The control of illegal gas stations: how and what are the results

The control of illegal gas stations in Ukraine was vigorously pursued until the beginning of the quarantine in the first quarter of 2020. Quarantine measures and restrictions on inspections have created loopholes to restore the activities of unscrupulous market players. Therefore, at the beginning of this year, the state began the second phase of the fight against illegal gas stations. Kosatka.Media discussed with experts what they managed to achieve in three months of this year and how to finally overcome the shadow fuel market.

Illegal schemes, which exist on the fuel market

Annually, about 2 million tons of illegal fuel are sold in Ukraine. According to experts, the state budget loses billions of hryvnias.

Illegals use several schemes that allow the production and sale of fuel bypassing budget and excise taxes.

The biggest tax fraud is VAT optimization and non-payment of the income tax. According to a study by specialists, this is more than UAH 15 billion of budget losses.


Fuel is paid for with cash. Thus, dishonest gas stations show less profit and, therefore, pay fewer taxes. And with cash, they can only buy illegal fuel again. This is the second illegal way to trade fuel.

As the head of the State Fiscal Service Vadym Melnyk told in an interview for Kosatka.Media, everything starts at the stage of importing fuel to Ukraine. Dishonest entrepreneurs lower the amount of imported fuel to pay less duty.

Then this bonded fuel is smuggled to illegal mini-refineries (and this is the third scheme), where gasoline is produced from it, not subject to excise tax. It is cheaper, of course. Thus, honest business suffers losses, and the state again loses payments to the budget. And since fuel is now becoming more expensive across the world market, experts expect the demand for illegal fuel will increase. This means that budget losses will grow.

Another tax evasion scheme is unregistered gas stations, which operate without a license, without paying the appropriate fee.

Also, illegals actively use the scheme of importing a legal, excise-free product, which is then illegally converted into gasoline at the illegal mini-refineries.

Are there any results of the fight?

Nataliia Hutarevych, a member of the Council of the Committee on Energy, Oil and Gas, drew attention to two issues that are essential in the fight against the illegal circulation of oil products: the quality of the product and the source of its origin. The second issue can be checked by conducting documentary and cameral (document analysis), as well as actual (reconciliation of data and information with those indicated in the documents) checks, while the product verification requires special laboratory studies. The State Ecological Inspectorate, which received appropriate funding in 2021 and is conducting the procurement of such services, declares the possibility of conducting such studies.

“The Cabinet of Ministers of Ukraine uses an integrated approach to taking measures to identify violations through the oil market, it was instructed to create working groups in each region to fight the illegal fuel market. This approach implies inspections by state regulatory and supervisory authorities, each of which has its own competence and powers. However, the normative regulation of the grounds and procedure for carrying out control and supervision measures is also excellent. However, this approach is not new: both business and government agencies have experience in conducting due diligence. Also, there is an opportunity to investigate the activities of the subject to comply with the legislation in the tax, environmental, labour, security, etc.,” the lawyer said.

This approach made it possible to identify and close seven illegal mini-refineries, stop the activities of 221 illegal fuel sales points, dismantle 151 illegal gas stations and apply penalties of UAH 136 million.

In the first half of 2020, through the joint efforts of the State Fiscal Service and regional interdepartmental working groups, the activities of 3206 objects of trade in fuels and lubricants were checked. 833 cases of illegal fuel trade were identified and terminated. 16,200 tons of fuel equal to 381 million hryvnias were withdrawn from the illegal turnover. Equipment that was used for illegal activities was dismantled at 538 illegal filling stations.

However, unfortunately, even despite the readiness and desire of law enforcement officers, it cannot yet be said that the problem of illegal fuel turnover in Ukraine has been resolved.

What contributes to the "longevity" of illegals

Director of Consulting Group A-95 Serhii Kuiun told there had been a problem of returning those closed illegal gas stations in two months.

“Last year, activists created a map of illegal gas stations. For a year, all those closed received licenses. For bribes by providing falsified documents. And tax office does not have to check the compliance of those documents. Illegal business is also adapting,” he explained.

The expert added that the role of local authorities in overcoming the shadow fuel market is very important.

