is an opinion that smuggling is a consequence of inefficient work of customs. At the same time, the issue of smuggling is related to the sale of such goods on the domestic market. It means that in order to remove smuggling, it must be impossible to sell it on the domestic market. Therefore, smuggling is a more global issue and lies more within the competence of the Tax Service. At the same time, currently, the function of customs is limited to replenishing the state budget, but, in fact, this should be the last they have to concern about. Thus, we can often observe a situation when the authorities increase the customs value, and so on in fulfilling the budget plan. I conclusion, Mr. Lazarev summed up smuggling cannot be defeated without total fiscalization. For this, a political will is needed, and in this context, obviously, the transparent business is out of the picture. Illegal employment is no less important in the general pool of the shadow economy. Valeria Bezpala, a of the EBA HR Committee member, noted that according to the latest estimates, every 5th Ukrainian is employed informally(about 3 million people). Losses from shadow employment amount to 130-155 billion a year. And although sometimes campaigns are conducted to identify undeclared workers, there are questions about its effectiveness. For example, in the 3rd quarter of 2021, only 11,000 undeclared workers were identified, and there are in fact millions. Thus, it is worth working on in this aspect as well. Evgen Shkola, Head of the Legal Department of Samsung Electronics Ukraine LLC, presented the latest statistics on the consumer electronics market. Thus, in 2021, the transparent market increased by an average of 10% in units of output, and the percentage of illegal imports decreased slightly to 16% on average in the market. However, unfortunately, this did not happen due to the effective actions of the authorities but due to situational factors caused by the coronavirus. Although the actions of the authorities in this aspect are crucial, particularly, creating a civilized environment for e-commerce. Besides, it is impossible to allow the existence of non-transparent norms – such as the smartphone tax” as the current CMO system of deductions is completely opaque. At the end of the first panel, Yurii Gaidai, a Senior Economist at the Center for Economic Strategy, presented a study on the abuse of FOP benefits. Thus, the majority of the FOP-2 group reports income on the verge of fiscalization. Also, this group includes businesses of high risk working in HoReCa, wholesale, and processing industry. There are no such anomalies in the 3rd group. The second panel featured cases from real industries. Serhii Badritdinov, CEO INTERTOP Ukraine thanked the state for supporting and implementing the decision on fiscalization – Laws №128-IX and №129-IX. According to their estimates, the company saves about UAH 5,000 per year from the implementation of each RSO program. Thus, using RSOs in a smartphone is inexpensive and they can be simply installed with or without the service help. Moreover, the use of RSOs is a civic stand because the paid taxes go to the state. The second useful initiative concerns the cashback that enables the consumers to control the issuance of checks. But unfortunately, the cashback implementation was put on halt while the public needs to be given leverage to control. Mykhailo Kotovenko, Groupe SEB Ukraine supported the idea of raising awareness. Surely, goods without a fiscal check can be up to 20% cheaper. But we must look at the root of the reason – this product may be counterfeit, low quality, without guarantees and checks, and thus it is also almost impossible to return it. Therefore, fiscalization (especially on the Internet) is a direct way to buy quality goods and protect your rights. Vasyl Gryb, Foxtrot, shared the retailers case on the use of software RSO which has accelerated the speed of customer checkout by 3 times, increased the number of satisfied consumers, saved the paper checks in length of 740 km equivalent to 3.5 tons of wood. Thus, it was a significant contribution to the environment. And yet – the use of RSOs provides for the absence of problems if the check is lost, secures the purchases, and ensures consumer protection. Oleksandr Samokhvalov, Head of Loostdorf, presented the situation with milk falsification. He stressed that Ukraine used to be a leader in dairy production, but now we have a shortage of raw milk, so it is one of the most expensive in the world, and there is a great temptation to falsify it. Several years ago, the EBA took the initiative to monitor the quality of dairy products - butter, sour cream, and cottage cheese. Unfortunately, it turned out that more than 30% of products contain falsification. Although this information was sent to public authorities (for example, the State Service of Ukraine on Food Safety and Consumer Protection), there was no response from the competent authorities. Oleksii Bridun, Director of Roust Ukraine, spoke about the situation on the illegal market of alcohol and spirit and noted that in order to change the situation it is necessary to complete the privatization of state distilleries, ensure transparency of procedures for confiscated alcoholic beverages, introduce civilized and equal conditions for trade in alcoholic beverages online. etc. Gintautas Dirgela, Director of Corporate Affairs and Communications at JTI Ukraine, shared data on the tobacco market where the illegal trade has already reached 18.1%. Thus, the state budget shortfalls from the shadows would amount to UAH 16 billion in 2021. He stressed that one of the main reasons for the rapid growth of the illegal market is the annual increase in excise taxes by 20% which is too high of a burden on white businesses and at the same time an additional incentive for the illegal ones. Under such conditions, law-abiding businesses cannot compete in any way with the shadow. Therefore, to improve the situation on the tobacco market, a comprehensive approach is needed which will combine both measures taken by law enforcement agencies, making the necessary changes in legislation, and implementing a more prudent policy of tobacco taxation. On behalf of the European Business Association, we truly thank the speakers for their participation and we very much hope that next year, if there is a Forum 3.0, we will talk more about achievements rather than shadows, problems, and losses. *The event was supported by the Detinizaciya Communication Platform   Specific steps proposed by the business:

