New study on profit shifting in Ukraine’s iron ore exports

Today, MEP Helmut Scholz (DIE LINKE.), presented a study commissioned by GUE/NGL on “Profit shifting in Ukraine’s iron ore exports” by Alexander Antonyuk, Zakhar Popovych, Tommaso Faccio and Graham Stack.

Very little has been discussed the mis-pricing of primary goods exported by developing countries in the European Parliament’s various committees looking into tax evasion, tax avoidance and money laundering, or in any of the legislative proposals. This area – the subject of today’s study – is one of the most relevant sources of illicit financial flows for developing countries.

The study compares the daily prices of iron ore commodity exports from Ukraine with international quotes, following a methodology previously used by Grondona and Burgos and based on what is known as the ‘Sixth Method’ for commodity valuation, to estimate that between 2015 and 2017 iron ore exports from Ukraine were on average under-invoiced at least by 20% which is equivalent to $ 520 million of profits potentially shifted out of Ukraine to low tax jurisdictions through transfer pricing. 

Considering that Ukraine has had transfer pricing rules in place since 2013, and the pricing of commodity is supposed to be done following the Sixth Method, it is quite remarkable that the level of under-invoicing in the iron ore sector is so high.

As noted in the study, and declared by the Ukrainian authorities themselves, the usage of transfer pricing within all types of operations results in a budgetary loss equivalent to 660–750 million euros, which is comparable to the scale of the annual macro-financial assistance received by Ukraine from the European Union in the last several years.

The European Parliament has been discussing many changes in EU legislation lately that have as an objective tackling tax evasion, tax avoidance and money laundering. This includes: the 5th anti-money laundering directive; the amendments to the Directive on Administrative Cooperation (DAC) in the field of taxation extended to include the mandatory automatic exchange of financial account information (DAC II), the mandatory automatic exchange of cross-border tax rulings and advance pricing arrangements (DAC III), Public Country by Country Reporting (DAC IV), the access to anti-money laundering information (DAC V), reportable cross-border arrangements (or the regulation of enablers and promoters of tax evasion and tax avoidance – ‘DAC VI’); the Common Corporate Tax Base (CCTB) and Common Consolidated Corporate Tax Base (CCCTB); and the anti-tax avoidance directive, among others. More recently and still under discussion is the European Commission’s Proposals on digital taxation, and a report on taxation and gender inequality.

The European Commission and the Council have also been working on the identification of high-risk third countries for terrorist financing and money laundering; the list of non-cooperative jurisdictions for tax purposes; the analysis of the preferential tax regimes; and the EU Member States promoting aggressive tax planning (i.e. tax avoidance).

Moreover, the European Parliament has already had 4 inquiry committees or special committees discussing tax evasion, tax avoidance and money laundering in the EU and making recommendations to the European Commission, the Council and the EU Member States in this regards: TAXE, TAX2, PANA Inquiry Committee, and the ongoing TAX3 Special Committee on financial crime, tax evasion and tax avoidance; and, per recommendation of the PANA Inquiry Committee, there is a discussion currently taking place on the need of creating a permanent subcommittee that will continue to address the problem of illicit financial flows in the European Parliament.


Read more about it here and here, and download the study here.