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ARCELORMITTAL BECOMES TARGET AFTER COMPLAINING ABOUT TAXES
Global steel-production leader and biggest of investors in Ukraine
Vlad Lavrov, Kyiv Post, Kyiv, Ukraine, Fri, Feb 25, 2011
KYIV - To put it mildly, last year was not the easiest one in Ukraine for ArcelorMittal, the global steel-production leader and biggest of investors in Ukraine.
First, the Prosecutor General ‘s Office started looking into whether the company, which in 2005 bought Ukraine’s largest steel mill for $4.8 billion, fulfilled its investment commitments. ArcelorMittal feared the process could go as far as the government re-taking ownership of the steel mill.
Some think that only the interference of French President Nicolas Sarkozy during Viktor Yanukovych’s visit to France and the Ukrainian president’s subsequent three-hour long meeting with ArcelorMittal’s owner, billionaire Lakshmi Mittal, halted such a scenario.
But such high-ranking interference didn’t solve the company’s day-to-day problems in Ukraine.
In September, the State Customs Administration accused the plant of being a coal smuggler, as it claimed that ArcelorMittal failed to pay Hr 200 million ($25 million) worth of customs duties on its imported coal, arresting nearly 67,000 tons of coal in question at ports. This case was dropped last December, only to give way to headaches.
Recently, tax authorities accused ArcelorMittal’s plant in Ukraine of more than $50 million in tax violations. But Russian-native Rinat Starkov, appointed ArcelorMittal’s general director in Ukraine, says his biggest headache is the state tax administration’s inability to refund value added tax on time and in full.
Government debts to the plant as of Jan. 1, he said, totaled Hr 2.3 billion, the biggest amount owed to any business in Ukraine. Starkov is also not happy that ArcelorMittal has had to make more than Hr 1 billion in advance tax payments to help Ukraine cover a budget shortfall. In addition, dealing with inspections from various controlling bodies, which the company faces on a daily basis, has become a daily routine.
In a Kyiv Post interview, Starkov talked about his outlook of Ukraine’s business climate, frequent meetings with tax authorities, and the way the company’s current difficulties in Ukraine are viewed at ArcelorMittal headquarters.
Kyiv Post: How do you look back on the last six months since you’ve become the company’s general director in Ukraine?
RS: It was a dynamic time. The bouquet of problems that the steel mill has, in general, is typical for a company working in post-Soviet environment. You have to be involved in many things outside improving the operational efficiency of the company, which I wish I had more time to work on.
But instead, I find myself dealing with the prosecutor’s office, various courts, which is a little irritating. There is definitely no time for boredom.
KP: Prior to your appointment, you worked for Mondi, a leading international paper manufacturer, and for several years ran one of their paper mills in Russia. How was working there different from Ukraine?
RS: Things have calmed down in Russia. It’s not like in Ukraine, where law enforcement authorities open a criminal case as soon as you disagree [with the authorities] on tax issues.
Everything is done in a civilized manner, through court proceedings.
No state official would rush to have a press conference and announce “we have caught a major smuggler,” only to realize later they have made a mistake [Starkov refers to accusations his company was smuggling coal.] But, nobody held a press conference and apologized for their mistakes.
Things like that are impossible in Russia, and in the West, where I worked for the last four years. It’s really difficult for [ArcelorMittal’s management in London] to understand what is really going on here. Russia had similar problems, but that was 10 years ago.
KP: Last week you announced that the total VAT refunds owed to ArcelorMittal’s steel mill in Kryvy Rih totaled Hr 2.3 billion ($290 million) as of Dec 31. Has there been any response from the government, or tax officials?
RS: No, these people don’t work like this (he laughs). They are well informed about this amount. But in December-January we got no refunds from them whatsoever. No interview would lead to this money being returned.
KP: But last week, a top tax official promised in a Kyiv Post interview that he would refund around Hr 17 million of the VAT owed to one Finnish company. It was around half of what they were owed.
