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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Shadow business gets the upper hand

Another attempt to drag Ukrainian business out of the shadow fails
24 March, 2009 - 00:00
Sketch by Anatolii KAZANSKY from The Day‘s archives

In shadowboxing the shadow has never beaten the boxer. Ukraine’s economy is an altogether different story: it constantly loses to shadow business. The latest such defeat was suffered on March 17 when the bill “On Legalization of Corporate and Individual Incomes” submitted by MP Hryhorii Smitiukh (Party of Regions) collected only a mere 182 yeas in the Verkhovna Rada and failed.

Dragging shadow business out of the shadow and making it legitimate is especially topical now that we are all gripped by the financial crisis. A memorandum attached to the bill reads that various estimates indicate that Ukraine’s shadow economy produces 30-50 percent of the GDP. Duly taxed, these revenues would tangibly add to the national budget, which is so meager now. Also, such legalization terms and conditions must be acceptable to the shadow businesses, for here everyone makes his own decision on whether or not to remain in the shadow and risk his assets that are not recognized by the state as being legal, or to pay a certain sum and thus have his property protected by law.

Under the said bill, what can be legalized are revenues earned without paying legally established taxes and duties (the so-called compulsory payments to budgets and specialized state funds). Revenues generated with violations the law, excepting cases envisaged by the said bill, are also subject to legalization. Exceptions include grave crime against Ukrainian national security, individual health and life, against world peace and international law and order, and those falling under the category of illicit drug trafficking. In a word, money produced by shadow business must not smack of crime.

Those who would decide to legalize such revenues would have to fill out a declaration. The bill contained a promise not to force businesses to yield data concerning the sources of revenues, exempt them from taxes for the period until legalization takes effect and during the legalization year. Such businesses were also guaranteed confidentiality in regard to any data as may have been obtained by pertinent authorities and their officials in the course of legalization.

The legalization procedures were supposed to last for a year. The Criminal Code had to be amended with a clause stipulating punishment for divulging information on such legalization. Also, tougher legal punishments were to be meted out for evading foreign exchange returns, unlawfully opening hard cash accounts in banks outside Ukraine, and so on. This was how the authors of the bill meant to make shadow business less secure.

Why was this bill voted down, after collecting just enough yeas to be slated for the repeated first reading?

There is no denying the possibility of shortcomings in the text and certain implicit nuances that the authors perhaps wanted to discuss during the parliamentary hearings and take into account what other MPs had to say on the subject. (All such bills are known to have one problem — taxing legalized property.)

This time something else became the stumbling block. Look at the vote: the bill proposed by the Party of Region MP was not supported by the entire faction, with 19 members abstaining, including the party and faction leader Viktor Yanukovych and other functionaries such as Azarov, Kluiev, Yatstuba, and Rybak

The party of Regions old guard voted with their feet, as the saying goes, although they ended up constituting the obvious minority. Nevertheless, they followed in BYuT’s footsteps, considering that this bloc did not give the bill a single yea. In contrast, it was wholeheartedly supported by the Communists (save for one vote in the CPU faction). After all, the Reds have never forgiven any tax evaders. The Lytvyn bloc acted exactly the other way around. All its members — save for a single MP, namely Speaker Volodymyr Lytvyn — voted in favor of the bill. In other words, the shadow revenue legalization bill triggered a revolt against the leadership in two factions of parliament at the same time.

What does all this add up to? One of the possibilities is that this economic bill fell prey to incomplete political arrangements between the Party of Regions and BYuT. The NUNS faction and the Lytvyn bloc would never favor such arrangements because any kind of alliance, even if situational, involving these parliamentary giants would jeopardize the coalition. If so, why didn’t the [coalition] leader Volodymyr Lytvyn vote for the legalization bill? Well, we all know that his hovers above the race to grab seats. Besides, he is getting prepared to run in the presidential marathon, so speaking out against the legalization of shadow business would be clearly improper.

There is, however, a different political viewpoint. According to Oleksandr Paskhaver, president of the Economic Development Center, “the level of corruption in our country is so high and the level of [people’s] confidence in our state is so low that any innovative efforts aimed at directly legitimizing shadow business revenues will never succeed in this country.” Paskhaver does not rule out the possibility of some technical shortcomings being present in the bill, but he insists that “any such endeavors are simply futile. For any laws to become effective in this country, there must be a certain degree of public confidence in the state, whereas our state can only be referred to as ineffective.” He added that “one of the functions of an effective state is being able to compel all its subjects to act in accordance with the law, yet here this function is practically ineffective […] People involved in shadow business have no reason to believe anything the state may promise them.”

By Vitalii KNIAZHANSKY, The Day
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