Study on tax evasion and smuggling of petroleum products in the Republic

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

TRANSPARENCY INTERNATIONAL MOLDOVA

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Mihai Roscovan Victor Rusu Iurie Rosca

Chisinau, 2004 1

Transparency International - Moldova

Transparency International Moldova, 2004 str. 31 August 98, 2004, Chisinau, MOLDOVA Tel/Fax. (373-22) 237876 www.transparency.md e-mail:ffice@transparency.md

CZU 343.359.2 (478) R 74 CIP Description of the National Chamber of Books Roscovan, Mihai Study on Tax Evasion and Smuggling of Petroleum Products in the Republc of Moldova / Mihai Roscovan, Victor Rusu, Iurie Rosca; Transparency International-Moldova. Ch.: S.N., 2004 (Tipogr. Bons Offices ). 68 p.

Bibliogr. p 68 (12 tit.)

ISBN 9975-9851-8-1 500 ex.

343.359.2 (478)

ISBN 9975-9851-8-1

© Transparency International Moldova, 2004 2

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Table of Contents: Executive summary Introduction

5 9

1. Concepts and definitions 1.1 Smuggling 1.2 Corruption 1.3 Tax evasion 1.4 Concealment of goods subject to taxation 1.5 Legal and illegal tax evasion 1.6 Economic offenses in the fiscal domain

11 11 12 12 13 14 16

2. Legal and institutional framework of the petroleum products market in the Republic of Moldova

18

3. Statistical analysis of the petroleum products market in the Republic of Moldova 3.1 Classification of petroleum products 3.2 Imports 3.3 Consumption 3.4 Distribution network

24 24 24 36 40

4. Factors that stimulate tax evasion and smuggling

43

5. Models of theoretical approaches to smuggling 5.1 Simple supply and demand model 5.2 Model with smuggled petroleum products

46 46 47

3

Transparency International - Moldova

6. Methods of evaluating the smuggling of petroleum products 6.1 Focus group study 6.2 Comparing the statistics of trading countries 6.3 Comparing registered sales with estimated consumption 6.4 Off shore transactions

50 50 54 57 61

7. Actions to combat smuggling of petroleum products 7.1 The GovernmentÂ’s Action plan on fighting the shadow economy in the petroleum products market

64

Conclusions and proposals

66

Bibliography

68

4

64

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Executive summary The context of the study: The present study was done on demand for Transparency International Moldova to evaluate the dimensions of petroleum smuggling and the economic and fiscal impact of this phenomenon The main tasks of the study consist in analyzing the petroleum products markets in the Republic of Moldova, identification of factors that generate illegal trade of petroleum, elaboration of smuggling methods, as well as measuring the dimensions of the impact generated by smuggling on the national economy.

Concepts and definitions: Smuggling means avoiding taxes and excise duties on goods by concealing control points.

Tax evasion can have different meanings. Tax evasion functions as both via fiscal fraud with law violations as well as via legal evasion from paying taxes. Concealment of taxable goods can be done by different operations with documents (accounting or fiscal reports) aiming at cheating tax bodies.

According to the harmonized system of description and codification of goods, petroleum products are divided into three groups of oils: light, average and heavy. The first group consists of gasoline for engines and other. The second group of petroleum products average oils consists of the kerosene family (lamp oil for jet engines, etc.), and the third group diesel oil, fuel oil and lubricants.

The Regulation of the oil products market is done via legislative and normative documents adopted by Parliament and the Government, the 5

Transparency International - Moldova

primary of which is the Budget Law for the respective year, the Law on the oil products market No. 461 of 30.07.2001, as well as a number of governmental decisions that enforce the market regulation mechanism.

The central public administration authority in the field is the Ministry of Energy that promotes the state policy of energy development. The licensing of activities in the domain is regulated by the National Agency for Energy Regulation. In Moldova there are two public associations Moldpetrol-business Association and the Union of importers and traders of petroleum products Importcompetrol .

The certification of petroleum products is done according to the standards of the country of origin of these products.

The import of petroleum products in 2003 constituted 606 thousand tons and is constantly growing after a period of decrease registered during 1998-2000. From a geographical aspect, petroleum products have been imported mainly from the Ukraine, Romania, Belarus and Russia.

During the period 1998-2003, the share of these four countries was over 95 percent. During the same period the number of economic agents that are involved in the import and gross trade of primary petroleum products dropped more than six fold and equaled 45 percent. Over 50 percent of the petroleum products imported come via 5 importing companies.

The average unit price on imports varies considerably depending on the importers, country of origin and season. In 2001 the prices for petroleum products registered a decrease when compared to 2000, a tendency that was maintained in 2002 too. This decrease of prices is a consequence of the decreasing prices with the producers in the Ukraine and Belarus, as well as an outcome of the introduction of pre-shipment inspection. In 2003 the import prices grew on all categories of petroleum products as a result of the tendencies in the international market.

The official consumption of primary petroleum products in Moldova in 2002 constituted 356 thousand tons (or 2.7 times less as compared to 6

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

1994). Of the total volume of consumption of petroleum products, 46% is used in transport, 29% - in agriculture and 22% - in public utilities and by the population. About 40% of total consumption is registered in Chisinau.

Theoretical models of the type demand- supply prove that the impact of smuggling does not influence the level of stable consumption, but affects the market shares of the legal suppliers. In a situation where the smuggling phenomenon exists, an increase of taxes applied to petroleum leads to a reduction of legal petroleum consumption.

Moreover, the increase of taxes on petroleum can lead to a growth of smuggling when no corresponding measures are undertaken.

The main factors that stimulate smuggling are lack of adequate control at the borders, differences in prices and taxation systems in different countries. In the Republic of Moldova these factors are of special relevance mainly because of the Transnistrean problem that considerably affects the national budgetary and customs system.

The assessment of the smuggling and tax evasion element was done by applying the following methods: • Work in focus-groups questioning a group of 15 expert importers and traders of petroleum products (about a third of the main importers of petroleum products from Moldova); • Comparing the statistics of the countries between which the petroleum product export-import transactions take place; • Comparing the registered sales and estimated consumption by making calculations; • Analysis of off shore transactions.

According to the poll, all respondents declare that there is smuggling of petroleum in Moldova, and 73% consider that it constitutes up to 10% of the total consumption, 91% of the respondents consider that the most favourable sector of smuggling is Transnistria. More than half of those interviewed say that the main causes leading importers to 7

Transparency International - Moldova

smuggle are the high rates of excise duties and VAT, 27% - in order to avoid negative economic activity, and 64% - in order to obtain extra profit.

The total consumption of petroleum and diesel as estimated by the authors for 2002 is 89 thousand tons higher than officially declared.

This allows us to estimate that the state budget does not collect annual excises and VAT in the amount of over 119 million MDL. At the same time over 60% of transactions in recent years are performed via off shore companies, thus avoiding some considerable payments to the state budget. Thus a 10% increase of the import price leads to noncontribution to the budget of 30 million MDL. The main measures for improving the regulation of the petroleum products market and decreasing smuggling are: • Elaboration of a strategy to fight against smuggling, corruption and tax evasion; • Imposing EURO standards on all petroleum products imported and rigorous quality control; • Cooperation with the exporting country with intentions to exchanging information and fight against smuggling; • Application of methods to mark the petrol with special isotopes; • Simplification of certification procedures for petroleum products trade objectives; Application of certain fiscal measures: deducting the excise duties on petroleum products at the filling stations from the retail price, avoiding VAT taxation on the value of goods that includes excises and reduces the licensing tax.

8

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Introduction This study was prepared by the experts at the Institute of Management Research and Consulting (Business Consulting Institute) at the request of Transparency International Moldova.

The studyÂ’s goal is to evaluate the scope of smuggling petroleum products and the economic and fiscal impact of this phenomenon on society as well as to elaborate recommendations that would contribute efficiently to both fighting against smuggling and optimizing of the domestic petroleum market regulations.

The main tasks of the study are to analyze the petroleum market in the Republic of Moldova, to identify the factors that generate illicit marketing of petroleum products, to elaborate methods of smuggling as well as to measure the impact generated by smuggling on the national economy. The difficulties of evaluating the scope of smuggling increases due to two reasons: first of all, smugglers and their accomplices undertake great efforts to hide any information that would reveal the smuggling and illegal marketing of petroleum products, and, second, there are no real methods to precisely estimate this index.

Methodology. The study was carried out in two stages. The first included the collection of information on the petroleum market, carrying out selective research about the main consumers of motor fuel (population, transport organizations, agricultural householders), as well as analysis of the legal and institutional framework of petroleum market regulations.

9

Transparency International - Moldova

Within the second stage, we applied different methods in order to assess the size of petroleum smuggling in Moldova and its impact; a public opinion poll was carried out among the importers of petroleum products, the results were analyzed and compared and the conclusions and recommendations were made according to the study s goals.

Sources of information. Official sources of information, as well as other authors estimations were used in the process of carrying out the study.

The following were used as sources of information: • Reports from the Statistics and Sociology Department of the Republic of Moldova (Statistics Year Book of the Republic of Moldova, 2003, the Bulletin of statistical information on foreign trade, Energy Balance of the Republic of Moldova, etc.); • Decisions by Parliament and the Government of the Republic of Moldova, as well as of the National Agency for Energy Regulation which regulate the activity of the petroleum products market; • Specialized literature (see bibliography); • Editions of periodical newspapers and journals from Moldova and abroad; • Interviews with 15 participants of the petroleum products market in Moldova.

The study was conducted by a group of consultants from the Business Consulting Institute: Mihai Roscovan, P.h.D. Economics - coordinator of the study, Iurie Rosca and Victor Rusu. The authors would like to express their sincere gratitude to Mrs. Lilia Carasciuc, P.h.D. Economics, Executive Director of Transparency International Moldova, to Mrs. Elena Nistor, economic counselor at the Romanian Embassy in the Republic of Moldova, to Mr. Vitalie Chiriac, Financial Director of the joint stock company Avante , which has activities relating to the import and marketing of petroleum products. These people contributed both to the launching of this study and it s implementation.

