Here is Asen Vasilev’s scheme with “Lukoil” – he betrays the state interest twice. The derogation is for distraction

Here is Asen Vasilev’s scheme with “Lukoil” – he betrays the state interest twice. The derogation is for distraction
Here is Asen Vasilev’s scheme with “Lukoil” – he betrays the state interest twice. The derogation is for distraction

Asen Vasilev and Rumen Spetsov. Yesterday’s fighters against the monopoly of “Lukoil” today defend it instead of deregulating the warehouses. The derogation drama is a distraction.

Everything described below is known, but not systematized.

It has long been known that Lukoil does not pay corporate tax in Bulgaria, as it does not make a profit from its activities. The Russians only administer VAT by bringing in what we pay at gas stations. When he came to power, Asen Vasilev, using the yellow-coat obsession with all things Russian, ordered his favorite bodybuilder at the NRA, Rumen Spetsov, to organize an inspection of the refinery. This is not the first: remember, there were revision acts for which “Yes, Bulgaria” unsuccessfully fought even in court to get access to information, and even Spetsov refused them. So, Vassilev starts an investigation, Spetsov brags to the media, and finally the investigation is closed. Georgi Kadiev writes about all this in detail on Facebook and we will not repeat it.

The two betrayals of Assen

Within a check, a certain period is looked at, after which it cannot be checked again. Accordingly, transactions through it can no longer be verified, because what is found remains. The NRA inspection is nothing but a tool for pressure and blackmail by Asen Vassilev. Instead of actually investigating, as the previous administration tried to do, whose audit report DB sought, Vassilev committed a terrible betrayal by accepting the Russians’ position on two points:

First, it assumes their huge capital investment in equipment, which squeezes out any opportunity for profit at a future point (Kadiev also described this, Krasen Stanchev also, but Asen Vassilev repeated it even after the management of GERB).

The second and far more important thing, which Vassilev himself repeatedly boasts about in the media, without anyone contradicting him, is that he accepts the position of the Bulgarian enterprise in the Lukoil group of companies and, accordingly, the entire business model.

Krasen Stanchev described it in an article, but now he is silent. This betrayal is carried out by the unqualified acceptance of the refinery’s transfer pricing report. Assen’s boasting shows his incompetence, but no one denounces him then.

Why are Lukoil at a loss?

It has long been known that the Russians do not pay corporate taxes for the profit from their activities in Bulgaria. The corporate tax regime is regulated in the Corporate Income Tax Act. The twist is not only in the fact of a huge investment in DMA – machines and technological renewal. The other reason is that they operate at a loss despite their monopoly position as a vertically integrated enterprise.

But how? Well, like “Kremikovtsi” – they apply the “input-output” scheme – they buy the raw material at non-market prices, process it and sell the oil products to related companies (the parent company in Switzerland or the Netherlands or wherever it is currently profitable). The relevant foreign company, on the other hand, sells the finished product at normal prices and the profit from the difference remains in the relevant beneficial jurisdiction. We get nothing, the relevant managers shrug their shoulders and reassure us that this is simple market logic and everything is legal.

During this time, on paper, there is an import-export of liquid fuels, which often change only their owner, but not the tanker. Well, we may see 200-300% growth in exports to Malta, but these are one-off hits.

But since “entry-exit” fraud is known not only to “Kremikovtsi” or in the post-Soviet space,

around the world they have also invented an antidote – transfer pricing.

This term was introduced in our country relatively recently, and it is no coincidence that it took years to adopt such a regulation, which actually prevents the above-described fraud. The lack of such a regulation makes it possible for non-transparent transactions between related persons (companies) and thus enterprises in our country are siphoned off. While in the settled and civilized world company X, part of a group of companies, prepares a report on transfer prices to prove whether the transactions between all the companies were concluded at average market prices, in our country this was not the case.

In order to prove that the price is marketable, databases accessible only to international consulting companies are used. Through them, comparisons are made with thousands of companies. For example, a company sells salt to a parent company. Through the report, the multinational consultants will prove that the average price (mark-up) for similar company with a similar profile that they generally sell to is at a certain profit and this is comparable according to relevant criteria, so the profit/loss is completely marketable. Correspondingly, there are ways to prove deviation from market prices as well, by arguing through functional analysis whether a firm, for example, is taking economic risk or operating only on a piecemeal basis. So this status of a firm within the group determines what rate of profit it can operate at, whether it will be profitable and in which jurisdiction it will remain.

Organization for Economic Cooperation and Development prepares relevant rules for these transfer prices. Once adopted, they provide relatively universal criteria allowing tax authorities to adjust prices for most cross-border intra-group transactions.

The rules allow related parties to set prices differently, but the tax authorities can adjust these prices for the purposes of calculating tax liabilities. Even our law allows corrections by the National Revenue Service if tax is avoided or evaded. The rules usually require the taxable person to prepare his own report (by international consulting companies, which also bear responsibility as an independent guarantor). It sets out the market level, functions, risks and terms of sale of the related party transactions or activities to be reasonably comparable to similar key elements in comparable unrelated party transactions. The report is submitted with the tax return, on the basis of which the tax authorities make an adjustment.

