After the Panama Papers scandal, Ukraine started talking about deoffshorization /

Lessons of Panama Papers for Ukraine

A major offshore scandal that erupted early April, focusing, among others, on Ukrainian President Petro Poroshenko, set a very difficult task for the Ukrainian authorities – to stop the praxis of seeking corporate benefits in foreign jurisdictions, and to finally reform business environment.

After the Panama Papers scandal, Ukraine started talking about deoffshorization /

For the second consecutive week, various media outlets worldwide continue to disclose on their front pages details of one of the largest investigative reports of recent times – on the activities of Panamanian company Mossack Fonseca which controls nearly 60% of the offshore company registration market. As it turned out, the world’s top politicians, public figures and prominent businessmen have enjoyed for decades (and still do) the services of Panamanian registrars.

While registering their offshore companies, each of them pursued various goals. Someone tried to hide traces of ultimate owners and beneficiaries of their assets, someone evades the need to share property with heirs, and someone builds sophisticated schemes of mediated asset management. However, a key challenge has been and remains minimization of tax deductions by withdrawing capital to the so-called tax havens – jurisdictions with low tax rates. Over the past two or three decades, offshore states have become a legal, and very effective, way to ensure substantial savings on obligations to the state budget in the form of income tax and profit tax.

The volume of transactions is indeed shocking: nearly $7.6 trillion, or 8% of global wealth, was siphoned through Mossack Fonseca and similar structures. However, it is really difficult to calculate the exact amount of money turnover in offshore companies today: until recently, the Panamanian companies were highly acclaimed among their clients for top secrecy of operations, not worse than Swiss bankers.

Not surprisingly, the released results of an investigative report is a shocking blow to the reputation of the registrars. And no less a shock is for the very subjects of this high profile probe, with prime ministers, famous football players, musicians, and, of course, the heads of state among them. The first scalp taken by Panama Papers was that of Prime Minister of Iceland Sigmyundyur Gyunnleygsson, who decided to resign. Next stop is Brazil, where the procedure of impeachment of President Dilma Rousseff is just starting.

U.S. President Barack Obama was among the first world leaders to comment on the Panamanian leak.


Speaking last week at the White House, he said: "We’ve had another reminder in this big dump of data that tax avoidance is a big, global problem.” “A lot of it is legal, but that’s exactly the problem. It’s not that they’re not breaking the laws, it’s that the laws are so poorly designed,” he said. He called on U.S. Congress to overhaul the corporate tax system, saying the abuse of tax breaks was costing middle class families.

Managing Director of the International Monetary Fund Christine Lagarde supported Obama.


The head of Ukraine’s key creditor has branded the mechanism of using offshore companies (applied to half the world's contries) "corrupt." In this context, Lagarde mentioned Ukraine, to which the IMF has accumulated a lot of complaints regarding the lack of any significant results in the area of anti-corruption efforts.

Awkward feeling...

No wonder, authorities in Kyiv heard Lagarde instantly. Several Ukrainian officials, including President Poroshenko, were among those who got into a spotlight of the Panama Papers inquiry. Head of the Ukrainian State was “accused” of undeclared creation in 2014 of three offshore companies - in the Netherlands, Cyprus and BVI (the British Virgin Islands). These companies have been entrusted management of the president’s key asset – Roshen confectionery company, which attracted the attention of investigators.

All last week, Poroshenko’s legal and financial advisers have been explaining diligently: offshore companies were needed only to fulfill the president’s public promise to sell his company and agree on the transfer of management of Roshen to another manager – Rothschild investment bank. The explanations suggested that the Ukrainian laws do not allow for such a maneuver, while the offshore jurisdictions do. After all these legal explanations, formal complaints against the President were dropped, but some kind of annoying feeling has remained. And this feeling is actually grounded enough. Experts and journalists have not heard from the president and his advisers the answer to the main question - what prevented the Head of State as a subject of legislative initiative to promote creation of a regulatory framework to convey Roshen to the trust without "the assistance" of offshore companies?