10

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

1. Concepts and definitions 1.1. Smuggling In the specialized literature, smuggling is defined as avoiding taxes and excises on goods by concealing the control points1. Smuggling of goods usually takes place due to the following reasons: avoiding the excise duties as well as infringement of laws that ban the marketing of these goods.

This definition of smuggling includes two types of illegal activities: typical smuggling, and simply concealing the tax payment that is legal, and generally is not considered smuggling. In general, economists determine illegal tax concealing as avoiding taxes, while legal concealing is called tax evasion . Both legal and illegal concealing effect income and consumption taxes.

According to legislation in the Republic of Moldova, smuggling means to get goods, objects and other valuables in significant quantities through the border by avoiding customs control, concealing it in hiding places specially prepared or adjusted for these purposes, by fraudulently using documents or customs identification means, not declaring or misrepresentating in customs documents or in other documents required at border crossing.

1

Merriman David, Understand, Measure and Combat Tobacco Smuggling, 2001.

11

Transparency International - Moldova

1.2. Corruption The definition of corruption in Roman law means the action of destroying, forging, selling or breaking up certain institutions, in the initial signification, public courts. Corruption is defined as a state of deviation from morality and duty. The word originates from the Latin term coruptio, characterizing the behavior of the public servant that in exchange for money or other illegal gains markets the priviledge of the position for which he was appointed. These kinds of actions jeopardize the capacity of the state s control over all sectors of social life2.

In other words, we can state that corruption is carried out illegally and contributes to the dissolving of the state s integrity by accepting bribery and other services. Most often, corrupt practice can become prevalent especially within state institutions and public agencies.

The legislation of the Republic of Moldova defines corruption as an antisocial phenomenon that represents an illegal agreement between two parties, one with the role of offering or promising illegal privileges or benefits, and the other from the public service which accepts in exchange for performing or not performing certain functions found to be offenses as stipulated in the Penal Code.

1.3. Tax evasion The legislation of the Republic of Moldova stipulates neither the definition nor the main differences between the definitions of syntagm collocation tax evasion and fiscal fraud. Tax evasion can be seen as a method or system of procedures via which interested persons intentionally evade, through legal ways, obligations stipulated in the fiscal legislation, or submit wrong data on taxable income and resources.

In order to define different syntagm collocations and terms from the fiscal domain, we used information and presented definitions from the book Tax Evasion, Chisinau 2001 , which represents a collection of 2

Munteanu Igor, Political Corruption, Chisinau, 2002.

12

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

documents from the practical - scientific Conference of the Main State Tax Inspectorate. This book includes articles by experts in the tax jurisdiction who participated in the conference and considers an aspect of the illegal economy that is known as tax evasion.

The term tax evasion can have different understandings. More widely, tax evasion means a system of legal and illegal procedures by which the interested persons hide their wealth completely or partially from obligations stipulated in the fiscal legislation. In the fiscal domain, as well as in specialized literature, we find such an expression as legally avoiding the fiscal provisions; in other words, this would represent deliberate deviation from observing the fiscal obligations, committed not by direct infringement of a real fiscal norm but by deliberate avoidance through simulative actions and acts which only appear authentic. So we may define tax evasion (dodging) as – eluding from paying fiscal obligations by submitting wrong data on taxable income and sources, or represents the well-directed actions of the tax payer which permits him to reduce (to a certain extent) his compulsory payments to the budget3.

1.4. Concealment of goods subject to taxation Unfortunately, no normative act of the Republic of Moldova stipulates the exact definition of concealing. Concealing taxable items implies misleading the state by presenting incorrect data on taxable items.

Concealing in itself represents the submission of incorrect data which diminishes the amount of income and, thus, diminishes the amount of taxes as well as concealing taxable items which are not included in the reports (accounting or fiscal) thus deceiving the tax authorities.

Concealing taxable items is expressed through action – and namely by including in the bookkeeping documents incorrect data on certain taxable items which diminishes income and contributes to the diminishing of Viorel Rusu, Aspects regarding the tax dodging phenomenon, Materials of the Conference on tax dodging, Chisinau, 2001, pag.34.

3

13

Transparency International - Moldova

tax amounts, social insurance contributions, etc., and through inaction - hiding taxable items, which is manifested by not including them in reports4.

The general interpretation of the law presumes that the term used in the law text should be understood by its general meaning, unless the lawmaker defines otherwise . General thesis of the interpretation technique of the law recommends that if there is no legal or authentic interpretation that reveals the context of these concepts, then the interpreter should himself set the lexical meaning of the concerned word or expression using dictionaries or other sources able to explain the unknown word 5.

1.5. Legal and illegal tax evasion Concluding those mentioned by Viorel Rusu in his article General aspects of tax evasion from Tax evasion, Materials of the Conference, 27-28 December 2001, Chisinau , we can speak of tax avoidance and tax evasion depending on the method of avoiding the fiscal provisions.

Tax avoidance is characterized by using legal procedures and combinations which leads to tax rediction.

Tax avoidance means as a result of certain activities, taxes are not paid, and tax reduction means the maximum use of fiscal facilities foreseen by the law, diminishing taxable income to a greater extent than allowed6.

Taking into account the legal or authentic inexistence that reveals certain concepts, we can say that those evasions mentioned above are under the law. Due to the existing gaps in fiscal laws and imperfections of the law, the so-called avoidance activity can be considered legal.

V.P.Verin, Offences in the economy , school-book, Moscow, 1999, pag.103.

Alexandru Bodarev, Materials of the conference on tax evasion , Chisinau, pag.74.

6 Viorel Rusu Aspects regarding the tax evasion phenomenon , materials of the conference on tax dodging, AESM, Chisinau, pag.34.

4

5

14

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Unlike tax avoidance, tax evasion, infringes flagrantly the law in order to not pay taxes and duties to the budget. Besides those mentioned, illegal tax dodging may have other purposes. For example, complete tax evasion which includes the activities that are not registered by the state such as not declaring taxable items, not maintaining accounting, creating ghost enterprises, destroying documents, etc. Another purpose is diminishing the size of fiscal obligation by hiding income, falsifying bookkeeping documents including not writing fictitious primary documents.

From the above mentioned things we can conclude that fraudulent tax dodging means blacking out the taxable item, undervaluation of the taxable items or methods of avoiding the duty and tax.

Tax evasion appears in multiple forms such as: • preparing false declarations; • preparing fictitious payment documents; • fictitious bookkeeping; • non-declaring of taxable items; • declaring less incomes than actual; • having double accounting: real and fictitious bookkeeping; • diminishing taxable items that resulted from the reduction of turnover via registering personal expenses of employers in company s expenses or registering expenses which were not incurred; • sales made without invoice, as well as issuing invoices without sales that hide real operations subject to taxation; • falsifying the balance sheet; • not paying the already set duties.

Committing these illegal activities requires the application of different measures of responsibility depending on method, the subject of offense and the detrimental effects of such actions.

15

Transparency International - Moldova

1.6. Economic offences in the fiscal domain The legal frame is the base of the process for fighting against economic offenses. For establishing the legal frame and its functioning, it is necessary to take into account the correct application of existing legislation as well as modification of legislation used by the judiciaries of other states.

Economic offenses are expressed through different ways; a classification of these is presented in the book Tax Evasion, Materials of the Conference , in the article written by Vladimir Gilca, the Chief of the Tax Offenses Division, which are listed below: • illegal business activity; • evading from presentation of documents and data on income; • tax evasion by enterprises, institutions and organizations as well as physical persons; • hiding income in estimates; • illegal opening of accounts and money depositing abroad; • non-payment of duties, taxes and other payments; • transporting, keeping and marketing the goods subject to excises without marking them with excise or control stamps.

To bring the economic agents to trial for tax evasion, it is necessary to have tangible records colleted by the agency and legal entities, like the presence of data on income hiding indices and data showing the magnitude of hidden income.

There are several stages for certifying and examining the cases of fiscal offences7: • implementing fiscal controls; • submitting the documents necessary to examine the case to the law bodies; 7 Vladimir Gilca, Aspects of combating offences in fiscal area , materials of the conference on tax dodging, Chisinau, pag.26.

16

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

• immediate examination of the documents by the police, which in its turn should be performed in two stages: (i) penal investigation; (ii) penal inquest; • submitting the criminal file to the court concluded with the court s decision; • serving the sentence.

It is necessary to take into account the fact that precise execution depends on efficient cooperation between responsible persons from all control bodies involved which determined the fiscal offense, however, this process may also involve well-trained persons from different branches of the national economy.

17

Transparency International - Moldova

2. Legal and institutional framework of the petroleum products market in the Republic of Moldova Compared to previous years when the marketing of petroleum products was regulated by a wider and diverse range of normative and legal acts, as of 2001 the Parliament of the Republic of Moldova adopted Law No. 461 on 30.07.2001 for the petroleum products market; as an organic law forms the organizational, legal and economic frame in order to ensure the economic security of the country and the regulation of import, transportation, depositing and marketing of petroleum products on the domestic market (as strategic products with a special system of activity) reliably supplies the market with petroleum products and protects the rights of consumers.

Based on this law, the importing and marketing activity of petrol, diesel and liquid gas is licensed by the National Agency for Energy Regulation that issues licenses to carry out importing of petroleum products, and the Department of Standardization and Metrology, with the approval of the Department for Exceptional Situations, issues technical authorizations to exploit petroleum deposits and to filling stations as economic agents that own or rent stock deposits. The Ministry of Transport and Communications, with approval of the Department of Standardization and Metrology, issues technical authorizations for the use of specialized transport. Two public organizations are active in Moldova the organization Moldpetrol business and the Union of 18

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

the entrepreneurs-importers and traders of petroleum products Importcompetrol .

The regulation of the petroleum market is performed through legal and normative acts adopted by Parliament and the Government of the Republic of Moldova, including acts issued by the relevant ministries.

