The downside of imagination


Sweden is best known in Russia for two things: IKEA, a furniture giant that owns here a dozen mega-stores and a few sawmills, and Karlsson, a fictional character in books by Astrid Lindgren. Short, plump and exceptionally prankish, Karlsson may look real but he is the creation of a little boy’s imagination – a friend to play with and, when parents get really cranky, someone on whom to shift the blame.

The link between the two may become unbreakable, for if IKEA lose the multi-million tax case it recently started in the Moscow Arbitrazhny Court, it would be held liable on account of its suppliers who, according to the taxmen, do not exist. Six contractors of the retailer, they say, ‘show the signs of fly-by-night companies’, sham structures without an office, assets or real management.

Paying tax for someone else – who, as a matter of fact, have actually fulfilled their contractual obligations - is unfair. It is certainly not what one of the biggest non-energy investors meant when, ten years ago, it started opening shops in Russia – each shop cost around $200 million to build. It is, of course, a serious hurdle in Russian-Swedish relations and with the Western business community as a whole. It is also very, very funny.

It’s not whether we pay taxes or not that matters: judging by the size and conceit of what is called the tax planning industry, many businesses and wealthy individuals don’t pay all that they should. How we don’t pay taxes is what really matters and is what makes us different.

Not paying taxes is a respectable business. Yet a tax scheme, if not meticulously legal, should at least look amusingly complex. Dealing with a sham structure isn’t like that at all, and individuals behind it are fraudsters - direct, primitive and open. Using fly-by-night companies was cool in the 1980s, common - in the 1990s, mauvais ton – in the 2000s. In 2010 it is just, well, stupid.

Taxation of corporate entities is based on the idea that all businesses in the economy are connected. If there is a cost centre, a company that pays more than it receives, there must be a profit centre too. When a company deducts the amounts paid to suppliers from its taxable income, it is assumed that the money will be taxed somewhere. When sham companies get involved, it doesn’t happen because con-men abscond with untaxed cash.

The sums involved in this sort of crime are colossal. When the British realised that they were loosing around $4 billion a year only on VAT scams involving missing traders, they tried to mitigate the losses by holding liable all companies in the same supply chain as a fraudster. Though in 2006 Her Majesty’s Revenue & Customs lost an important case against Optigen Ltd et al in the European Court of Justice, the idea that a company may be kept accountable for its fraudulent counterparts has become established in tax law.

In 2008 the Eldorado Group, the largest network of household appliance stores in Russia with a turnover of $6 billion, faced tax charges of around $470 million. In July 2009 an international search warrant was issued for its former CEO Alexander Shifrin. The Eldorado Group wasn’t alone. The Moscow Oil Refinery, Svyaznoy, a mobile retailer chain, MIAN, a real estate agency, Moscow McDonald's, Basic Element, an aluminium giant, and others were held liable for taxes not paid by suppliers if they turned out to be sham entities.

This is, perhaps, the most intriguing twist in Russian tax law of the last decade. The state now considers private companies, at least the bigger ones, as its agents in tax collection. The taxmen say, basically, that businesses must look after the public purse too, and not only after their own.

This should let the authorities trace assets from company to company and reach an ultimate villain. If need be, they can even pierce the corporate veil and get into the pockets of those hiding behind sham structures (it is now allowed by the law of April 28, 2009 'On changes to certain legislative acts of the Russian Federation').

So if you bought something from a fraud, the taxmen will come for you and the price they’ll ask will be someone real, of flesh and blood, to put the blame on.


October 17, 2010
text: S. Matyunin
picture: hakan çorbacı -

This article first appeared in The Moscow Times



Tax evasion: new era in tax collection