However, Roshen is just the tip of the iceberg of the large Ukrainian companies' relations with tax havens. Most of Ukraine’s large companies used offshore services when they wished to either go on IPO, or attract money in foreign markets, or enter into the listing of stock exchanges in London, Dublin and Warsaw. To date, financial and corporate interests of the largest Ukrainian agricultural or metallurgical holdings abroad are represented not by parent companies registered in Ukraine, but offshore companies formally representing those jurisdictions where tax law is very loyal to the big money.

Let's not forget that it is Cyprus which has been Ukraine’s key investor for many years, as Cyprus is one of the world’s popular tax havens.

Ukraine’s key

Moreover, it remained the country’s top investor even amid grave financial crisis of 2012-2013, which led to the paralysis of the banking system of the island. Cyprus accounts for about one-third of the total foreign direct investment in Ukraine.

Why such generosity? That’s because Cypriot investment in Ukraine for the most part is nothing more than a return of capital to its homeland in the “investment wrapper” and with certain legislative preferences. This is the money that has been siphoned from Ukraine under various pretexts, the main one among them is to conceal true owners of assets, and to evade taxes. Moreover, it is supposed, we’ll never know the amount of money withdrawn. We only know that nearly $11.7 billion has come to Ukraine from Cyprus over the entire investment period.

It is clear that all these nuances are well known. Potential investors and lenders working with our country have repeatedly pointed to such a clear and long-term manipulation with the capital. So the Panama Papers scandal showed nothing new, being just another reason to talk about the need for the urgent radical economic changes in Ukraine. This should be changes, instilling a culture of relations between the state and business in general, and financial discipline in particular.

... Will we change our ways?

After the scandal erupted, President Poroshenko said in a TV interview: "Attempts to prohibit offshore companies only lead to an increase in their number. It is absolutely a dead-end road. I want to reveal a few steps that we need to do to carry out an effective, fast and deep process of deoffshorization.”

According to him, it needs to accede to the International Convention on access to the accounts of non-residents - and since January 1, 2017. The President also proposed to introduce at the legislative level, the status of foreign-controlled companies. He will be available to companies registered in other countries, but working in Ukraine, and whose owners and beneficiaries are residents of the country. It is the responsibility of these companies will be paying taxes in Ukraine by Ukrainian legislation.


Poroshenko insists on further harmonization of the Ukrainian tax legislation and completion of judicial reform that would ensure the rights of businesses to a fair trial in Ukraine, not in some other with more favorable conditions.

The World Bank has also submitted its proposals. World Bank’s expert Hans Timmer has told the reporters that Ukraine needs structural changes to provide for de-offshorization, ranging from the changes in business environment to those in the labor market. Meanwhile, integration of the economy and globalization contributes to the fact that there are new options for doing business, and Ukraine should respond to these challenges, according to Timmer.

Head of the parliamentary committee for tax and customs policy Nina Yuzhanina offered to start a professional discussion on de-offshorization and its objectives, involving expert community, to make the issue less politicized and find out what changes should be adopted to the tax legislation.

The expert community also has its own views on the solution to the problem. Economists and lawyers interviewed by UNIAN say that banning offshore business as a tool is impossible. It is if to impose a ban on trade with other countries, where the tax rates differ from the Ukrainian ones. "The issue of the eradication of offshore practices should be raised not in terms of sanctions or tightening the regulatory framework. Ukraine should try becoming the Eastern European offshore haven,” says managing partner of Da Vinci AG Andriy Kolpakov. “Look at the United Arab Emirates and the Netherlands, or even Cyprus. Those are not offshore states in a conventional sense. But these are the jurisdictions that are winning in the global fiscal competition and thus attracting capital and developing the services sector. For Ukraine, or say, for its part, such as Odesa, Lviv and Kharkiv, this would be a good option. "

In other words, experts urge the authorities to have a differentiated approach to addressing the issue of offshore practices. In their view, the country needs legislation that would prohibit withdrawing money, oblige people to pay taxes within the country, at the same time allowing to return the funds and attract new foreign investment. Implementation of such an idea would have contributed not only to investment and financial opportunities, but also instilled to business community the culture of financial discipline and paying taxes in their own country, rather than forcing them to seek corporate benefits elsewhere.

Olesia Safronova (UNIAN)

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