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Still under pressure: what is real purpose of controlling bodies?

authors: Alexander Minin, Maxim Oleksiyuk

source: "Kyiv Post Legal Quarterly", Vol.4,Issue 4

28 December, 2017 Press

The main purpose of controlling bodies should be the prevention of violations. Yet, being wrongly motivated, results in them not being interested in this. On the contrary, the more violations an inspector reveals and heavier penalties applied the better for the control agency and the more importance such agency has.

The practice shows that the main object of “control” in most cases is far away from assuring real interest of the society, public.

For instance, a formal check of presence of documents, rather than check of technological safety as such. Another example where current court practice proves that architectural inspection mostly applies sanctions not for violation of construction norms, but for defects in permissive documents (which defects are themselves a result of obscure rules).

Moreover, we regularly see cases when being improving technology and safety of its production facilities the entity is penalized later by a control bodies for not adhering merely to formal procedures, which in itself quite often are not clear enough or so much burdensome that it is almost impossible to pass them undoubtedly. For example –ecological inspection, together with a court, prevents a company from the using newly built modern system of rainwater purification because of a defect in permissive documents. Stop of that system leads to not-treated rainwater getting into the river after it washed the territory of the factory. This shows that the priority for ecological inspection was clearly not ecological safety (which is its main goal under the law), but penalizing a company. Or, in other words, creating corruption opportunities.

But even in the situation, when a company is sure it adhered to all regulations, there is no guarantee from trouble. When an inspector wants to find a violation – it will be found for sure. Example from practice – ecological inspection names certain equipment as “pollutant sources” and applying sanctions for absence of permit, ignoring the fact that these “pollutant sources” were not discovered during previous audits of the same facility and examination of project documentation. Another example – architectural inspection claims that construction of minor building on the territory of the plant is equal to reconstruction of the whole plant in order to raise category of construction. Result – a fine for absence of permit for such higher category and order to stop production. The aim of the inspector is not to hold you responsible for a real violation, but rather to create a problem for you. To put you in a situation where it is much easier to provoke to “settle the matter”, otherwise they ruin your business.

The practice is so dominant, that the very idea of controlling function has been discredited. Today none of the like bodies actually improves safety of the people and environment. Instead they constantly hinder the business activity in hope for illegal benefit. And all that for taxpayers’ money.

At the same time, the problem cannot be solved just with enforcing anticorruption measures, because the roots of it are in the fundamental flaws of regulatory system.Intentionally confusing and complicated, it puts all the responsibility on business, and never holds an officials liable – even in case of false accusations.

The system can be changed by redistributing responsibility and the role of inspections from punitive to service side. Since any controlling body is financed from the state budget, their main function should be provision of free advice and explanations on regulations (which currently is difficult to obtain). Moreover, no sanctions should be applied to business which follows such advice. And when a company followed the wrong advice from the official, responsibility should be on the side of official.

Any audit by a controlling body should be treated as free of charge service where an official helps the business to improve their standards. Sanctions should be allowed only after an official has informed a company on violation, explained the ways on its elimination (which should be a detailed list of exact actions, not just general directions), and given a reasonable time to do so. Suspension of activity should be allowed only when there is an immediate and proved danger to people or environment. Controlling bodies have enough capabilities to prevent a violation through examining project documents and consulting business and these should become their main activity through amending the laws and practice.

The above is said mainly in respect of the agencies responsible for technical, ecological, architectural and the like control but is also true in respect of many other areas where the state intervenes for control.

One of the recent stories is with the authority granted to the state fiscal service to block VAT vouchers registration as a method of preventing tax fraud. Although such authority is at least disputable from constitutional perspective, it was basically accepted initially by the business. The reasons for this were tacit understanding of implicit agreement that while certain VAT voucher passes the registration with inbound verification, respective VAT credit supported by this voucher cannot be challenged. Qui pro quo, business accepts the burden of check of ‘entry into the system’ but expects no further troubles with the admitted VAT credit (vouchers). Unfortunately, such an implicit agreement was ruined almost immediately. The tax authorities point out that under the law registered VAT voucher is merely ‘sufficient’ but not literally unchallengeable reason for the tax credit. Respective requests and control actions launched already on this VAT credit with ‘admitted’ VAT vouchers. In other words, we face extreme complication of VAT registration, administration and control this year with this system of pre-admissive control this year, which however did not prove to protect the taxpayers from the problems they expected to go away with introduction of this system.

Again, while the Constitution of Ukraine stands for the presumption of innocence principle, the approach taken for the system of pre-admissive control of VAT vouchers is based on the opposite, i.e., if the taxpayer is not able to prove sufficiently that he does not pursue a tax fraud with VAT, you are not allowed to register your VAT voucher. The burden of proof that you are not ‘likely might be pursuing tax fraud’ is levied by the system on the taxpayer, which is against Article 62 of the Constitution that nobody could be forced to prove innocence.

Well, it’s not easy. When to fly, you are also to pass security check whether you do not carry for instance weapon without proper permit (which in itself is considered as the criminal offence). Yet, when you are buying a ticket, you agree implicitly for such security check which is for your safety and the safety of other passengers. It’s up to you whether you choose this or other way of travelling on easier conditions. In respect of tax you are not given such choice. Still, when introducing respective additional procedures and burden for the taxpayers it shall be agreed balance of ‘pro’ and ‘contra’ for the business and entire society. Otherwise there is much easier way of preventing potential tax fraud – to prohibit private business activity as it was basically the case in the Soviet Union. And much more radical measures: the best medicine against dandruff is guillotine.

The feeling of right balance is still not in place in a number of cases. When no right balance, it is legal fight in place.

And to find the right balance probably would not be possible without principle restructuring of the control bodies and their approach. Otherwise it will be a continued source of conflict without the benefit for society but rather glorifying the nonexistent merits of the control agencies.

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