According to the latest data from the Ministry of Economy, the share of the shadow economy in the first half of 2021 (compared to 2020) remained unchanged and amounted to more than 30%. And this is only what official data says. The shadow hinders the development of transparent businesses and the state. After all, the shadow of 6 industries alone causes the shortfall in the state budget totaling 155 billion UAH. These concern such industries as apparel and footwear, fuel, alcohol, tobacco, consumer electronics, jewelry.

Last year, for the first time, the European Business Association held an event “From Shadows to Transparency” where it emphasized the need to fight the shadow as it is not a solution to put more pressure on transparent business every time. A year has passed, but as we can see, the situation has not changed much. So this year the EBA held the event for the second time to provide updates on the situation. 

Volodymyr Kotenko, Chair of the EBA Tax Committee, talked about tax novelties. He stressed that fair taxes are likely to be difficult to administer as they require details. However, the transparent business pays them as it is aware of its social responsibility to the state and the need to comply with legislation. However, when there is a “shadow” nearby that does not pay these taxes, working conditions become unequal and legal businesses have a number of questions to ask.

Lately, it seems that the legislation is being written to further regulate the legal business which already works by the rules. This is how initiatives such as draft law №5600 emerge – at a time when there is an urgent need not for regulation of what already works, but for eradication of what degrades the country, namely the shadow.

It is worth noting that quite often in meetings with the authorities there are phrases that one or another body lacks the authority to fight the shadow. So, the rhetorical question arises: what powers does the government lack? And who but the authorities can possess them?

The next part of the discussion was dedicated to smuggling and customs operations. Oleksandr Lazarev, Co-chair of the EBA Customs Committee, stressed that there is an opinion that smuggling is a consequence of inefficient work of customs. At the same time, the issue of smuggling is related to the sale of such goods on the domestic market. It means that in order to remove smuggling, it must be impossible to sell it on the domestic market. Therefore, smuggling is a more global issue and lies more within the competence of the Tax Service. At the same time, currently, the function of customs is limited to replenishing the state budget, but, in fact, this should be the last they have to concern about. Thus, we can often observe a situation when the authorities increase the customs value, and so on in fulfilling the budget plan. I conclusion, Mr. Lazarev summed up smuggling cannot be defeated without total fiscalization. For this, a political will is needed, and in this context, obviously, the transparent business is out of the picture.

Illegal employment is no less important in the general pool of the shadow economy. Valeria Bezpala, a of the EBA HR Committee member, noted that according to the latest estimates, every 5th Ukrainian is employed informally(about 3 million people). Losses from shadow employment amount to 130-155 billion a year. And although sometimes campaigns are conducted to identify undeclared workers, there are questions about its effectiveness. For example, in the 3rd quarter of 2021, only 11,000 undeclared workers were identified, and there are in fact millions. Thus, it is worth working on in this aspect as well.

