How we avoided paying five million KM of VAT

Starting in 2018, UNDP BiH and Canton Sarajevo initiated extensive cooperation to implement joint projects primarily financed by the Canton’s budgetary funds, supplemented to a lesser extent by this international organization’s funds.

UNDP BiH’s role in these projects primarily involved assembling a project team to oversee project management, reporting on implementation phases to donors—specifically the cantonal ministries—and conducting procurement procedures for goods and services in accordance with its own protocols.

According to official data from the Ministry of Finance of Canton Sarajevo, UNDP BiH was involved in public procurement totaling 35.3 million KM from 2018 to mid-2023.

Specifically, UNDP BiH procured goods and services for various entities including the Ministry of Spatial Planning, Construction and Environmental Protection, the Ministry of Internal Affairs of Sarajevo Canton, the Ministry of Health, the Ministry of Finance of Sarajevo Canton, and the University Rectorate.

The cooperation between UNDP BiH and Sarajevo Canton was formalized through a Memorandum of Understanding signed in the presence of then Prime Minister Edin Forto and the former Deputy Director of UNDP Mission in Bosnia and Herzegovina, Sukhrob Khoshmukhamed.

Thus, UNDP BiH effectively assumed the role of the “Canton Sarajevo Procurement Service.” This development was highlighted by the portal Žurnal.info, which reported that this approach deliberately circumvented the then Public Procurement Law.

What is the problem?

Since 1996, UNDP has been actively involved in our country, implementing numerous projects funded by both the national budget and international aid. Its mission has been dedicated to “enhancing the quality of life for Bosnian citizens, fostering efforts towards establishing a peaceful democratic society, and supporting Bosnia and Herzegovina in achieving sustainable development goals. UNDP’s initiatives have focused on three key areas: sustainable, resilient, and inclusive growth; governance centered on people; and the rule of law; and engaging citizens and communities to promote social cohesion.”

From pins to pianos: five percent

Contrary to its official mission and goals, over the past six years UNDP BiH has been responsible for procuring construction works, IT equipment, classroom equipment, fuel, and more on behalf of the Canton Sarajevo. These activities were conducted without the possibility of appealing contractor selections or procurement decisions, and with unclear and non-transparent supplier selection processes.

UNDP BiH invoices its services for these activities through a standard “fee” of five percent.

How does it look like in practice?

UNDP BiH collaborated with the Canton of Sarajevo on a public lighting reconstruction project, where the Canton allocated two million KM of budget funds and UNDP contributed 280 thousand KM. From the total amount transferred by the Canton, UNDP deducts a 5 percent fee for the GMS service.

From 2019 to 2022, the University of Sarajevo’s Rectorate, in partnership with UNDP BiH, implemented projects totaling approximately 13.2 million KM. These funds were primarily sourced from the Sarajevo Canton’s budget, supplemented by the University’s and UNDP’s funds.

Rector Rifat Škrijelj highlighted in an interview with the Tačno.net portal that projects were undertaken through UNDP primarily because of the inability of suppliers to appeal, a provision allowed under the Public Procurement Law, as well as the expedited delivery of goods and services.

He refrained from discussing specific issues such as VAT refunds.

As of the article’s publication, the Tačno.net portal had not received a response from the Public Procurement Agency regarding their stance on procurements conducted through UNDP.

Tutorial: How (not) to pay the taxes

Given UNDP BiH’s international status, the organization is exempt from paying the 17 percent value-added tax (VAT).

Therefore, Sarajevo Canton transferred funds directly to UNDP’s account for procurement purposes. UNDP BiH manages the tender process and selects suppliers. Suppliers invoice UNDP BiH with VAT included, but due to agreements with Bosnia and Herzegovina, UNDP BiH does not pay VAT or, if invoices are paid with VAT, it legally seeks a refund of the tax.

Tačno.net portal has repeatedly contacted UNDP BiH regarding the disclosure of supplier data for past periods, details about the tendering process, and the issue of VAT refunds, particularly concerning procurements funded by Sarajevo Canton’s budget.

After numerous urgent appeals to UNDP headquarters in New York, we finally received a response from the organization, although it failed to address any of our specific questions.

We sought clarification regarding the collection and refund of VAT from the BiH Indirect Taxation Authority.

According to the information provided by this institution, if UNDP enters into a subcontract with a local government unit for a joint assistance project, this subcontract is based on an international agreement between BiH and UNDP. Under this agreement, BiH is exempted from VAT for such projects, which are financed from funds received pursuant to that international agreement. Consequently, the local government unit has the right to reclaim VAT on purchases used for project implementation.