RS: I hope that company receives it. But I am not a fan of such personalized solutions. There needs to be a system of automatic refunds. We need to stop wasting each other’s time.
KP: Have you applied for automatic refunds? Has it been approved?
RS: No, we haven’t. At the moment, we are not able to establish even normal day-to-day communication with the tax authorities.
PAYING PROFIT TAXES IN ADVANCE
May I remind you that we had to pay profit tax in advance? This happened because tax authorities demanded that we immediately return 50 percent of whatever VAT refunds we got as the profit tax. So, overall, the state owes us Hr 3.5 billion.
KP: How do tax officials explain this?
RS: They are basically forcing us to import everything we need for our work, first of all, coal, our biggest purchased commodity. Tax officials claim that our Ukrainian suppliers of coal or scrap metal often wouldn’t pay the VAT they received from us to the budget, as it “evaporates somewhere along the chain of intermediaries.”
We tried to explain that we paid the VAT to suppliers, and it’s not our job to monitor what happens to it afterwards. But all we hear is that since this money didn’t make it to the budget, they won’t refund it. That’s their approach. It is a little strange to me.
During our last meeting, we said that we are switching entirely to imports, as in this case we pay VAT directly to the budget, and that we hope they won’t again say it “evaporates.”
In our view, this VAT is simply impossible to dispute. We hope that in the future what we pay for imported commodities, as well as for gas, and electricity inside the country will be returned to us unconditionally.
This is about half of what we are owed every month. Probably, such a switch to imports will be very bad for Ukraine’s economy, but we are forced to do this.
Currently, whenever we try to talk to them and find out what’s going on, they tell us that they found new violations related, for example, to scrap metal purchases, and that they are opening a criminal case.
KP: Have you set up the special department to work with the relentless inspections?
RS: I think it’s necessary, as currently working with inspectors requires efforts of many departments. We try to have the legal department coordinate all this, but when you have two-to-three inspections each day, it’s really difficult.
KP: Are they searching for something specific?
RS: Well, you know how it is. When there is an inspection, they cannot leave empty-handed. Sometimes, it’s something small, sometimes, bigger issues arise. Last time, they took a whole truckload of documents related to scrap metal purchases. I kind of understand them, as they know we are the only ones who have all the necessary documents on scrap metal in order.
So, they took a truckload of them, in turn paralyzing the work of two departments which needed to arrange all these documents for them. We offered giving them an electronic version on a disk, but they said it wasn’t enough.
KP: Any idea why they pay so much attention to ArcelorMittal?
RS: I try not to think about it and move forward. There could be many reasons.
KP: Could someone be trying to force ArcelorMittal to sell its mill?
RS: No, such minor mosquito bites won’t lead even to the thought of selling it.
KP: How does ArcelorMittal top management and its main owner, Lakshmi Mittal, view this situation with their Ukrainian daughter company? Is it their biggest headache?
RS: This steel mill is considered a gem for ArcelorMittal. This is the biggest price the company has ever paid for a single production asset. Therefore, Lakshmi Mittal personally controls the situation in the Ukrainian company.
UKRAINE KEEPS OUR TOP MANAGEMENT IN SUSPENSE
So, it happens that during the quarterly reports in the parent company, the report from us always takes the longest, considering the VAT problems, prosecutors, tax evasion criminal cases, and the coal smuggling story. Ukraine keeps our top management in suspense. Nobody understands why such methods are used against one of the world’s largest companies, one which controls 10 percent of the global steel market.
But, it’s important to understand that in the ArcelorMittal empire, the Ukrainian company accounts for only 3 percent of the whole company. To say that the whole corporation cannot live or breathe without it would be a huge exaggeration.
NOTE: Kyiv Post staff writer Vlad Lavrov can be reached at firstname.lastname@example.org.
NOTE: ARCELORMITTAL is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.usubc.org.