The Law No.1585-XV of the Republic of Moldova for the market of petroleum products of 26.12.2002 regarding amendments to the Law No.461-XV of 30.07.2001 (Official Gazette, No.27-29/96 of 28.02.2003) with the date of last modification being 05.12.2003, as an organic law forms the organizational, legal and economic frame for ensuring economic security of the country and regulation of import, transportation, depositing and marketing of petroleum products in the domestic market as strategic products, with a special system of activity, reliably supplies the market with petroleum products and protects the rights of consumers. The players on the market of petroleum products (importers, transporters, deposit managers, sellers) must be the owners of the licenses or technical authorizations and live in the Republic of Moldova. At the same time, all players benefit from equal rights, irrespective of the type of property and its legal form, and have the right to set up associations, unions and other forms of association for purposes that do not contravene the legislation, including the regulations of free competition.

According to the abovementioned law, state regulation of the petroleum market is the prerogative of the National Agency for Energy Regulation, which issues licences for: • import and wholesale trade of primary petroleum products; • retail marketing of primary petroleum products; • import and wholesale trade of liquid gas; • retail marketing of liquid gas.

The Department of Standardization and Metrology, with the approval of the Department for Exceptional Situations, issues technical authorization for: 19

Transparency International - Moldova

• exploiting petroleum deposits; • operating filling stations.

The Ministry of Transport and Communications, with the approval of the Department of Standardization and Metrology, issues technical authorizations for the use of specialized transport. The abovementioned Law stipulates the ways and means for importing, exporting, transporting, depositing, and marketing the petroleum products.

Art.4, p.1 of the Law on State Budget for 2001, 2002 (and in 2003 directly in the Tax Code) stipulates that imported goods and services shall be subject to value added tax according to the provisions of Title III of the Tax Code, and other goods, including petroleum products, shall be subject to excise duties. The Value Added Tax is set at 20% of the customs value of the goods, including the excises. The amount of excises, according to the Law on State Budget for 2002 and 2003, is MDL 1200 per one ton of petrol, MDL 500 per one ton of diesel and MDL 1200 per one ton of liquid gas. The way of declaring and paying the VAT, excises and customs duties for goods subjected to excises is set in art.6, p.2 of the Law on State Budget for 2002, in the Annex for 2003, and is declared at cross-border points.

The activity of importing and marketing petroleum products is licensed in accordance with p.45 of art.8 of the Law No. 451 on Licensing of certain types of activities of 30.07.2001, which stipulates the type of activity import and/or wholesale or retail marketing of petrol, diesel, or liquid gas. This Law contains the main concepts, principles and criteria of determining the types of activity, players in the process of licensing and the authorities delegated with the right to issue licences.

The tariff for the license based on the Law on State Budget for 2001 and 2002 is MDL 90,000 for importation of petrol, diesel, and liquid gas; for wholesale trading with petrol and diesel at filling stations MDL 90,000, for retail sale of petrol and diesel at filling stations, for 20

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

each station in rural areas MDL 9,000, in other places MDL 18,000; for retail trading of liquid gas at fuel stations, for each station MDL 9,000; for depositing fuel and lubricating materials MDL 36,000.

In 2003, the tariff for licensure based on the Law on State Budget constitutes MDL 180,000 for importation of fuel, diesel, and liquid gas; for wholesale trade with petrol, gas and diesel MDL 180,000 while the other taxes remaining unchanged.

Government Decision No.1027 of 01.10.2001 states that economic agents are issued licenses to perform importing of petroleum products upon submitting the documents that certify that they: • own or rent stocking deposits with a capacity of 5,000 m3, authorized by control and state supervision bodies; • have capital equal to USD 750,000; • do not have debts to the consolidated budget and the budget for social insurance.

Initially, Government Decision No. 1027 of 01.10.2001 stipulated the ownership or renting of stocking deposits with the capacity of at least 25,000 m3 and capital equal to USD 2 million, the Decision that was further modified and completed as Government Decision No.1322 of 29.01.2001.

Through Government Decision No.476 of 17.04.2002, the Regulation on the method of transporting the imported petroleum products, which stipulates the customs clearance procedure of imported petroleum products, was approved. The abovementioned Decision states the border crossing customs points for importing petroleum products by rail which are: Ocnitsa, Cuciurgan, Etulia, Giurgiulesti and Ungheni, including Leuseni as a customs point through which petroleum products can be transported by road; by sea, it may only be done only through Giurgiulesti.

Government Decision No.1117 of 22.08.2002 sets the Rules of retail trading of petroleum products , which stipulates the requirements for 21

Transparency International - Moldova

operation of PECO stations and rooms in specialized shops, rules of receiving, depositing, registering, and organization of petroleum marketing.

In July 2002, Parliament adopted Decision No.1198-XV of 04.07.2002 (Official Gazette No.103-105 of 18.07.2002) for control of observing Law No.461-XV on the marketing of petroleum products, where the Government is responsible for the implementation of a single integrated system of automated registration of importing and marketing petroleum products in the country. The Decision foresees elaboration by November 2002 of (i) the Regulations on depositing, retail and wholesale trading of identified petroleum products through the automated system, and (ii) the method of placing filling stations and deposits of petroleum products and liquid gas in the territory of the Republic of Moldova.

Thus, Government Decision No.958 of 19.07.2002 (Official Gazette No.110-112 of 01.08.2002) approved the Regulation for an automated system of registration of petroleum products. The respective regulation was implemented through Government Decision No.111 of 7.02.2002 (Official Gazette No.20-22 of 14.02.2003).

On 30.05.2002, the Council of Administration of NARE through decision No.63 approved the Methodology of forming and applying prices to petroleum products, which was elaborated according to the provisions of Law No.461 on 30.07.2001 for the marketing of petroleum products.

The taxation procedure for off-shore areas was adopted during its last evaluation on April 16, 2004 by Parliament. This Law stipulates the off-shore tariff in the amount of 15% of the total cost of goods procured from non-residents of the Republic of Moldova, registered in off-shore areas, and should be collected from all residents of the Republic of Moldova (physical and legal persons). But the President of the Republic of Moldova did not promulgate the Law that stipulated beginning July 1, 22

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

2004, all financial and import operations in the Republic via off-shore areas should be subject to taxation – an off-shore tariff in the amount of 15% of the total cost of goods.

Problems with registration and control and fighting against smuggling in the Republic of Moldova fall under the jurisdiction of criminal enforcement within the Customs Department and the jurisdiction of criminal enforcement by the Centre to Combat Economic Crimes and Corruption.

The criminal enforcement division of the Customs Department performs criminal enforcement regarding offenses stipulated in arts. 28 (Smuggling) and 249 (eluding from paying customs duties) of the Criminal Code.

The division of criminal enforcement at the Centre to Combat Economic Crimes and Corruption performs criminal enforcement regarding offenses stipulated in arts.191, 195, 236-261, 324-336 of the Criminal Code, according to Law No.1104-XXV of the Republic of Moldova by the Centre to Combat Economic Crimes and Corruption of 6.06.2002.

23

Transparency International - Moldova

3. Statistical analysis of the marketing of petroleum products in the Republic of Moldova 3.1. Classification of petroleum products In accordance with the Harmonized System of description and codification of goods, petroleum products are divided into three groups of oils: light, medium, and heavy.

The first group of products consists of oils: (a) meant to be subjected to a specific treatment; (b) meant to be subjected to chemical transformations; and (c) meant for different uses. Specific fuel, fuel for engines and other fuels are included in the sub-group of oils meant for different uses. The following types of fuel for engines are used in Moldova: A-72, A-76, A-90, A-92, A-95 and A-98.

The second group of products medium oils includes jet fuel and other types of kerosene.

The third group of petroleum products heavy oils consists of diesel oil, crude oil and lubricating oils. The first two products from the third group are also grouped according to sulphur content.

3.2. Importation According to the data by the Department of Statistics and Sociology of the Republic of Moldova, the import volume of petroleum products in the Republic of Moldova in 2003 accounted for 606 thousand tons and increased by 14.3% as compared to 2002, and compared to 2000 by 30.5% (Table 1).

24

25

3 864

66 268

2 747

5 639

14 749

Kerosene (including jet fuel)

Diesel oil

Fuel oil

Oils

Liquid gas

56,2

11,7

21,5

284,8

14,9

202,5

1,000 tons

*

Data do not include the export-import operations of economic agents from the left bank of the river Nistru.

Source: the Department of Statistics and Sociology.

52 535

USD 1,000

2003

Petrol

Name of product

Table 1. Import of petroleum products in the Republic of Moldova* Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Transparency International - Moldova

The volume of imports in economic terms during the indicated period increased by 32.2% as compared to 2002 and by 23.2% as compared to 2000, reaching a level of about USD 150 million. This divergence between the evolution of volume and monetary value is explained by the fact that in 2001-2002, the prices of petroleum product imports were falling, and in 2003, they rose in all categories of these products. The evolution of imports of petroleum products during 1998-2003 is presented in Figure 1.

During 1998-2001, a continuous decrease of the volume and monetary value of imports of all types of petroleum products was achieved, reaching a minimum level in 2000, when the volume of the import of petroleum products reached the level of 48.7% as compared to 1997.

The essential reduction of the volume of imports took place under the influence of the following factors: (1) worsening of the economic and social situation in Moldova, (2) increasing the cost of import of petroleum products, including excises, taxes for obtaining the license, etc., and (3) growth of illegal imports.

F ig u re 1. T h e evo lu t p ro d u cts in th e R ep u ( 1 200,0 1 000,0 800,0 600,0 400,0 200,0 99 20

19

98 19

97 19

19

96

0,0

Y

Note: Data on liquid gas are presented only for 1999-2003.

Source: Based on the data from the Department of Statistics and Sociology.

26

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

In 2001, the decrease in the volume of petroleum products imported stopped and registered a slight increase as compared to 2000. But, despite the increasing trend that followed in 2001-2003, the volume of petroleum products imported in 2003 is, however, at the level of 63.6% as compared to 1997, when about 953 thousand tons was registered.

As for the imports for each category of products, the situation in 2003 compared to 2002 is as follows: fuel registered an increase by 20.6% of the imported quantity, diesel oil – by 14.3%, liquid gas – by 14%.