Most systems allow the use of multiple transfer pricing methods. Among the commonly used methods are the “comparable uncontrolled price method”, “cost plus”, “resale price or markup” and methods based on profitability. To determine which model to apply, it is analyzed whether the transactions are comparable based on whether the nature of the product/service is comparable, the risk and function, conditions, market level, geography and economic conditions are compared, prices are tested and should be apply that method which is most adequate.

The most commonly used method is that of the “comparable uncontrolled price” (CUP). In this transaction method, the fair price is determined using prices charged in comparable transactions between unrelated parties. In general, the OECD and most countries that follow their guidelines consider the CUP method to be the most direct method, provided that any differences between controlled and uncontrolled transactions do not have a material effect on the price or their effects can be estimated and appropriate adjustments can be made at the price. For example, to compare our refinery with the one in Romania, etc. There is also the resale price (RPM) method: goods are regularly offered by a seller or purchased by a retailer to/from unrelated parties at a standard “list” price less a fixed discount. Another method is that of gross margin: similar to the resale price method recognized in several systems. A profit-based method can also be used.

Instead of all this, Asen Vasilev adopts the “cost plus” method: the goods or services are constantly valued at the actual production price formed by costs (electricity, wages, etc.) plus a fixed markup (e.g. 5%), which is the simplest ishleme, characteristic of colonial countries, which do not have any know-how, and their companies are weak, deprived of funding, etc. This model does not correspond to the structure of the enterprise, which has its own warehouses for raw materials, for finished products and de facto operates the entire process from unloading the ship to the gas station.

“Lukoil Neftohim Burgas” is changing its business model and retroactively – from January 1 this year, the refinery is going bankrupt. This is clear from the company’s financial report for 2020.

So it turns out that at GERB, the NRA protected the public interest by issuing the revision acts that “Yes, Bulgaria” is trying to publish, which is also acknowledged by Asen Vassilev, but he himself does not defend it.

Asen Vassilev’s shot

It is here that Assen screws up the state and brazenly declares it a resounding success. Whether out of misunderstanding, whether out of malice or a ridiculous combination of the two, the state fully accepts Lukoil’s position and approves their transfer pricing report. The fundamental of this betrayal is that this fixes the business model for years to come and it is very difficult (impossible) to defend a position that this business model should change. There must be some change in the business processes, in the assets of the company or something similar, so that the way of profit formation can also change. This is how the refinery will operate for years to come.

Thus, the revision from the time of Assen not only accepts without comment the amount of the capital investment (which will eat up the profit for years), but also the way of operation of the enterprise in the group precisely according to the “input-output” scheme. And from here on out there is no wiggle room – either it has to completely restructure the undertaking to accept that there is another type of business structure, or it has to break the law to change it.

The derogation drama is a distraction

Derogation is a side topic for distraction. “Dnevnik” has already explained to us that “Lukoil” cannot work without Russian oil due to logistics. But the drama is invented to create unnecessary noise and distract attention from the main point in this case study.

It’s simple: after Asen Vassilev has betrayed the interests of the state, he deprives the institutions of a useful move against Lukoil. When the war starts, he just becomes their servant. And he makes a deal (as Kiril Petkov confirmed) – “you don’t cover your losses, we legalize your Russian oil and present to the people that we have done something, but in reality nothing has changed”. Except that the profit is microscopic, because we have approved the business model of working with transfer prices, in which “Neftochem” carries no risk and is a simple merchant with a 4-5% profit. Accordingly, the profit is 20-30 million, the same as a large store.

The proof is in the fact that in this scheme the state cannot even say that Lukoil is buying cheap Urals, because it is not Lukoil that is buying it. He buys “Litasco” and gives it to Neftokhima ishleme to process it. It doesn’t matter how much “Litasco” buys. On paper, it is the same as the price of “Brent”, never mind that “Urals” costs 20 euros less. That doesn’t matter at all. Because “Litasco” takes the risk, the high insurance premiums, the danger of mines and Ukrainian drones in the Black Sea, of the war and volatility, of the lack of tankers. “Litasco” even bears the risk of not having a port, which is allegedly taken from them. Speaking of Rosenets, let’s note that by depriving “Lukoil” of a port, it again puts “Neftohim” in the position of an ishlemyar.

In reality, it was an enterprise with a quay, a warehouse for raw products, a fully integrated business process, a product pipeline, warehouse bases and a distribution network. Such a complex business structure cannot work in isolation because it has all the levers in one enterprise. By breaking down this business structure, the argument that the business position of the enterprise in the group is different, and the model of transfer prices is different, is lost.

Here’s the proof –

Accordingly, there is no fiscal effect from the derogation, and that is where the scandal starts. “Neftochem” does not carry any risk, it works on an arm’s length basis, so there is no profit and no income for the National Revenue Agency. All of last week’s straining is a mixture of fear, utter incompetence and empty straining in the face of external factors. Therefore, we come to a situation in which Denkov and all the democratic media defend Asen Vasilev, by defending Lukoil.

Everything described here can be easily verified and has long been published in the media. Those involved have said it publicly, but in a sugary way. GFOs are visible in the Commercial Register.

The article is in bulgaria

Tags: Asen Vasilevs scheme Lukoil betrays state interest derogation distraction


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