Ukraine Corruption and Transfer Pricing

As I listened to the testimony of Bill Taylor and George Kent, I was also reading up on some South African transfer pricing case involving iron ore:

Kumba Iron Ore will pay less than half of the tax bill it received from the SA Revenue Service (Sars) last year following audits of its export marketing practices during the commodities boom. The settlement of R2.5bn significantly overshot the R1.5bn Kumba had set aside as a contingent liability. It is, however, a fraction of the taxes, penalties and interest payments Sars was pursuing the country’s dominant iron ore producer for. The existence of a potential tax liability was first reported to shareholders in June 2014, but Kumba could only put a number on it early last year when it received a tax assessment of R5 billion for the years 2006 to 2010.

If this account sounds like a lot of accounting gibberish, one might check with other accounts including whatever BDO wrote but these other accounts were even less informative. To paraphrase one commercial “people who know” avoid BDO. I think what happened is that the South African tax authority objected to what it saw as a lowball transfer pricing paid to the South African mining affiliate by a tax haven marketing affiliate and decided to completely disallow any commission income for the tax haven affiliate. This account at least notes that Kumba Iron Ore eventually told its shareholders that there might be some transfer pricing risk and that the issue was eventually resolved with a more modest commission rate booked by the marketing affiliate. So what does this have to do with Ukraine?

There is high public interest in the topic of “offshores” in both Ukraine and the EU. It is of particular importance for Ukraine which is categorized as an “open economy”, meaning a country with a high share of exports and imports relative to GDP. In particular, iron and steel production and exports from Ukraine are very significant even by the scale the global iron and steel markets. These sectors have also become the single largest source of wealth for the richest Ukrainians … It is intriguing that even the Ukrainian authorities publicly declare that there is significant profit shifting occurring to avoid corporate taxation. For instance, according to the State Fiscal Service of Ukraine the usage of transfer pricing within all types of operations results in 100 billion hryvnia tax avoidance annually (around 3.3 billion euros), which leads to almost 20-25 billion hryvnia loss of the national state budget (Riabych, Vakulchyk 2015). This budgetary loss is equivalent to 660–750 million euros, which is comparable to the scale of the annual macro-financial assistance received by Ukraine from the European Union in the last several years to fill the budgetary gap.

The authors spend considerable effort attempting to document the extent of transfer pricing manipulation involving Ukraine’s exports of iron ore and steel. While I’m not convinced they have the right metrics, let’s admit that such tasks are difficult without the multinationals providing information on their business and transfer pricing policies. Of course, multinationals involved with the type of tax avoidance suggested in this document are reluctant to provide such clarity unless they were compelled to do so. It was funny yesterday when the Trump sycophants whined about second hand information with the obvious reply being to demand the testimony of those with first hand information. Now if we could get Rudy Giuliani under oath, not only should he be asked about UkraineGate but he should also be compelled to tell us what he knows about Ukrainian iron ore transfer pricing.