However, as compared to 1997, the imports of petrol and diesel are at a level of 70.5% and 86.1% respectively, the trend being the same as the general trend on the total of imported petroleum products. Liquid gas registered a continuous increase during 1999-2003. The import of kerosene registered a relatively stable evolution, with insignificant oscillations, reaching in 2003 a decrease by 2.6% as compared to 2002 (placing itself at a level of 75% as compared to 1997). Imports of crude (fuel) oils and oils achieved a significant continuous decrease year after year reaching in 2003 the level of 8.5% and 27.7% respectively in 1997.

During the period of 1996-2003, important structural changes took place in the field of petroleum products importation. Thus, the volume of petrol as an import of petroleum products oscillated between 25 and 33.4%, indicating a slight growth trend. Diesel oil imports had a continuous growing proportion during this period, reaching the level of 47% in 2003 as compared to 33.8% in 1996. The weight of fuel oil imports, though, registered a drastic decrease – from 32.5% in 1996 to 3.5% in 2003. Imports of kerosene registered a relatively stable proportion, with insignificant oscillations. A decreasing trend was registered in the imports of oils that equaled to 1.9% in 2003, about twice as much as in 1998 or over three times smaller than in 1996.

These trends are represented graphically in Figure 2.

From a geographical perspective, petroleum products were primarily imported from the Ukraine, Romania, Belarus and Russia. During 199827

Transparency International - Moldova Fig. 2 The evolution o 50,0 45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 1996

1997

1998

1999

Source: Data of the Department of Statistics and Sociology.

2003, the share of these four countries was maintained at the level of over 95% (96.1% in 1998 and 95.4% in 2003), registering a slight diversification of exporting countries in 1999-2000, when the weight of those four countries decreased to 86.8% and 94.2% respectively. But radical changes took place among the top four. The Ukraine, which in 1998 had only 6.8% of the imports of petroleum products in the RM, registered a continuous ascent reaching the share of 62.3% in 2003, placing itself in the first position. Romania, from the first place in 1998 (with a share of 53.3%) goes to the second place in 2003 with the share of 16.2%. The weight of Belarus registered a growing trend from 11.4% in 1998 to 14.2% in 2003, with a maximum value (19.7%) in 2001. The share of Russia decreased during this period from 24.6% in 1998 to 2.8% in 2003 (Table 2).

We can also mention that the structure of imports by exporting countries was different for certain categories of products. For example, over 98% of the imports of petrol, diesel oil and kerosene are from four countries (The Ukraine, Romania, Belarus and Russia) and less than 2% from 28

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Table 2. The structure of the import of petroleum products by exporting countries Exporting country

2003 1,000 tons

2002 %

1,000 tons

%

The Ukraine 377,7 62,3 280,1 52,8 Romania

98,1 16,2 127,4 24,0

Belarus

86,0 14,2 92,6 17,5

Russia

16,7

2,8

17,3

3,3

Other countries

27,7

4,6

13,1

2,5

Total

606,1 100,0 530,4 100,

Source: Estimations were done on the basis of data of the Department of Statistics and Sociology.

other countries. For the imports of oils and other petroleum products, the list of exporting countries is longer (Germany, Slovakia, Lithonia, Lithuania, Slovenia, Poland, Bulgaria, Israel, Estonia, USA, Turkey and other countries).

The Ukraine had the greatest proportion in the import of petroleum products in 2003 (62.3% or 377.7 thousand tons). This country especially exported diesel oil in the amount of 207.3 thousand tons (72.8% of the total import of diesel in the Republic of Moldova); petrol in the amount of 111.0 thousand tons (54.8% of the total import of the country); fuel oil – 19.6 thousand tons (91.2% of the imported fuel oil) and liquid gas in the amount of 36.3 thousand tons (which represents 64.6% of the total imports of liquid gas). Moreover, 21.4% of the total imported oils were imported from the Ukraine (about 2.5 thousand tons).

Romania was the country from which in 2003, over 98.1 thousand tons of petroleum products were imported which represents 16.2% of the total imports of the country. This quantity was achieved from 48.9 thousand tons of petrol (or 24.1% of the total imported petrol); diesel 29

Transparency International - Moldova

oil in the amount of 42.2 thousand tons (i.e. 14.8% of the total imports of diesel) and liquid gas in the amount of 6.8 thousand tons (which represents 12.1% of the total import of liquid gas). Imports of fuel oil and kerosene from this country were continuously decreasing, thus, in 2003, these had insignificant impacts on the structure of imports from Romania.

The imports of petroleum products from Belarus were about 86 thousand tons in 2003, which represents 14.2% of the total of imports of these categories of goods. Belarus is one of the main suppliers of petroleum products from the category “other petroleum products” (bitumen products, paraffin, stearin, cokes, asphalt, petroleum oils meant to specific processes, others). In 2003, 12.1 thousand tons of such products were imported from Belarus (about 84% of the total imports of these products); 38.5 thousand tons of petrol (or 19% of the total import of petrol); 32.4 thousand tons of diesel oil (respectively 11.4% of the total imported diesel oil); 1.9 thousand tons of fuel oil (8.8% of the total); 1.1 thousand tons of oils (about 9% of the total oil imports), as well as insignificant quantities of kerosene and liquid gas.

During 1998-2003 the import of petroleum products from Russia dropped significantly, reaching a volume of 16.7 thousand tons in 2003, which represents 2.8% of the total imports of these products. Russia is still one of the main suppliers of oils, ensuring 50.3% of the imports of oils in 2003 (about 5.9 thousand tons). Russia exported to Moldova about 6 thousand tons of liquid gas (or 10.6% of the total imports of liquid gas); 2.7 thousand tons of fuel (1.3% of the total) and 1.3 thousand tons of other categories of petroleum products (i.e. 9.2% of the total amount of imports of these categories of products). The imports of diesel oil were insignificant in 2003.

Less significant proportions of imports in 2003, as compared to imports from previously mentioned countries, are attributed to Lithuania, Slovakia and Lithonia. Imports from other countries are insignificant.

30

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Importers. Changes in the petroleum market of the Republic of Moldova are characterized by reducing the number of economic agents that specialize in the field of import and retail trading of petroleum products, and at the same time, by increasing the number of agents that specialize in the field of retail trading of these products. If in 2001, there were over 70 agents registered, the active goal of which was import and retail trading of primary petroleum products (petrol and diesel oil), then in 2003 this activity was practiced by 45 economic agents. It should be mentioned that over 50% of the imports of petroleum products result from 5 importing companies. Unit prices on the import of petroleum products vary essentially depending on the importer, exporting country and season. During 2001-2002, a decrease of import price was registered which was also influenced by the introduction of pre-shipment inspections. Beginning with 2003, import prices are in continuous growth as a result of changes in the world market.

The biggest volume of petrol imports were made by the CFC Lukoil Moldova Ltd. (41.4% of the total), the CFC Petrom-Moldova JS (13.2% of the total) and Valiexchimp Ltd. (6.8%).

As for the imports of diesel oil, the biggest share is of the CFC Lukoil Moldova Ltd. (39.6% of the total), JSC Tirex-Petrol (15.7%), the CFC Petrom-Moldova JS (11.9%) and Armamil-Com Ltd. (3.9%).

The biggest importers of liquid gas were the firms CFC Lukoil Moldova Ltd. (47.7%), Gazflaur Ltd (13.5%), Tat-Petrol Ltd (9.5%) and Gaz-Tat-Grup Ltd (7.2%).

It is interesting that over 75% of import transactions of petroleum products are not concluded directly with the suppliers (producers), but through intermediary off-shore companies. This fact should not be neglected because through such transactions the schemes of legal tax dodging are carried out (tax evasion) and moreover, the capitalization of enormous amounts of income abroad.

31

Transparency International - Moldova

Import prices. The analysis of the average import unit price (customs cost of goods), for 1998 – 2003, presented in Table 3, shows that for the majority of petroleum products the cost of export expressed in USD registered a considerable growth in 2000, registering the highest prices in customs for the majority of petroleum products. This is explained by price growth for petrol on the world market, as well as through the fact that importers capitalized their income outside the country (made imports through intermediary off-shore companies).

Table 3. Average unit prices for the import of petroleum products Name of product

USD/ton 2003 2002 2001

200

Petrol

259

227

265

29

Kerosene

259

226

250

26

Diesel oil

233

204

236

25

Fuel oil

128

122

148

16

Oils

482

397

381

32

Liquid gas

262

215

262

27

Source: estimates based on the volume and monetary values of imports

In 2001 the prices of petroleum products registered a decrease compared to the prices of 2000, a trend that was maintained also in 2002 when there were the lowest prices for petroleum products imported during recent years. This decrease of import prices for petroleum products is a result of the decrease of prices by producers from the Ukraine and Belarus and the introduction of pre-shipment inspections beginning January 1, 2002.

In 2003, import prices grew in all categories of petroleum products, the most significant growth registered for liquid gas (121.9% compared to 2002) and oils (121.3% compared to 2002). As for petrol, import prices grew on average by 14.3%, for kerosene by 14.8% and for diesel oil – 32

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

by 14.2% compared to prices from 2002. A less significant increase of average import prices was registered for fuel oil. It should be mentioned that only the dynamics of oil prices was different compared to the general tendency, they registered a continuous increase during the entire period (Figure 3).

Fi g . 3 Dyn ami fo r th e i mp o r t o

Price, USD/ton

600 500 400 300 200 100 0 1998

1999

2000

Petrol Oils

It is interesting that unit prices for the import of petroleum products essentially vary even within every year, their evolution during the year characterized by a seasonal aspect. For example, in the case of petrol, import prices in the first two quarters of the year are under the average, and in the third and fourth quarters grow above their annual average.

Import prices for diesel oil in the first two quarters of the year are smaller than their average annual prices, in the third quarter these are close to the annual average, and in the last quarter of the year grow considerably.

As for the import of liquid gas, the highest unit prices are registered in quarters I and IV, and in II and III are under their annual average (Table 4). This fact should be considered while programming and creating stocks necessary to ensure the energy security of the state, especially if we take into account the fact that the consumption of primary petroleum products in the Republic of Moldova has a strong seasonal effect.

33

265,0

Quarter III

34

205,4

227,3

Source: evaluation based on data of the National Agency for Energy Regulation.

