The taxman comenth
According to Benjamin Franklin, there are two certain things in life: Death and Taxes. In Kyrgyzstan you used to be able to add a third: the annual Tax Inspection.
The appearance of the tax inspector was enough to cause palpitations for the Accountant and Director of many firms – even the most diligent and accurate of accountants or a Director trying to run a company in a transparent and honest manner according to the requirements of legislation.
As it happens, we try to scrupulous about our tax affairs and obligations. It’s not just a case of trying to avoid the consequences of breaking the law, (as a former Prime Minister was wont to say: “Pay your taxes and sleep easily”), but a question of civil duty. We all want the state to fulfill its functions: to protect the border and maintain safety and security within those borders; to provide the basic infrastructure of the state, the roads, emergency services, basic education and health services, and so forth. This has to be paid for somehow and tax is the community’s contribution to these meeting costs. We all complain if they are not delivered, but don’t want to pay for them. Part of the problem is that people don’t see the connection between the tax going from their accounts and the services provided by the state. There is also a feeling that the money in a company’s accounts is theirs, but it isn’t … it actually belongs to the authorities and is simply held in the account temporarily.
It wasn’t just the annual inspection you had to worry about. This checked all your tax affairs, but there are also thematic inspections, checking just one tax; dislocation inspections, checking registration details; checks on the operation of cash registers; and vrestchniy proverka, a cross check with the documentation in the inspection of another enterprise.
There were several reasons why the appearance of the tax inspector used to unnerve people:
Apart from the fact, that is, that nobody likes to be inspected. Inspection involves a sense of judgment … and can have implications.
Then there is the fact that it is to do with tax and there is a common dislike of paying taxes.
Many years ago I was told a story, (I can’t vouch for its veracity; it sounds as if it could easily have been a joke, but it also has a ring of truth to it), of an inspector who looked at the accounts and failing to find anything wrong walked into the Director’s office, sat down and said … “Who does your accountant work for? … you or the tax authority? You are paying far too much tax. Sack her. I can introduce you to another accountant, a very good accountant, who can save you lots of money.” It turned out that the accountant he wanted to introduce the Director to was indeed a very good accountant, and would probably have very little difficulty with the tax authorities … it was his cousin’s wife.
The haughty and high minded attitude of the inspectors did not help. They had power and authority and they intended to use it. They stood on their dignity and issued commands, (and some would issue threats along with them). That’s not to say that all the inspectors behaved in such a manner, but quite a lot of them of them did.
I remember, for example, being summoned by an inspector to Naryn, some 350 km away from Bishkek. Having examined our accounts over the course of several days, he appeared in the office at the guesthouse at four o’clock in the afternoon and demanded that I appear before him at nine o’clock the next morning. As it happens, I had meetings in Bishkek at that time and told the staff in Naryn that I would go up the following day. He wasn’t happy and when I appeared he stormed into the room and read the “riot act” at me and my accountant. We sat and listened, and when he had finished began to try and answer his points one by one. He didn’t let us finish even addressing the first one, and simply told us that he had been an inspector for x-years and we would do as he said. I am afraid that I lost my cool and said that I was astounded at his attitude which was rude and overbearing, that if he had indeed been an inspector for x-years then he knew that he should listen to and consider what we had to say and that if he refused to do so then he could write what he liked in his report and if we disagreed with it, (and we did), then we would challenge it – and also write an official complaint about him and his attitude … and then I stormed out of the room. Within ten minutes my accountant came to tell me that he was willing to sit and listen to us. In the conversation that followed he eventually agreed that we had good points in answer to his four complaints, (I think it was four, but it was some time ago and I cannot remember what they all were, now), and although they didn’t amount to infringements as such, they did raise issues which should address in future.
On another occasion we received a telephone call from an inspector working in a tax department which had nothing to do with us. “Bring me all your documents on ‘x’,” she said. We referred her to our tax office and told her to talk to them … or bring us the proper order which we would comply with, but we would not respond to a telephone call, especially one from a tax office which was not our tax office. Her response was to ask me my nationality. “What difference does it make?”, I asked, “I’m a tax payer and under Kyrgyz law I should be treated the same as any other taxpayer. You have to bring me the order and then I will comply with it.” She kept me on the phone for an inordinate amount of time, eventually saying that they wouldn’t be an order, so I said she would receive no documents, and hung up.