Evgen Shkola, Head of the Legal Department of Samsung Electronics Ukraine LLC, presented the latest statistics on the consumer electronics market. Thus, in 2021, the transparent market increased by an average of 10% in units of output, and the percentage of illegal imports decreased slightly to 16% on average in the market. However, unfortunately, this did not happen due to the effective actions of the authorities but due to situational factors caused by the coronavirus. Although the actions of the authorities in this aspect are crucial, particularly, creating a civilized environment for e-commerce. Besides, it is impossible to allow the existence of non-transparent norms – such as the “smartphone tax” as the current CMO system of deductions is completely opaque.

At the end of the first panel, Yurii Gaidai, a Senior Economist at the Center for Economic Strategy, presented a study on the abuse of FOP benefits. Thus, the majority of the FOP-2 group reports income on the verge of fiscalization. Also, this group includes businesses of high risk working in HoReCa, wholesale, and processing industry. There are no such anomalies in the 3rd group.

The second panel featured cases from real industries. Serhii Badritdinov, CEO INTERTOP Ukraine thanked the state for supporting and implementing the decision on fiscalization – Laws №128-IX and №129-IX. According to their estimates, the company saves about UAH 5,000 per year from the implementation of each RSO program. Thus, using RSOs in a smartphone is inexpensive and they can be simply installed with or without the service help. Moreover, the use of RSOs is a civic stand because the paid taxes go to the state. The second useful initiative concerns the cashback that enables the consumers to control the issuance of checks. But unfortunately, the cashback implementation was put on halt while the public needs to be given leverage to control.

Mykhailo Kotovenko, Groupe SEB Ukraine supported the idea of raising awareness. Surely, goods without a fiscal check can be up to 20% cheaper. But we must look at the root of the reason – this product may be counterfeit, low quality, without guarantees and checks, and thus it is also almost impossible to return it. Therefore, fiscalization (especially on the Internet) is a direct way to buy quality goods and protect your rights.

Vasyl Gryb, Foxtrot, shared the retailer’s case on the use of software RSO which has accelerated the speed of customer checkout by 3 times, increased the number of satisfied consumers, saved the paper checks in length of 740 km equivalent to 3.5 tons of wood. Thus, it was a significant contribution to the environment. And yet – the use of RSOs provides for the absence of problems if the check is lost, secures the purchases, and ensures consumer protection.

Oleksandr Samokhvalov, Head of Loostdorf, presented the situation with milk falsification. He stressed that Ukraine used to be a leader in dairy production, but now we have a shortage of raw milk, so it is one of the most expensive in the world, and there is a great temptation to falsify it. Several years ago, the EBA took the initiative to monitor the quality of dairy products – butter, sour cream, and cottage cheese. Unfortunately, it turned out that more than 30% of products contain falsification. Although this information was sent to public authorities (for example, the State Service of Ukraine on Food Safety and Consumer Protection), there was no response from the competent authorities.

Oleksii Bridun, Director of Roust Ukraine, spoke about the situation on the illegal market of alcohol and spirit and noted that in order to change the situation it is necessary to complete the privatization of state distilleries, ensure transparency of procedures for confiscated alcoholic beverages, introduce civilized and equal conditions for trade in alcoholic beverages online. etc.

Gintautas Dirgela, Director of Corporate Affairs and Communications at JTI Ukraine, shared data on the tobacco market where the illegal trade has already reached 18.1%. Thus, the state budget shortfalls from the shadows would amount to UAH 16 billion in 2021. He stressed that one of the main reasons for the rapid growth of the illegal market is the annual increase in excise taxes by 20% which is too high of a burden on white businesses and at the same time an additional incentive for the illegal ones. Under such conditions, law-abiding businesses cannot compete in any way with the shadow. Therefore, to improve the situation on the tobacco market, a comprehensive approach is needed which will combine both measures taken by law enforcement agencies, making the necessary changes in legislation, and implementing a more prudent policy of tobacco taxation.

On behalf of the European Business Association, we truly thank the speakers for their participation and we very much hope that next year, if there is a Forum 3.0, we will talk more about achievements rather than shadows, problems, and losses.

*The event was supported by the Detinizaciya Communication Platform  

Specific steps proposed by the business:

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