Quarter I

Year 2002

276,8

239,0

Quarter II

Quarter IV

246,4

259,4

USD/ton

Quarter I

Year 2003

Analyzed period

Pet

Table 4. Dynamics of average import prices on petrol, diesel and liquid gas by quarters

Transparency International - Moldova

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Table 5 presents the average prices for the import of petroleum products calculated for the most important exporting countries.

In 2000, the cheapest petrol was imported from Romania; the average price being USD 276 per ton, exceeded by Belarus 5% and the Ukraine by 20%. The same classification was in 2001, with a tendency of diminishing prices for the import from these countries. In 2002, the prices were almost at the same level for all exporting countries, reaching the lowest levels from recent years. In 2003, import prices on petrol grew considerably for all exporting countries, but the top countries reversed Romania had exported the most expensive fuels (USD 276 per ton), and the cheapest were from the Ukraine (USD 241 per ton).

The dynamics of kerosene prices registered the same tendency as petrol.

Table 5. Average unit price for the import of primary petroleum products by exporting countries (USD/ton) Name of prod.

Romania 2003

2002

2001

2000

Petrol

276

207

247

276

Kerosene

194

236

Diesel oil

237

189

237

255

Fuel oil

250

228

Liquid gas

242

207

277

316

Source: evaluation based on the data on volume and monetary values of imports by the Department of Statistics and Sociology.

As for diesel oil, the lowest prices were registered alternatively during 2000-2003 as the imports from Romania and the Ukraine respectively, imports from Belarus registering the highest prices. In 2003, the cheapest diesel oil was imported from the Ukraine (USD 229/ton) and Romania (USD 237/ton). In spite of price growth by over 26% compared to those from previous years, however, import prices from Romania and the 35

Transparency International - Moldova

Ukraine are not higher than in 2001. Prices for imports from Belarus grew by over 30% in 2003 compared to those from 2002, registering a growth even compared to 2001 (USD 251/ton).

The lowest prices for imports of fuel oil were offered during this period by the Ukraine and the highest by Romania.

Prices for liquid gas had a similar tendency as the prices for petroleum products. The smallest prices were fixed during this period for imports from the Ukraine, except for 2003, when the smallest price was registered from Romania (USD 242/ton), with the Ukraine offering higher prices by over 7.5%.

Import prices are influenced by means of accumulating profit by the importing companies (in Moldova or outside depending on the financial interests of the importer), as well as by the evolution of prices on the world markets of petroleum products.

3.3. Consumption Size and structure of consumption. The evolution of consumption by various fields from 1994 up to 2002 of petrol, diesel oil and fuel oil is presented in Table 6. The analysis of these data shows the total consumption of the primary petroleum products as consumption reduced considerably during 1994-2000, reaching a minimum level in 2002 (356 thousand tons), or 2.7 times smaller as compared to 1994. The highest decrease of 7.7 times was registered for fuel oil and the smallest of 1.8 times for petrol, and 2.0 times for diesel oil. Consumption of jet fuel is relatively stable and is about 21 thousand tons annually. Beginning with 2001, the consumption of petroleum products has grown with an increase of 7.6% compared to 2000, growth that had also continued in 2002 (by 17.5% compared to 2001). However, the level of consumption for these products is only 46.7% when compared to 1994.

From the analysis of the structure of petrol consumption during 1994 – 2002, one can see the highest growth registered by consumer population, 36

37

Industry

Total

Others

Communal services and population

Agriculture

Transport

Industry

Total

Others

Population

Agriculture

Transport

Field of application

Source: the Department of Statistics and Sociology.

Diesel oil

Petrol

Name of petroleum product

Table 6. Consumption of primary petroleum products during 1994 – 2003, divided by sectors of national economy (thousand tons) Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Transparency International - Moldova

which reached 127 thousand tons in 1997, which is 270% compared to 1994 and 155% compared to 2002. The weight of population consumption from the total petrol consumption is over 50% in recent years, and in conditions of consumption growth, the weight of this segment will remain at this level. Total consumption of petrol in the transport sector has diminished from 75% in 1994 to 43% in 2000 and 49% in 2002.

The key consumers of diesel oil in 2002 are transport (46%), agriculture (29%) and communal services and population (22%). The consumption of diesel oil by the population grew during the entire period by over 8 times. In future years, the consumption of diesel oil in agriculture and the consumption of diesel oil by the population should be analyzed together, because as a result of the privatization of agricultural lands, the consumption from agriculture may be confused with the consumption by the population.

The consumption of fuel oil decreased 11 times from 1994 up to 2002, maintaining its structure. The greatest factor (85%) of the total consumption of fuel oil is indicated as production of thermal energy.

Consumption prices. The analysis of selling prices of primary petroleum products on the domestic market in 2002 shows a decrease of wholesale prices by 15-17% on petrol and 6-8% on diesel oil compared to prices of 2001. Retail prices are at the same level with a slight variation of 2-3% growth.

Factors that influenced these changes are: (1) growth of competition between companies that operate in the field; (2) low prices of petroleum products on the market in the Ukraine and Belarus; (3) direct imports of petroleum products from Romania; and (4) introduction of the preshipment inspection. The tendency of price decreases of petroleum products ceased in June 2002 and has registered a slight increase since then.

38

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Average retail trade prices on petrol and liquid gas registered an increase in 2003, but not as significant as in the case of import prices. The retail prices on diesel oil reduced by about 8.9%.

The growth of retail prices was slower than the growth of import prices, and in some cases their decreasing was due to dollar depreciation as compared to the main international currencies and MDL. Retail prices for petrol and diesel oil vary depending on the region and modernization of the filling stations. As a rule, the highest prices are registered in Chisinau and county centers of the republic. However, if in 2001 the variation of retail prices in the territory of the Republic of Moldova reached the level of about 7%, in 2003 the prices were more homogenous in territorial aspects, their variation about 1-2%. This is due to the concentration of the petroleum market and expanding the retail distribution network of big importers that, by placing their filling stations in all territorial structures, contributed to the homogenizing and maintaining of retail prices on petroleum products.

The main price makers on the market are the biggest importers of petroleum products Lukoil Moldova Ltd, Petrom-Moldova JSC, Mabanaft-Moldova Ltd, AS Petrol Moldova Ltd. We should mention that the homogenization of the selling prices contributes indirectly to combating smuggling of petroleum products.

It is known that illegal importers usually try to sell their goods cheaper than market value in order to sell it quicker. And since the prices tend to be homogenized, the appearance of goods with smaller prices on the market raise suspicions regarding their origin and quality. On the other hand, maintaining a market price would require a longer period to sell the smuggled products and this increases the risks of smugglers being discovered. So, an adequate price policy would constitute another measure of prevention for the smuggling of petroleum products.

39

Transparency International - Moldova

3.4. Distribution network According to the legislation in force, the marketing of petroleum products in the Republic of Moldova is licensed. Companies can hold two types of licenses: wholesale trade and retail trade of petroleum products.

The first ones can trade the products only from petroleum deposits.

During 2003, 45 economic agents carried out imports and wholesale trade of petrol, diesel oil and kerosene. If we include the trading of fuel oil, then the figure will be 62 economic agents, the main players on the wholesale market of petroleum products. The decisive weight on this market belongs to the same agents named in the chapter “Importers”.

At the end of 2003, there were 30 petroleum deposits in the territory of the Republic of Moldova with a total stocking capacity of about 279.4 thousand tons and 7 deposits of liquid gas with a total stocking capacity of about 5.9 thousand m3 (Table 7).

Only companies that own or rent filling stations can get a license for retail trade. The retail distribution network of petrol and diesel oil consists of 493 filing stations, which belong to 188 economic agents.

The total capacity of registered stations is about 77.9 thousand fuelings per day, and their total stocking capacity is about 51.4 thousand m3.

Out of the total number of stations, 132 belong directly to the importers.

In Chisinau there are 91 filling stations or 18% of the total number and 5 deposits (4 for stocking petrol and 1 for stocking gas). In Table 7 one can see the territorial distribution of filling stations as of the end of 2003.

Out of the total number of these stations, there were 395 petrol and diesel filling stations at the end of 2003 in the Republic of Moldova (10 stations more than in 2002) and 120 gas stations (58 stations more than in 2002).

40

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Table 7. Filling stations and deposits of petroleum and gas products placed in the territory of the Republic of Moldova No./ R

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Location

Chisinau municipality Anenii Noi Criuleni Dubasari Ialoveni Straseni Baltsi Mun. Singerei Glodeni Falesti Riscani Causeni Stefan Voda Cainari Orhei Soldanesti R i

Stations in total

91 14 19 8 14 13 16 7 5 9 15 7 5 3 22 3 6

Source: Government Decision No.929 of 04.08.03, Annex No.5, Official Gazette No.170172/971 of 08.08.03.

41

Transparency International - Moldova

According to the placement scheme of filling stations submitted recently to the Government for approval, during the next four years the number of filling stations shall double and will reach some 808 stations. Many new stations are going to be placed in rural areas.

We can affirm that the development of the retail distribution network of petroleum products not only has positive effects on the market and on the degree of satisfying the consumers, but also represents an extra constraint for those that try to distribute smuggled products. The automated System of keeping records of petroleum products was implemented for the same purpose. It also requires the equipment at all filling stations with cash registers to maintain fiscal memory. This system should ensure efficient monitoring of primary petroleum products and their sales in the territory of the Republic of Moldova.

42

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

4. Factors that stimulate tax evasion and smuggling Key stimulants of smuggling are the differences of prices and tax systems in different countries. If any product may be procured in a country at a certain price, and in other country the same product can be sold at a higher price (because it includes higher excises and customs tariffs), the temptation exists to import this product avoiding import taxes and duties, including illegally.

From the economic point of view, the gross benefit of the smuggling is equal to the amount of duties and taxes that had to be paid, should these products be imported legally. So, an important condition to fight against smuggling would be the collaboration at the interstate level in order to harmonize the policies related to prices and taxation of petroleum products.

