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. Last Updated: 07/27/2016

Minister: VAT Fraud Doubles to $730M

VAT fraud more than doubled in the first nine months of the year, reaching $730 million, some 9 percent of total claims, Tax Minister Gennady Bukayev said on Monday.

VAT collected on domestically produced goods and services is the single largest source of federal budget revenues. Under the Tax Code, the government must reimburse exporters for amounts they pay, but do not collect when goods are sold abroad.

In 2001, about one-third of collected VAT, or 212 billion rubles ($6.7 billion), was returned. In the first nine months of October 2002, companies had already turned in requests for 258 billion rubles, many of which are likely to be rejected or, many companies say, ignored.

Bukayev, speaking at a meeting of Baltic region tax ministers, said 163 million rubles had been reimbursed, mainly to legitimate exporters, news agencies reported.

It was not clear how much of the 23 billion rubles in fraudulent requests had been reimbursed, but tax experts said the amount should be small, given the difficulties legitimate exporters experience in obtaining refunds.

The government has condemned rising VAT fraud as a danger to the federal budget.

But major domestic and international companies fighting to recover millions of dollars in refunds say they are bearing the brunt of a crackdown on fraud by tax authorities.

"Every time they've given different reasons [for not refunding VAT]," said Leonid Mazin, general director of Hamilton Strand Nauka, a joint venture set up by United Technologies, a multibillion-dollar, U.S.-based technology corporation with about $400 million invested in Russia.

"For the first half of 2000, they tried to prove that we're not an exporter," Mazin said. HSN exports up to 80 percent of its production – heat-exchangers – to Western aviation companies.

Foreign and domestic companies have tried various avenues to recover their money, filing and re-filing documents, negotiating with the tax authorities and appealing to the government. More and more, they are turning to the courts.

"Our efforts to resolve the VAT issue out of court resulted in delays, no progress," said Richard Brody, president of United Technologies' Moscow operations. "We felt that our only recourse was to sue."

HSN filed 15 cases against its local tax inspectorate in September and October after three years of battling to recover a VAT debt that could reach $1 million by the end of the year, a critical amount for the $5 million-per-year manufacturer.

Their choice of going to court is growing more popular, tax experts said.

"The only thing really that has changed in the past 12 months is the position of certain taxpayers in terms of pursuing the tax authorities and actively enforcing their rights under the Tax Code," said Paul Tobin, head of PricewaterhouseCoopers' VAT department.

For now, it appears to be one of the few options open to companies.

"Basically, they don't want to pay," Mazin said. "This is not something that Tax Inspectorate 14 thought up. It seems to be the ministry's policy."