“However, based on the documentation provided, it is evident that these projects are partially implemented and financed using Sarajevo Canton’s own budgetary funds, which are transferred to UNDP’s account for project execution. These funds are not derived from an international agreement, therefore, we believe Sarajevo Canton does not qualify for VAT refunds on payments made to UNDP BiH for jointly implemented projects.”

When we inquired whether UNDP BiH had applied for VAT refunds for these specific projects, which were funded by Sarajevo Canton’s budgetary funds, the Indirect Taxation Authority stated that they could not disclose this information due to legal confidentiality requirements.

When VAT payment is not public interest

Edin Forto, one of the prime ministers of Sarajevo Canton during this period, stated in an interview with the Tačno.net portal that the claim of directing procurement through UNDP is incorrect, particularly considering the Canton’s annual budget of approximately one billion KM.

“It is necessary to take into account the exceptional circumstances arising from the coronavirus pandemic, during which all levels of government in Bosnia and Herzegovina conducted emergency procurements through UNDP. This resulted in a substantial increase in funds allocated to Sarajevo Canton compared to standard procedures. For instance, the Federation Government allocated more than 22.6 million KM (12.6 million USD) to UNDP in 2020 for a single project aimed at purchasing pandemic response equipment. It is quite symptomatic that the Government of Canton Sarajevo is constantly getting inquiries about its cooperation with the UNDP.”

Regarding the specific allegation of bypassing the implementation of the Public Procurement Law, Edin Forto stated that UNDP’s procurement system is endorsed by international financial institutions like the World Bank and donors such as the EU. He emphasized that UNDP’s system is highly efficient and transparent, demonstrated by numerous successful projects carried out in collaboration with international partners.

Forto does not dispute the fact that VAT was not paid during the execution of these projects. However, he justifies this by citing public interest considerations.

“Considering that the funds not paid in VAT were allocated to procure a larger quantity of goods or services deemed of public importance, these funds were utilized in alignment with the public interest. Furthermore, UNDP provided co-financing exceeding the unpaid VAT amount, and had delivered, in cooperation with several different governments within Sarajevo Canton, results that substantially improved citizens’ quality of life, particularly during the COVID-19 pandemic when swift actions of partners saved numerous lives.”

It is noteworthy reminding that Criminal Code of Bosnia and Herzegovina, in its Article 210, paragraph 4, reads:

“Whoever perpetrates the criminal offence referred to in paragraph (1) of this Article if the evaded amount exceeds 200.000 KM, or perpetrated the criminal offence in violation of paragraph (2) of this Article if the presented amount of tax refund or indirect tax credit exceeds 200.000 KM, shall be punished by a prison sentence of not less than three years”

We were planting raspberries before Fikret

The coronavirus pandemic, along with the governmental response across various levels to combat the disease through the procurement of medical equipment, laid bare the widespread corruption within public procurement in Bosnia and Herzegovina. The UNDP also has its role in this environment of endemic corruption, which later led to prison sentences for former FBiH Prime Minister Fadil Novalić and other individuals.

Due to the reputational risk and media scrutiny, the government of Canton Sarajevo under Prime Minister Mario Nenadić opted to route the procurement of medical equipment through UNDP BiH. This decision was justified at the time by “enhanced efficiency, transparency, and cost savings”.

However, the transparency of UNDP’s procurement practices also came under investigation, as highlighted in research conducted by the Tačno.net portal and published towards the end of 2020.

We would like to remind you that during that period, UNDP BiH did not initially disclose the list of suppliers for medical equipment or the amounts paid to these suppliers. Following our inquiry, a list of tender winners was provided but was retracted within 24 hours. Subsequently, a revised list was eventually published on the organization’s official website.

It was observed that UNDP awarded significant contracts to companies that had already drawn public attention. For example, contracts were granted to companies like Panta Rei, owned by Bariš Bejtović, the son of SBB cadre Bilsena Šahman, and IDS Zdrava Sredina, which, according to media reports, has ties to the management of NiP party.

Criteria such as clinical drug testing, necessary permits from regulatory agencies for drugs and medical equipment market regulation, and even pricing were not significant factors in the awarding of lucrative contracts funded by the budget of Sarajevo Canton citizens.

An employee of UNDP BiH, whose identity remains undisclosed due to potential repercussions, described to Tačno.net how procurement was managed during the COVID-19 pandemic.

“Direct communication with suppliers was established, and purchases were made directly from them, or their equipment specifications were explicitly outlined in the tenders. Some items were procured at prices significantly higher than prevailing market rates. There were instances where tenders remained open for as little as two hours, favoring suppliers who were pre-informed and prepared to swiftly submit bids because their specifications were tailored to match those in the tender documents. However, what is concerning is that no action was taken despite repeated attempts to raise awareness and address these issues.”

Today, with a four-year time lapse, no one has reacted or taken action.