On the other hand, illegal import of petroleum products also implies some risks. In the case when illegal importers are caught, they risk confiscation of the smuggled goods, confiscation of the transport unit used to smuggle goods, and a criminal file. In these conditions, few resort to the import of smuggled petroleum products without making sure they will not be caught. Thus, they offer bribes to persons with control functions fighting against smuggling. That is why the fight against smuggling will not be efficient as long as it is not correlated with the fight against corruption, protectionism, lack of responsibility and as long as the transparency and monitoring of the activities of all control bodies is not ensured.

43

Transparency International - Moldova

Another factor that is crucial for importers in making a decision to smuggle is the level of risk related to smuggling operations. The smaller the risk (and less risky) of illegal importing of petroleum products regarding legal procedures, the greater will be the temptation for smuggling. For this purpose, the smugglers use the most unexpected methods, sometimes so simple such as on the pretext of a legal petroleum import as transit to Transnistria, the petroleum products still remain in Moldova not reaching the official destination. Tankers from Romania are parked on the customs territory in the Republic of Moldova waiting for customs escort to Transnistria. While they wait for the escort, the tankers go nearby and illegally unload the fuel and are filled with water (in order to appear as a loaded vehicle). Tankers with water, escorted by customs, go to Transnistria, reach its territory, document the export and pour out the water. Later, they return without cargo to do another illegal route.

Generally, the cross border area along the River Nistru is the most affected concerning the smuggling of petroleum products due to the Transnistrian conflict, which makes it impossible without technical and engineer equipment and security of the border with Transnistria. The lack of an agreement on state border crossings also creates difficulties in ensuring border security.

All these factors lead to the violation of the state border of Moldova – Ukrainian, first of all, via smuggles goods, which causes a considerable material prejudice to the Republic of Moldova.

One of the causes of the legal flow of petroleum products from abroad is the fact that in Transnistria since April 1, 2003, the excises on petrol have been set in the amount of USD 40 per ton, and for diesel oil – USD 20 per ton. In the Republic of Moldova the excises on these products are twice as much.

The length of the administrative border that divides the Transnistrian region from the Republic of Moldova is 443 km. But, until a final 44

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

settlement of the conflict, it is difficult to ensure the security of the state border between the Republic of Moldova and the Ukraine. For more than a decade this region represents a black whole in the economy of Moldova, and certain parties in Transnistria, Russia, the Ukraine and Moldova are interested in maintaining it.

Therefore, the advantage obtained by the smugglers of petroleum products or gross benefit of petroleum product smuggling (i.e. their material advantage as compared to the legal imports) equals the amount of legal payments they should pay. But if we deduct the costs connected to their transportation: • Bribes to public servants, forging documents, etc.

• risks due to the failure of smuggling, then, the net benefit as a result of illegal traffic will equal to the difference between the gross profit and these costs.

So, fighting against smuggling should follow the minimization of the net profit that could be obtained by the smugglers. To this extent, it is recommended besides harshening the control and punishments for smuggling (i.e. to increase the risks to smugglers), to also create some favorable conditions for legal importers of petroleum products (i.e. decreasing the gross profit). When the legal imports would bring more profits or at least equal to the profits obtained illegally, the temptation for smuggling with petroleum products would be suppressed.

45

Transparency International - Moldova

5. Models of theoretical approaches to smuggling In order to assess the impact and to elaborate effective measures to fight against smuggling, it is necessary to understand how the smuggled petroleum products react on the market. Further, we will present several theoretical models from which one can see how smuggled petroleum products replace legally taxed products on the domestic market and how these influence the market price and consumption8.

5.1. Simple supply and demand model A simple model of supply and demand of the legal course of petroleum products (taxes paid) is presented in Figure 4. This model represents legal suppliers which compete with each other, and the smuggling of petroleum products does not exist.

The consumption of petroleum products depends on many factors. It is well known that the price is an important factor when determining the demand. In this case the demanded quantity is in inverse ratio to the price the curve of demand of petroleum products has the form of a decreasing slope. This is very important, because any increase of the price in a short period of time will decrease the consumption.

The capacity of supply with petroleum products depends on the level of profit the importer receives. On the drawing, the initial price for one liter of petrol is P1. In this scheme, the supply of petrol shall be The model is analogical to that described for tobacco products in the paper of Merriman David Understand, Measure and Combat Tobacco Smuggling , 2001.

1

46

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

P r i c e

Fig. 4. The effect of tax growth on the price and balance quantity in a condition of perfect competition and without smuggling Curve of demand

New curve of supply after increasing the tax

P2 Initial curve of supply

P 11

Q2

Q1

Quantity

determined by the level of price P1. The quantity of petrol that will be sold on the commodity market Q1 may be determined by finding the cross point of the curve of demand and supply. By introducing a tax t, the price increases from P1 to P2= P1+t. In this case, the volume of petrol that will be sold shall decrease up to Q2 and will be determined by the cross point of demand and creates a new supply curve. So, in this scenario, the balance price increases from P1 to P2, and the sales go down from Q1 to Q2.

5.2. Model with smuggled petroleum products Unfortunately, the tax on petroleum products is not an impediment for smugglers. Figure 5 presents an economy where the phenomenon of smuggling with petrol is present. It is observed that prices at which the smuggled petroleum products may be sold have a greater range. The quantity of smuggled goods is directly proportional to the prices that 47

Transparency International - Moldova

P r I c e

Fig. 5. Smuggling, legal demand, quantity and equilibrium price on fuel in a condition of perfect competition Demand curve

P1

Qsmugg

Qt

are set on the market. That is why, even in a short period of time, the supply curve of smuggled petroleum products goes up. The higher the tax, the more smugglers are willing to bring petrol illegally. The total quantity of petroleum products offered in the economy equals to the sum of the quantity delivered by smugglers and quantity brought by legal suppliers. In Figure 5, the smugglers offer the quantity Qsmugg of units, while the price is P1. Total demand at market price P1 is greater and can be found at the cross point of the demand curve and supply curve of petrol offered on the official market Qtotal. So, in this case, the quantity of petroleum products marketed legally Q legal shall be determined as the difference between total quantity and illegal quantity: Qlegal = Qtotal – Qsmugg. It should be mentioned that in this case, the smuggling of petroleum products does not influence the balance price or the total consumption. It only substitutes a part of the legal market.

LetÂ’s suppose the taxes on petroleum products grow with a certain amount t. Thus, the price will go up from P1 to P2= P1+t. In this case, the supply curve shall move up to the level P2. As a result, the quantity of smuggled petrol will grow, and that marketed illegally will decrease (Figure 6).

48

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

2 H 1 ?

A

Fig. 6. Smuggling, legal supply, quantity and equilibrium price of petrol in perfect competition: the case of increasing taxes Demand curve

P1

3smugg 3smugg

3total

3

The conclusion is as follows: in a short period of time smuggling does not influence the level of consumption, but affects market shares of legal suppliers. This should be understood by legal importers and they should join forces together with control bodies against smuggling.

The models presented above are foreseen for a short period. During a longer period, the supply of petroleum products will depend on the price level. For a higher price, the importers will be willing to offer more product. That is why the aggregate supply curve in a short period of time will be positive. Practically, this means that the balance price on the market will be lower, thus diminishing the income of the legal importers. At the same time, it will stimulate the increase of total consumption, simultaneously increasing the proportion of products imported illegally. At first sight, such a situation would be convenient for the consumers of petroleum products. A price decrease and a consumption increase are desired by any consumer. But this model also proves that the increase of consumption due to price cutting will be smaller than the increase of the quantity of products imported illegally.

As a result the entire economy is damaged. Moreover, increasing taxes in these conditions will lead to a growth of smuggling.

49

Transparency International - Moldova

6. Methods of evaluating the smuggling of petroleum products In its essence, the smuggling phenomenon is an illicit part of the shadow economy. Thus, no exact information about it can be found as well as no concrete indications on exactly how the size of smuggling in any field be evaluated. We tried to present in this paper some methods and models of smuggling valuation used in international practice. Some of these methods have been used by us to assess the extent of petroleum product smuggling in the Republic of Moldova. We can mention the following methods: • interviewing experts; • comparing statistics of the countries between which export-import transactions with petroleum products take place; • comparing registered sales and consumption estimated through calculations; • analyzing off-shore transactions.

The results obtained by applying these methods are presented below.

6.1. Focus group study Usually when there is no statistical information about a phenomenon that is going to be studied, the solution is to exploit the experience and opinions of experts from the respective field. That is why we used the method focus group, which consists in selecting a group of experts, specialists in the given field, who were asked to give certain judgments 50

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

regarding the concerned problem. To estimate the size of smuggling of petroleum products, a group of 15 importers and traders of petroleum products in Moldova (owners, financial directors, and sales directors) was interviewed. The respondents were selected randomly and their number represents about one third of the main importers of petroleum products in Moldova. The answers to the questions from the questionnaire, as well as additional discussions, were used to evaluate the degree of smuggling, factors that encourage the importers to resort to smuggling, most frequently used ways of smuggling, as well as measures that should be taken to eradicate smuggling of petroleum products in the country. Following are the results of the discussions with the main participants of the petrol market.

Does there exist or not any smuggling of petroleum products in Moldova? Unfortunately, we think that it exists, because 100% of the interviewed persons confirmed this. There is one good thing – the degree of smuggling of petroleum products, in the opinion of the respondents, registered a decreasing tendency in recent years (the highest values registered in 1998-2000).

Fig. 7. Ways of illegal im por (on Import w ithout decalring the goods incust Diminishing the quantity of decalred go Declaring under other categories of go Diminishing the value in cus O

51

Transparency International - Moldova

We tried to find out which are the most popular ways of illegal evasion of taxes and duties on the import of petroleum products. Over 64% of respondents mentioned that smuggled products are introduced into the country without being declared at customs. That is, either they are crossing the border by roads which are not controlled by customs points (especially in Transnistria and the Ukraine) or bribes are offered to the representatives at the customs points (including the border police). On the second place is the lowering of the value of goods declared in customs (in order to decrease the payment of VAT), a way that was indicated by 55% of those interviewed. Quite frequently, the diminishment of the quantity declared in customs is also used (to reduce the payment of excises and VAT), declared by 45% of the respondents.

