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Mistake Damaging Trade Relations: The Lessons Ukraine Drew from the Estonian Offshore Scandal


Georgiy Dzhaniashvili, lawyer

Source: European pravda

At the end of 2017 the Cabinet of Ministers of Ukraine – by its Resolution No. 1045 – included several European countries into the list of states the financial operations with which looked suspicious to the Ukrainian authorities and, therefore, were subject to control under the transfer pricing law.

This document came into force on January 1 this year and provoked an international scandal. The fact is that Ukraine has not informed the relevant countries on their inclusion into this peculiar ‘black list’, making it secret.

The story leaked out after an Estonian entrepreneur, who is exporting furniture to Ukraine, decided to make a bank transfer from the Ukrainian firm’s account to the account of his Estonian company, and the bank representative told that they should carefully check the firm before the currency conversion…

The reason behind Estonia’s inclusion into the list is that Ukraine considers the income tax imposed on the Estonian companies to be 0% as a result of reinvested profits’ exemption from tax. However, it is commonly known that in Estonia income is taxed during the payment of dividends and tax avoidance is not possible in principle. Interestingly, within a framework of its tax reform Ukraine is introducing the taxation system similar to Estonian.

In any case, thanks to the intervention of the Prime Minister of Estonia, this country was quickly removed from the list, yet the bad aftertaste remained.

In fact, such ‘mistakes’ are very dangerous, for our country in the first place. About 400 Estonian enterprises do business with Ukraine. And, of course, the scandalous Resolution of the Cabinet of Ministers affected all of them.

Importantly, the interested parties were not aware of the CMU’s Resolution No. 1045 and, thus, could not anticipate all the nuances during the export of Estonian goods. In fact, this means that, pursuant to the Ukrainian offshore laws, 30% of the value of goods coming from Estonia to Ukraine should be declared as profit and, consequently, the income tax and turnover tax should be charged on the said amount.

For instance, you import goods for EUR 1 million and have to immediately pay EUR 300 thousand of income and turnover taxes.

This is a total collapse for business since it makes economic activities simply financially disadvantageous.

If the situation had not stabilized, many Ukrainian enterprises would have definitely suffered, since Estonian partners, for whom it would have become unprofitable to conduct business in Ukraine, would simply switch to other markets. In addition, this would have resulted in the increase of control on the part of the banks, the need to provide additional reports, additional costs and delays in transactions.

Fortunately, Estonia’s exclusion from the offshore list was time-efficient, so financial losses of businesses were minimized.

It is hoped that Ukraine will try to avoid such ‘mistakes’ in the future. Next time the negative consequences of such a ‘mistake’ may turn out to be much more disastrous.

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