Taxing Extra-Profit

How to Tax Privileges

The Karic family did not become rich by abuse of a Serbian Revival Loan as had been rumored for years, but they did enjoy all other privileges. But of the 170 individuals who will have to pay taxes on extra-profit, 20 did come by over one million German marks by access to the loan

AIM Belgrade, July 30, 2001

When a bill on taxing extra-property was passed a month ago the general impression was that it was to be applied only once, in order to right at least a portion of wrongs committed during the former regime, but that it would not exempt anyone from being prosecuted if there was reason to do so. In other words, its aim was to make good on campaign promises made by the present ruling coalition, which voted that everybody ho became rich thanks to privileges granted to them by the former authorities would have to give back at least some of their property by paying a special tax.

The first concrete move to enforce the law has shown that in Serbia, everything can be turned upside down overnight. Thus the Democratic Party of Serbia is saying the same things the Socialists and the Radicals used to say in the Serbian Legislature. They obviously believe that their refusal to vote in favor of the bill as part of the then unified DOS caucus absolves them of responsibility for the law, which "is neither constitutional, nor expert, nor implementable," as Jovan Rankovic, the new Yugoslav finance minister from the democratic Party of Serbia, now puts it.

Simultaneously, Serbian Premier Zoran Djindjic is angry with National Bank of Yugoslavia governor Mladjan Dinkic, for going public with data gathered by the Commission for Investigating Economic and Financial Corruption (access to money from the primary and grey issue, purchase of hard currency from the NBY at lower prices, use of funds granted by Serbian Revival Loan). The data provoked fierce reactions in the public. Instead of going public with the names of companies and individuals that had access to funds inaccessible to ordinary people, said the premier, "the problem had to be discussed with each of the 635 listed individuals and companies, and only then could the data have been published." Thus he agreed with those who claim that Dinkic "deliberately did what he did to deter foreign investors from such companies, neglecting the fact that they did much to prevent social unrest, as they were forced to sell their merchandise at depreciated prices, transfer to the NBY a part of their hard currency earnings, or hand over their gold in the past."

In other words, they were not privileged at all, but were victims of the former regime. Aleksandar Radovic, head of the corruption commission and director of the Serbian Public Revenue Administration, who is authorized to implement the law on taxing extra property responds by saying that "everybody is equal before the law." "All of them have the right to be angry and deny allegations, but I have the right to determine facts on the basis of which certain steps will be taken," says Radovic. Namely, the law specifically says that every company or individual has the right to prove his claims before the revenue service. The only thing one has to have is valid documentation, like any other ordinary citizen. In other words, if funds from the primary issue were invested in production, or were used for medical treatment in a foreign country, such evidence should not be difficult to provide.

Whether or not evidence is valid, however, could be a matter of dispute, because revenue service officials are authorized not only to look into papers, but to check other proof as well. In other words they can investigate whether company managers used their privileged position for personal gain or to finance business that had nothing to do with the company they were managing. As governor Dinkic put it, "On one end we have the funds mentioned by NBY experts, and on the other are luxurious mansions and foreign bank accounts."

Thus the managers of the Naftna Industrija Srbije oil company say it is true that they used to purchase German marks at the official, then substantially lower exchange rate, but that they had to sell gasoline and oil at unrealistically low prices, because it was state policy, and they are deeply indebted because of that. They even claim they are DM976.7 million in the red, an amount that exceeds the value of NIS capital. A report arrived from the Belgrade District Court, however, saying that Dragan Tomic, former NIS manager, and Zivko Soklovacki, former chairman of the NIS managing board, are being investigated on suspicion that they had caused the company to lose several million German marks. This should provide valid grounds for a thorough examination of the company balance sheets. Tomic is accused of having damaged the company by buying apartments at attractive locations and of having enabled his party colleagues to profit from his connections. He is also suspected of having participated in the division of profits of the Bermuda-based Eurol International company, founded by NIS Jugopetrol and Bermuda-based Vitol Energy, after having informed the National Bank of Yugoslavia that the company no longer existed. It is estimated that in this manner Tomic gained US$660,000 and over DM180,000. If this turns out to be true, this profit will be a good source for covering NIS's share of the extra-profit tax.

The fact that 2,679 legal and physical entities earned extra-profit amounting to DM2.7 billion should not be disregarded, because 393 of them earned over one million German marks from this. Of them, 173 individuals and companies earned over DM675 million, and 60 over one million German marks, using the "benefits" of the grey issue. Only highly confidential individuals and companies were included in such transactions. Among them were four banks -- Beobanka, Jugobanka, Invest Banka and Beogradska Banka -- later to be joined by Karic Banka, Resavska Banka, Dafiment Banka and Union Banka, of which the last three were liquidated meanwhile. Their mission was to purchase hard currency from citizens with cash given to them by the central bank. Only a portion of the central bank's funds was returned, with the explanation that the black market exchange rate had gone up, and the money was used for behind-the-scenes deals by the ruling regime and certain individuals who were part of it.

It is interesting that Bogoljub Karic in his protest of the law says that Astra Banka, which is the name his banking system current goes under, used only 0.39 percent of the primary issue of money, but fails to specify what other names his banks used in the past and what they did in the interest of the former regime. The fact that they paid the costs incurred by the former president's son abroad, is for Karic of little importance. The banker's boast of having brought mobile phones to Serbia, or giving TV viewers BK TV cannot serve as justification for everything the Karic company did in past years. Nor can his readiness to give, together with some hundred other businessmen, a "million in donations" to the new government erase all the "sins" of the past.

And what should be done with the almost one thousand legal and physical entities that had privileged access to hard currency on the basis of import deals for goods that never entered the country? This made it possible for them to earn DM510 million in profit, and 90 of them obtained over one million German marks through such transactions. Fictitious, government-sponsored imports were obviously an easy way to get rich, much as it was easy to pay 6 dinars for one German mark and charge clients several times more, as if the actual hard currency value was part of the price of such goods. The NBY governor says that it is only possible to make calculations based on the black market rate valid at the time deals were made, "because data on the rate for electronic wire transfers applied in such deals, much higher than the market rate, is impossible to find."

All this indicates that tax officials have many a reason to start investigating. The law has enabled them to scrutinize even deals that were made legally. It is clear that the law will miss its target if, under pressure from any side, even by coalition partners, and for any reason, certain solutions are not applied in practice and everything boils down to taxing private entrepreneurs, while absolving socially-owned companies and their managers of responsibility. Then the issue of confidence in the government which adopted such a law will be unavoidably brought up. Serbia is at a crossroads. It has to draw a line and take the right path no matter how painful it is.

If it turns out that money printed over the years went to pay salaries and finance production, then the people should be told that the previous government was not as dishonest as many claim now. But it should also be said that the companies using such money exist only on the lists of loss makers, and that their production is fictional. If revealing the names of companies and individuals that were privileged during the former regime at least had the effect of public information, and if a hundred or so million German mark in taxes is collected, this could also be viewed as success. The time has come to say that the Karic company did not become powerful thanks to the funds from a Serbian Revival Loan as had been rumored for years, but because it had access to other privileged sources of money. But, among 170 such companies and individuals there are 20 who earned over one million German marks by access to the Serbian Revival Loan.

Tatjana Stankovic

(AIM)