As for the proportion of smuggled petroleum products in the petrol marketed in Moldova, the answers were quite homogeneous about 10% (in the opinion of 73% of respondents); 18% of interviewed persons evaluated the proportion of smuggled products at a level of 10-25%, and 9% of the interviewed at 30-40%.

Even if we evaluate the smuggling of petroleum products at 10% of legal imports, this percentage represents quantities in the amount of about USD 16 million in 2003 (customs value!). For example, if we consider that about 22.5 thousand tons of petrol and 31.6 thousand tons of diesel oil (supposing that these represent 10% of the total quantity imported legal and illegal) were imported illegally, then only for excises and VAT2 the state budget could have collected about MDL 88 million (without considering the collection of income tax and other taxes and payments).

In importers opinion the most favorable part of the national border for illegal import of petroleum products is the border with Transnistria 9 Calculations were made based on the level of excises of MDL 1200 per one ton of petrol and MDL 500 per one ton of diesel oil. VAT is calculated in the amount of 20% of the customs value, after the excises were calculated; the average import price of petrol was USD 259/t, and of diesel oil USD 233/t; average annual exchange rate MDL/USD 13.93 (n.a.).

52

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Fig. 8. Which are the of smuggled p Import through Transnistria

Import from Ukraine

Transit to Transnistria

Import from Russia

9

Import from Romania

9 0

Import from Belarus

0

20

(declared by 91% of the respondents), followed by the border with the Ukraine (64% of respondents).

About 55% of the interviewed persons declared that the main cause that motivates the importers to resort to smuggling is the high rate of excises and VAT. On the other hand, only 27% of respondents declared that importers resort to illegal import in order to avoid losses in their economic activity, 64% of respondents confessed that they do it in order to obtain excess profit.

As for the measures that should be applied to optimize the regulation of the petroleum market in Moldova, the most frequently named were: • to set severe customs controls; • to impose EURO standards on all imported petroleum products and rigorous quality control (both in customs and at the filling stations and deposits); • to harden the Penal Code in order to punish the importers of smuggled petroleum products and to withdraw their licenses; 53

Transparency International - Moldova

• to collaborate with Transnistrean authorities for information exchange and combating smuggling; • to simplify the certification procedures; • to avoid double taxation by applying VAT on the goods value after which the excises were calculated; • to reduce by 50% the fee for the license.

6.2. Comparing the statistics of trading countries If the importing country applies taxes and duties on petroleum products at importing points, the importers are predisposed to hide or under appreciate the data on the import of petroleum products. They can offer bribes to official representatives of customs to falsely register the composition or value, or can avoid the control point by entering illegally into the country.

One of the possibilities of tracing and assessing the smuggling of petroleum products is the method of comparing statistics of countries between which export-import transactions of petroleum products take place.

This method consists of comparing the information that relates to external trade flows of the country where the smuggling degree is assessed with the same information of countries with economic relations.

International statistics data have substantial information on the legal flow of petroleum products of countries. Each country registers the quantity of export of petroleum products by importing countries. And respectively, each country registers the quantity of its import of petroleum products by exporting countries.

In fact, when a country exports a quantity of products into another country, then the quantity of this product imported by the beneficiary country should have the same value. In practice these two values may be different (due to registration errors, time gaps, etc.). However, if the 54

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

differences are substantial and are consistent, then we have all the reason to believe that the (positive) differences of registered quantities were introduced illegally. The advantage of this method is that it is based on official statistical information and its application is direct.

In this paper, the authors made a comparison of data that relate to the trade of petroleum products between the Republic of Moldova and Romania.

Table 8. Trade of petroleum products between the Republic of Moldova and Romania Indices

1

RomaniaÂ’s export to Mold thousand tons

2

MoldovaÂ’s import from Romania, thousand tons *

3

Deviations, thousand tons (3=1-2 ) Source: data from the DSS and information submitted by the Embassy of Romania * Does not include the regions from the left bank of River Nistru

The table shows that in 2000 a significant difference between the export of petroleum products from Romania to Moldova and the import of these products registered officially in the Republic of Moldova.

Moreover, by comparing the flows officially registered in these two countries by each category of products (according to the single Classified List of goods), it was determined that this difference in quantity is achieved (mostly) due to petrol and diesel oil imports. This difference of 37.8 thousand tons in 2000 (or about 14% of the import volume from Romania officially registered), represents in value terms about USD 10 million10.

About 27 thousand tons of petrol at an average price of USD 276/ton and 11 thousand tons of diesel oil at an average import price of USD 255/ton.

10

55

Transparency International - Moldova

But we can not be sure that this quantity of petroleum products represents smuggled imports from Romania for the following reason: it could represent the imports from Romania to economic agents from the left bank of the River Nistru, which Romania considers as imports to Moldova. Resulting from the fact that TransnistriaÂ’s import of energy products and fuel from countries outside the CIS was USD 12.9 million11 in 2000, it is possible that those 38 thousand tons of petrol represent the legal import of Transnistria from Romania. The Transnistrean problem is a serious problem for evaluating the smuggling of petroleum products in the Republic of Moldova. Due to the lack of collaboration and information exchange from this territorial-administrative unit, it is very difficult to make reliable estimates.

In 2002-2003 the differences registered as a result of comparing the data on the trade between Moldova and Romania was insignificant.

But it should be mentioned that during this period a general decrease in the proportion of imports of petroleum products from Romania (down to 16% in 2003 compared to 57% in 2000) was registered. During these years, the biggest part of imports of petroleum products was done with the Ukraine.

In order to make a reliable estimation of the smuggled petroleum products during this period, it is very important to monitor the trade flows between Moldova, the Ukraine and Belarus. For this purpose, detailed information regarding the exports of petroleum products from these countries to Moldova was requested, via the Embassies of Romania, the Ukraine, the Russian Federation and the Republic of Belarus. Unfortunately, we only got the required information from the embassy of Romania. That is why we did not succeed in obtaining conclusive results via this method.

11

Statistic Year Book of Transnistrean Moldavian Republic, 2002.

56

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

6.3. Comparing registered sales and estimated consumption Another possibility to estimate the size of smuggling is the method of comparing the effective consumption of the imports (resources) officially registered. If the effective consumption significantly exceeds the resources available officially (imports + modified stocks), then we can conclude that the difference of products was imported through illegal ways (smuggling).

The estimation of real consumption for primary petroleum products (petrol and diesel oil) in 2002 (and comparing the obtained results with the consumption officially registered) was made in the following categories of consumption: transport, population and agriculture. We started with examination of the dynamics of petrol and diesel oil consumption during 1995-2002, and its comparison with the trends of the main indices that characterize the activity of those three sectors (Table 9).

Table 9. Evolution of economic indices during 1995-2002 Indices

Index of the volume of petrol and consumption Index of transportation by types - by rail - by road Index of passenger transportation Index of the number of vehicles b - cars - buses and vans - trucks Index of agricultural production: - value - physical volume Source: based on data from the Statistic Year Book of the Republic of Moldova, 2003.

57

Transparency International - Moldova

Table 9 clearly shows that the evolution of fuel consumption is not similar to the evolution of other indices, thus bringing us to the conclusion that in reality the consumption of petrol and diesel oil is much greater, but that a part of this consumption does not appear in official statistics.

The estimation of petrol and diesel oil consumption in 2002 was made on the basis of statistic data, observations and a study Business planning in entrepreneurial cooperatives carried out by the Business Consulting Institute. As a result of the calculations, it was determined that the effective consumption of petrol and diesel oil of those three sectors was 499 thousand tons in 2002 (compared to 410 thousand tons according to statistical data). The data on the consumption of petroleum products by fields of use are presented in the following table: Table 10. Estimation of petrol and diesel oil consumption in 2002, thousand tons Statistica Field of use

Petrol Dies Consumption consu

Agriculture

1.0

73

Transport

80.0

11

Population

81.0

57

162.0

24

Total

Source: Department of Statistics and Sociology and the study Business planning in entrepreneurial cooperation carried out by the Business Consulting Institute, 2001.

The estimates of petroleum product consumption were made in the following way.

In agriculture, based on the estimation of average consumption for one hectare of arable land, vineyards, orchards and hay-fields: 58

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Table 11. Estimation of petrol and diesel oil consumption for processing agricultural lands Arable lands

Arable land

Surface, 1,000 hectares

D

1 842.6

Orchards

137.5

Vineyards

152.8

Hay-fields and grazing fields

379.7

Total Source: Statistical Year Book of the Republic of Moldova, 2003. * on the basis of the study Business planning in entrepreneurial cooperation , BCI, 2001.

In transport: (a) for goods12 based on the estimated petroleum consumption for 1000 tons-km and (b) for passengers13 based on the estimated consumption of petroleum for a conventional unit of distance covered; The consumption by the population, based on the number of means of transport in the population and estimated distance covered and annual average consumption (based on a study made by BCI, the annual average distance covered for 2002 was determined to be around 10,000km; the method of travel 55% with fuel-consuming motors and 40% with diesel motors; the average consumption was set at 10l/100km for petrol consuming units and 8l/100km for diesel-consuming units).

As for the transportation by rail, the consumption was estimated resulting from the specific consumption of 40.35 kg fuel for 10000 tons-km in gross terms; goods transportation by road 45.5 l of fuel for 1000 tons-km.

13 As for passenger transportation by rail, the consumption was estimated resulting from the specific consumption of 66.02kg for 10000 tons-km in gross terms; passenger interurban transportation by bus 99.6 l for 10000 pas.-km; urban transportation by minibuses based on the average distance covered of 300km/day and the number of minibuses and routes.

12

59

Transparency International - Moldova

Table 10 shows that the estimated consumption of those three sectors for 2002 is 89 thousand tons higher than the consumption registered officially, or 20%. The unregistered consumption of diesel constitutes about 80% of this quantity.

In value terms, this means illegal imports in the amount of over USD 18 million (18 thousand tons of petrol at an average import price of USD 227 per ton and 71 thousand tons of diesel at an average price of USD 204 per ton). Legally these imports would have generated collections of excises and VAT in the amount of about MDL 119 million14. We could consider that the same share of unregistered consumption (20%) is also present in other consumption sectors and then, the budget losses would be greater.