On yet another occasion, I was faced with an inspector who was in uniform and showed me his identity, but, once again, had no official order. I told him to come back with the order saying what question he was investigating and what documents I had to show him and I would comply. When he started to get officious and quoting penalties for inhibiting an inspector in his work, I turned to the person who was with him and asked: “Who are you?” “I’m with him,” was the reply. “Yes, but who are you?” I work with the tax authority.” “Then show me your identity card.” “I don’t have it on me.” “Then goodbye,” I said, holding the door open, “Come back with the order and I will comply with it … come back without one and I will complain to the authorities.” They left.
Then there is the fact that, if they find an infringement, then the inspector can impose sanctions: apart from recovering any unpaid tax, they can exact fines and “penya” a sort of compound interest on both the unpaid tax and the fine. In some cases these sanctions can be considerable. There are lots of stories about how the inspectors would look for, or create, problems and then, (for a small “consideration” by way of “gratitude”), find a way to overlook the “infringement”. Even if they weren’t looking for a “bribe”, if they could find an infringement then the budget would receive additional funds and they would gain credit for that, so there was an incentive to find something.
To make matters worse, there seems to be an assumption that businessmen are all cheats and tax evaders. Now, tax evasion, (the practice of not paying the tax which is due, for example by running two sets of accounts and not reporting the income from one of them, or reporting expenses which are not allowed), and it is illegal and it is the inspector’s job to look for it. On the other hand, tax avoidance, (arranging your business affairs in order to reduce or minimize the amount of tax paid), is not illegal. Many governments around the world, (including in the UK), constantly try to find and close what they call the “tax loopholes” which companies legitimately use in order to reduce their tax burden.
Once an inspector arrived, (although this wasn’t a tax inspector), with a list of seventeen infringements already written down. When we went through them, sixteen didn’t apply to us, and although the seventeenth was a problem – it required us to do something twice a year but we were only doing it once – she agreed that it was a minor problem and told us to deal with it in future according to the rules and regulations.
On two other occasions, an inspector has appeared at our door and before they even crossed the threshold they said: “… you’ve infringed the law and you will pay … you will play a lot!” (I wondered if they had both been on the same training course.) Having checked their paperwork, we told them to sit down and check the documents they had come to check and if they found an infringement to show, and then we would talk about fines. They found nothing and left. One of them, when he left, turned and said how pleasant it was to come across a law abiding tax payer.
Finally, there is the fact that tax law is so complex, that it is almost impossible, (some people say that it IS impossible), to comply with all of them.
Sometimes, it seems to me similar to the story of “Morton’s Fork”. John Morton was Archbishop of Canterbury during reign of Henry VII in the late 15th century, and is supposed to have held that “a man living modestly must be saving money and could therefore afford taxes, whereas if he was living extravagantly then he was obviously rich and could still afford them.”
In fact, the rules have changed over the years, and in my experience changed for the better.
These days, not every enterprise is inspected annually. In Bishkek, for example, the last time we were subject to a general inspection was five years ago. Now, the authorities use a system of “risk assessment” involving a variety of factors, including the number of years since the last inspection, and only those enterprises which obtain a score above a particular threshold are selected for inspection. It’s automatic, and although maybe not exactly foolproof, there is no room for subjective factors. As it happens we got selected for a general inspection this year and the process is just drawing to a close.
Secondly, the attitude of the inspectors is much more professional and far less adversarial. They have their job to do, which may not make them very popular, but I have no problem with that. “Let them do their job,” I say, “but let them do it properly and according to the rules.” We are expected to follow the rules so it is only right that we should expect them to do so, too. Doing their job involves asking questions and, particularly in recent years, they have posed particularly good, searching questions. I always tell people not to worry too much about questions … the time to worry is when you don’t have answers to those questions, or when the answers that you do have turn out to be wrong or unsatisfactory in some way. Fortunately, because we try to be scrupulous about our tax affairs, we’ve nearly always been able to provide answers which satisfy the inspectors that we have done the right thing and acted according to the law.
I also try to keep in mind that the AKT, (the report drawn up at the end of the inspection), is just the opinion of one inspector, and an inspector is human and can be wrong. If one disagrees with their conclusion then there is an appeals process set down in the law and, especially if it is a point of principle, one can use this and, if necessary, even submit a case to the courts … and, we have done so in the past. Although there are lots of stories about the courts being corrupt, in my experience of them hasn’t been so bad. The judges have heard the case attentively, asked good questions and given reasons for their decision. Of course, it is time consuming and nerve racking and, sometimes, I have still disagreed with their reasoning, but I know why they have decided as they did.
Bishkek