“They know, they control. But why should they overcome this problem if they get money from it? And the problems of the central budget do not bother them much,” Kuiun said.

President of the Ukrainian Energy Association Yuliia Pidkomorna emphasizzed that the fight against illegal gas stations can continue until such gas stations have resources of illegal fuel for sale. After all, such a gas station costs about $10 thousand and pays off three to four times per season.

To get results, leverage that influences the sources of supply of illegal fuel must be used – shadow producers explained Pidkomorna. The basis for reducing the cost of fuel is products manufactured clandestinely or even openly at the so-called mini-refineries, under the guise of other refined products.

They are not subject to excise taxation and on paper are sold to “gasket firms” under the guise of solvents or similar reagents.

Such low-quality refined products (passed the maximum primary stage of processing) do not comply with the current GOST. In particular, they have an insufficient octane number (maximum at the level of A-80 gasoline) and a significant amount of associated chemical compounds that are harmful to both the car and the environment. An increase in the octane number is carried out with the help of appropriate additives such as MTBE and methanol, which are in legal circulation in the form of a mixture of solvents (77.4 thousand tons were imported to Ukraine in 2020). Mixing of reagents and petroleum products takes place at oil depots or directly during transportation, simply by adding them to tanks.

“Therefore, the fight against such gas stations will have a sustainable result only by limiting the production of low-quality petroleum products and closing the “excise” window for solvents (octane-increasing mixtures are not excisable)” Pidkomorna emphasized.

How to finally overcome the shadow fuel market

The effect of eliminating the shadow fuel turnover for the Ukrainian economy will be significant, explained Yuliшa Pidkomorna: putting a mini-refinery into the legal field will mean additional budget revenues of about UAH 3.7 billion of excise tax and VAT. Compliance with cash discipline for sale means an additional UAH 10-14 billion of VAT.

But overcoming the shadow market or its maximum reduction is possible subject to the conscientious performance of the work by law enforcement agencies and the elimination of regulatory and legislative gaps, the expert added.

The State Customs Service, the State Tax Service, together with the Ministry of Finance of Ukraine, proposed to amend Article 215 of the Tax Code of Ukraine regarding the establishment of an excise tax rate of 245 euros per 1000 liters of the share of goods defined as excisable, and if they are included in mixtures. The Tax Service of Ukraine plans to check the intended use of mixtures of MTBE and methanol as solvents.

“At a meeting of the Government on April 19, 2021, the Ministry of Finance was instructed to prepare an action plan to shade the economy, counter economic threats in the customs and tax spheres on the illegal market of excisable goods and agricultural products. Let's hope that there will also be measures for legislative and other changes in the fight against illegal fuel,” Pidkomorna said.

According to Nataliia Рutarevych, the state has the appropriate tools to solve the problem of the illegal fuel market. But it is important to establish effective oversight of the regulatory authorities, so that their actions are clearly aimed at achieving their goals, and not turn into an instrument for achieving indicators when formal violations are the basis for prosecution and increasing statistical indicators.

“What is more important is to prevent the risk of corruption, so that comprehensive measures to combat the illegal segment of the market do not turn into measures to collect prepayment for the possibility of further carrying out illegal activities,” the lawyer said.

Serhii Kuiun believes that the problem of falsification “must be dealt with constantly, and not once a year: they came, liquidated, ran. And illegal immigrants receive "indulgence" for another year. We need some kind of permanent bodies that will keep this issue in a constant field of vision."

The SFT is working on improving the analytical functions of law enforcement agencies to exclude illegal schemes, instead of “catching the hand” of every illegal gas station.

Vadym Melnyk told that the problem was not so much in the legislation as in the fuzzy regulation of the accounting system across this market: receipts, processing, costs. Everything needs to work according to the same standards.

“There is no need to interfere with the business of conducting legal activities and strictly control it. We just need to get data from the correct certified flow meters, level gauges. Let the business work, and we will see that the balance is the same in quantity and taxes are paid. If there is a clear record of entry, distribution and sale – the problem will be solved," said the head of the SFS.


Tags: taxes, gasoline, diesel

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