And these are just rough estimates. It is necessary to take into account the fact that smuggled products affect the rules of the game on the legal market and also the sales by official importers and distributors. It is well known that illegal importers use bribery, corruption, tax evasion and other illegal actions that can be combated and stopped together with controlling bodies.

The key problem in applying this method is, of course, a reliable estimation of the effective consumption of petroleum products. A large part of the estimations are based on selective research. And these should be treated cautiously because the consumption indicated by the interviewed persons could be diminished (or increased). That is why it is recommended to carry out periodic research – establishing the diminishing (or increasing) trends, and then, on the basis of periodic observations during a longer period of time, the real increasing or decreasing trends of consumption of petroleum products could be stated.

14 The amount of excises is calculated: 18000t x MDL1200 + 71000t x MDL500 = MDL 57.1 million; VAT = (USD 18.570 million x 13.57 + MDL57.1 million) x 0.20 = MDL 61.8 million; Total = 57.1 + 61.8 = MDL 118.9 million.

60

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

6.4. Off-shore transactions It was mentioned above that the phenomenon of smuggling is tightly connected to other phenomena characteristic of the shadow economy.

It is clear that in order to illegally import a quantity of petrol one should resort to bribery, forging documents, etc.; to sell this quantity through the retail distribution network double bookkeeping will be needed in order for these products not to be discovered, so tax evasion must be committed.

But besides these illegal methods of tax dodging and making other unofficial payments, there are other legal ways of avoidance of taxes.

Such a method is the import price manipulation through intermediary firms registered off-shore. It should be mentioned that significant sums of money, which resulted form export-import activity, are capitalized outside the country via such transactions. What is the motivation behind these types of schemes?

At first sight it seems that all these types of transactions are made for the purpose of decreasing the import price, to present a smaller value to customs. Usually, many importers do this. But it could be shown that in some cases deliberate increases of import prices can bring more benefits to the importers (and, respectively, more prejudices for the state budget).

A conventional example, in this regard, is presented in Figure 10. From this scheme we see how, due to a simple rotation of documents (Scenario B), the importer succeeds in legally decreasing the income tax payment by about 20% (in this case, for a quantity of 1,000 tons, this represents about MDL 67 thousand). Moreover, a great deal of profit is going to be capitalized abroad (USD 25 thousand). The table below presents a general scheme to indicate the costs of imported fuel for each variant from fig. 10.

61

Transparency International - Moldova

Table 12. Forming the unit cost of imported fuel * Indices

1. Official exchange rate of USD/ MD 2. Buying rate of dollar, MDL 3. Fuel density, g/cm3 4. Buying price (import), USD/ton 5. Quantity (tons) 6. Value of goods, USD ( 6=5x4 ) Value of goods according to the de 7.

MDL ( 7=6x1 ) Excises, MDL (8=5xMDL1200), e 8.

1l of fuel MDL 1200 9. Customs procedures, MDL (9=7x 10. VAT, MDL ( 10=(7+8+9)x0,20 ) 11. Ecology, MDL ( 11=7x0,005 ) 12. Security, MDL ( 12=5x0,20x1 )

* The estimation is conventional and serves to emphasize the import difference in relative amounts 62

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

Of course, this is a particular case, but knowing the total amount of income taxes paid by economic agents that import petroleum products, and the share of transactions performed via intermediary off-shore firms, an estimated value of losses to the state budget resulting from these kinds of transactions can be calculated.

Fig. 9. The scheme of transactions via off-shore accounts in the trade of petrol and diesel oil Intermediary company (off-shore)

Seller Seller sells 1,000 tons of petrol, at the price of USD 250/ton

Scenario B

Intermediary company buys 1,000 tons of petrol at the price of USD 250/ ton, after which sells it to the importer at the price of USD 275/ton

Scenario A STATE BORDER

Importer Importer buys 1,000 tons of petrol.The petrol is imported legally by paying all taxes.

At a fixed selling price in both cases we obtain: SCENARIO A Income tax:

MDL 336.1 thousand

SCENARIO B Income tax: Plus:

MDL 269.4 thousand USD 25,000 in an off-shore account.

63

Transparency International - Moldova

Legally, such transactions do not represent an infringement. But it is very sad that, besides losses to the state budget, the money capitalized outside the country will probably be used for other purposes besides supporting the development of a national economy.

7. Actions to combat smuggling of petroleum products 7.1. The Government s Action plan on fighting the shadow economy in the petroleum products market Through Decision No. 1641 of 31.12.2003, the Government of the Republic of Moldova approved an Action Plan to fight the shadow economy in the market of petroleum products. The actions elaborated during 2004 for the purpose of future implementation by the ministries, departments and bodies responsible for the control and monitoring of petroleum products include: • the creation of a single electronic Register for the Department of Border Guards and Customs Department in order to register the transport of petroleum products through customs points; • to establish permanent recording between ministries and departments authorized to allow customs clearance of petroleum products by submitting the documents that certify not only the quantity and value of imported products, but also the type and brand of product in accordance with the tariffs from the Classifying List of goods of the Republic of Moldova; • to carry out analysis of the activity of importers of petroleum products with the goal of efficiently licensing activities and correctly forming and applying prices according to the Methodology approved by NARE; • to amend the legislation in force on collection of excises and VAT on transit through the customs territory of the Republic of Moldova 64

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

and refunding these payments after getting confirmation that these were moved from the customs territory of the country; • to create mixed customs posts at the border crossing points along the entire Moldovan-Ukrainian border. To strengthen control along the entire border with the Ukraine in order to trace the cases of smuggling, tax evasion and customs duties dodging; • to elaborate together with the MIA, the Ministry of Transport and Communications and the Customs Department a Single Scheme of transporting petroleum products imported to the territory of the Republic of Moldova by modifying the normative acts in force; • to permanently perform quality control of petroleum products imported and transported via the State-owned company Calea Ferata din Moldova and other specialized road transport.

These decisions by the Government are necessary for the regulation of customs activity and combating smuggling in the market of petroleum products. However, the implementation and functioning of these measures of combating smuggling of petroleum products will not be sufficient to eradicate the phenomenon of smuggling. Since smuggling is multi-lateral, the perpetrators are aware of the imperfections in the legislation, the mazes of regulation bureaucracy, family connections in business, transparency of customs borders and the generosity of fiscal bodies. That is why, first of all, we should solve the problems that appear within the control bodies, which are the main mechanisms meant to ensure economic security of the state. The key problem that appears is that of transparency and corruption. In order to solve these, harsher punishment measures in all cases of bribing public servants from the institutions meant to combat smuggling of petroleum products.

65

Transparency International - Moldova

Conclusions and suggestions The problem of illegal import of petroleum products is largely committed in society. The negative impact of illegal import on the economy is often discussed in the daily papers, radio and TV, during government sessions and especially during election campaigns. The exact assessment of the magnitude of illegal imports, of their impact on the economy, on the state budget and especially on the society as a whole remains a difficult problem.

Given the fact that the Republic of Moldova imports one hundred percent of its petroleum products, the illegal import of these products brings enormous detriment to the official economy and state budget. The socioeconomic impact of these illegal imports is huge.

The importers resort to illegal imports in order to avoid losses in their economic activity or to obtain extra profits. The main causes motivating them to resort to smuggling are the high rates of excises, high costs of the license and high rate of VAT. It should be mentioned that the proportions of smuggling of petroleum products registered in recent years showed a diminishing trend. This is due to many factors like intensification of competition on the domestic market, implementation of automated systems of evidence, control both at the border and place of sale, thus mediating the problem to the local press and efforts made by customs officials.

At the same time, the problem of smuggling and tax evasion in the field is far from settled. One of the main causes is the lack of control on the 66

Study on Tax Evasion and Smuggling of Petroleum Products in the Republic of Moldova

eastern border, which is under the supervision of the separatist regime of Transnistria. Until the conflict in this region is settled, it is necessary to establish severe controls at the border along the River Nistru.

Moreover, it is necessary to undertake measures in order to optimize the regulation of the petroleum market in Moldova and to diminish the degree of smuggling by: • elaborating and adopting a strategy of combating smuggling, corruption, tax dodging, and influence trading through synchronization of actions; • imposing EURO standards on all imported petroleum products and severe quality control (both in customs and at the filling stations and deposits); • cooperation with exporting countries with the intention to exchange information and combat smuggling; • stimulating legal trade, supporting entrepreneurs and maintaining a system of competition on the fuel market; • stimulating the legalization of shadow incomes, amplifying the property protection and personality of entrepreneurs; • applying the methods of marking fuel with special isotopes; • hardening the Criminal Code in order to punish the agents involved in the import and marketing of smuggled petroleum products.

Based on the focus group study, the participants mentioned the following actions that would stimulate the eradication of smuggling of petroleum products: • to simplify the procedures of certification in the objectives of

petroleum products trade; • to deduct the excises on petroleum products directly at the filling stations from the retail price; • to avoid application of VAT on the value of goods that already includes the excises.

67

Transparency International - Moldova

Bibliography 1. The Criminal Code of the Republic of Moldova, Chisinau 2002.

2. The Law of the Republic of Moldova on Fighting against Corruption and Protectionism.

3. Merriman David, Understand, Measure and Combat Tabacco Smuggling, 2001.

4. Munteanu Igor, Political Corruption, Chisinau, 2002.

5. Vremea Igor, Tax Evasion in Enterprise, the SUM, Chisinau, 2003.

6. Lapteacru Vasile, Fighting against Corruption, Chisinau, 1998.

7. Carasciuc Lilia, Ciubotaru Maria, etc., Corruption and Tax Evasion, Transparency International Moldova, Chisinau, 2003.

8. Mrejeru Theodor, Corruption Offences, Bucuresti, 2000.

9. Decuseara Ion, Petroleum Market, Economic observer No.10, Chisinau, 2001.

10. Determinants of Barter in Russia, FMI, Washington, October, 2000.

11. Gately D., Streifel, Shane, The Demand for Oil Products in Developing Countries, Washington, 1997.

12. Domestic Petroleum Price Smoothing in Developing and Transition Countries, IMF, Washington, May 2001.

68