FUEL RETAIL: State Fights Monkey Business with Deposits

15 Jun 2011 • by Natalie Aster

Starting from 1 June, all motor fuel retailers are obliged to set up a deposit of EUR 1m or EUR 0.1m, depending on their position in the "food chain" of the fuel business.

With this measure, the state hopes to minimize the monkey business based on tax evasion, which robbed approximately EUR 64m from the state's coffers last year and hampered the operations of taxpaying fuel retailers.

Tax evaders - market leaders

In general, the "food chain" of fuel business consists of wholesalers, middlemen and retailers. Wholesalers have so-called excise warehouses, from where they sell fuel without VAT and excise paid. The middlemen buy the fuel, pay excise and VAT, and resell the fuel to retailers.

The monkey business has been mostly done in the middlemen level: the dishonest businessmen establish a company, buy a large amount of fuel and resell it immediately without paying a penny of taxes. After a month or two of operations and accumulation a huge amount of unpaid tax bills, the company goes bust. In order to not get caught themselves, the tax evaders use shadow owners – for instance, pensioners who are largely unaware of how their name and signature has been used.

In the end of the last year, 360 dealers in fuel products were registered in the registry of economic activities Majandustegevuse Register (MTR), along with 51 importers. At the same time, there are 395 fuel stations all over Estonia.

According to Eesti Statoil, the subsidiary of Statoil Fuel & Retail, the number of companies dealing in fuel products is abnormally high in comparison with the neighbouring markets. 153 first-time entries were made in MTR in 2010, a 300% increase compared to the previous year.

According to the tax and customs office Maksu- ja Tolliamet (MTA), 32% of the fuel retail market was contaminated with tax dodgers. The un-declared and -paid VAT in the fuel business amounted to EUR 47m.

"If one asks, who is the fuel market leader in Estonia, the answer is: the VAT-dodgers," says Helle Kirs-Toiger, CEO of Eesti Statoil, to news2biz.

Fuel chains lost market

The Estonian oil traders association Oliuhing, whose members are the influential participants of the fuel market – Eesti Statoil, Neste Eesti, Alexela Oil, Mazeikiu Nafta Trading House, etc. – lobbied to change the law, as they started to lose money due to the large extent of taxevasion. Namely, those middlemen, whose business plan was based on tax evasion, were able to sell the fuel to the stations at a lowered price. In several cases, their price was much lower than that of the company from whom the fuel was bought.

"We have lost some large-scale clients to the dishonest price competition," says Kirs-Toiger. "When a client purchasing 100,000 litres of diesel fuel yearly tells us that he received an offer of 20% lower than ours, we cannot say anything else than: thank you for your cooperation, but we cannot compete with this price."

Statoil's policy is to import fuel only for its own stations and not to resell to others. But this very same dishonest competitor may have purchased the fuel from any other excise warehouse, and can offer much lower price than Statoil's retail department due to the fact that he evades paying taxes while Statoil pays them.

In Q1 2011, 41% of the end price at the pump consisted of fuel price in the world market, and 52% of taxes: excise tax, VAT, etc., according to Statoil, which leaves the fuel retailer with a margin of approximately 7%, which also includes costs on operations, logistics, etc.

When one litre of E95 gasoline sold for EUR 1.214 (average price in Estonian fuel stations in Q1 2011), the average margin of the retailer was EUR 0.08. At the same time, tax evader's offer can be up to 20% cheaper compared to that of taxpayer, according to Kirs-Toiger's example. Considering how much more a tax evader can lower the price, it is no wonder that large fuel chains felt themselves threatened.

State introduces deposits

In April, an amendment to the liquid fuel law came into force. According to the new regulations, all entities purchasing fuel from the excise warehouses, have to set a EUR 1m deposit first. Those, who buy fuel from the middlemen, have to set a deposit of EUR 0.1m.  When fuel dealer evades paying taxes, the state has a right to cash in the deposit.

"It is hard to tell yet, whether the deposit system will work or not," says Kirs-Toiger. "I think it will be more visible in the 4th quarter of the year. We really hope it will work."

For the starters, the law change seems at least clean the economic activities registry. Of 371 registrars in March, only 133 can continue their operations in the fuel business after 1 June, according to MTA. All these 133 have set up deposits or are among the few exempts mentioned in the law.

Others cannot trade in fuel products until they get MTA's clearance regarding the deposit, and buying from them is prohibited. However, it can be predicted that many of those companies fail to apply for continued registration and thus lose their opportunity to legal trade in motor fuel. The percentage of companies diasppearing from the motor fuel market may reach over 50% by the year’s end.

Law change ignited a row

The law sets some exempts, for instance the aircraft fuel and liquid natural gas traders are not subject to the deposit. In addition, the motor fuel dealers can apply for a lower deposit if they have no tax debts and a history of three years minimum. But these exempts apply only to fuel dealers who buy from middlemen (the group whose deposit is EUR 0.1m). The entities who want to deal with excise warehouses, can apply for lower deposit not before the year 2013.

This difference in exempts ignited a row. Several small-scale fuel dealers hired the law office Varul, and applied to the parliament Riigikogu to amend the law in order to treat fairly both groups. As Oliuhing finds that the delay until 2013 is necessary to sort out dishonest traders, it began lobbying against the second amendment.

At the moment, the discussions over the second amendment are half-way, and it is yet unclear, whether the law will be changed the second time or not.

The above news abstract has been taken from a bi-weekly newsletter to professionals doing business in Eastern Europe "news2biz - Energy and Environment".

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