VAT claims amounted to UAH 21.9 billion the end of the first half of 2015, of which UAH 7.1 billion were VAT refund arrears, equivalent to 1.1 and 0.4 percent of GDP respectively (IMF, 2016).

Have politically connected firms received unfair advantage in the VAT refund process when compared with their non-connected peers? We compare politically-connected and non-connected firms’ access to refunds and the timeliness with which refunds are issued. The analysis is based on the data set of connected firms and data from the Ministry of Finance and the State Fiscal Service (SFS) on audits, refund claims, SFS decisions and the payments of the VAT refund for the period February 2016 through March 2017. Most of the unplanned audits in Ukraine relate to desk audit, which takes up to 30 days, and document inspection, which takes up to additional 30 days, before the decision on refund is made.

Compliance costs for politically-connected firms are lower than those for non-connected firms. A connected firm is 61 percent less likely to be audited than a non-connected firm controlling for turnover and other factors (Annex 3 provides details of the estimate). Firms with higher turnover overall are more likely to be audited. This is to be expected given the higher revenue potential. A number of other factors – sector, age of company, number of employees - seem to be important determinants on the likelihood of audit. There is a negative correlation between the firm being connected and likelihood of the firm being audited related to a VAT refund.

Recent reform efforts have made some progress in addressing the fairness and efficiency of the refund process. From the second half of 2015, outstanding VAT claims have been on a downward trend as a result of the government’s effort to increase automatic VAT refunds. The analysis of the largest 20 exporting companies shows that in 2014, 10 out of 20 companies in the list were connected companies and they received 63 percent of total refunds of the 20 largest exporters. In 2016 10 out of 20 of the largest exporters were still connected, but their share in VAT refunds decreased to 43 percent. Nonetheless, politically-connected firms continued to benefit from a lower likelihood of VAT refund-related audits, which in most cases provides for faster refund processing. In April 2017, a single VAT refund registry was introduced to ensure automatic VAT refunds for all companies.

<mark>AIR TRANSPORTATION - EXPLOITING MONOPOLISTIC STATUS TO EXTRACT BENEFITS</mark> The Ukrainian air transportation market is dominated by a single large player: Ukrainian International Airlines (UIA). In the beginning of 2013 one of the two largest Ukrainian airlines – Aerosvit,<sup>4</sup> part of Privat group – entered bankruptcy and stopped all flights. Media reports speculated that the bankruptcy was artificial since a large part of outstanding debt was to companies affiliated with Privat group.<sup>5</sup> As a result of the bankruptcy, UIA became the only large operator on intra-Ukrainian routes. UIA carries over 80 percent of domestic passengers as the only airline on most domestic routes. It also services many international destinations. In the largest Ukrainian airport, Boryspil, UIA has a market share of around 60 percent. UIA has benefitted from several decisions by public entities that have helped strengthen and protect its monopolistic position by creating barriers for other carriers to enter the market.

In 2013, UIA secured preferential prices for passenger transfers, aircraft service, and parking space from the Boryspil Airport. UIA received discounts in the range of 50-80 percent on services

> 4 - <u>http://www.magazine</u>

> <u>rest.in.ua/ua/articles/from_ukrainian_aviation_market_takes_one_of_the_two_most_powerful_players.html</u>

> 5 <u>http://www.theinsider.ua/rus/business/53c93648d5a12/</u>

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