The new Customs Code: making some positive changes

ACC Country Profile 2012,

12/2012

Igor Dankov, Senior Manager

Robert Zeldy, Manager

The new Customs Code of Ukraine took effect on 1 June 2012. It was the result of a long working process by various state authorities and businesses. The American Chamber of Commerce took an active part in this process. The authors of this article, for example, were members of the relevant Governmental and Parliamentary working groups and submitted numerous proposals that became provisions of the Code. We discuss these provisions in detail below.

The proposals were based on the best practice available around the world. Ukraine has declared its adherence to EU values and a willingness to join that organization in the future. For it to do so, its legislation must be aligned with the EU’s. Adapting Ukraine’s customs legislation is a priority task for the state authorities.

The EU has successfully implemented the WTO’s customs valuation principles and accumulated many best customs practices. Logically enough, we studied this experience and tried to borrow from it while preparing our proposals.

The purpose of this article is twofold. On the one hand, we summarize our contributions to the new Code. On the other hand, we discuss a variety of complex customs issues that remain unsolved in Ukraine.

1. General characteristics of the new Customs Code

Opinions about the new Code vary. Some say that it is worse than the previous Code. Many believe there are a lot of good changes as compared to the previous legislation.

It is obvious that many changes to the Code are good for business. The unambiguous successes include:

  • Customs clearance at any customs offi ce without any additional approvals (previously, entities had to seek permission for customs clearance in a customs offi ce other than the one in which they were registered);
  • A legislative reduction of the duration of customs clearance to four hours (previously customs clearance had to be fi nalized within a day, but in practice it lasted longer);
  • A real reduction in the percentage of goods inspected (from 70% in 2009 to 9% in 2012);
  • A signifi cant increase in the amount of goods declared electronically to customs (50% by the end of 2012). There is, however, room for improvement here.

Businesses may also benefi t from the following provisions of the Code:

  • The confl ict of interest rule: if customs legislation is unclear or allows for multiple interpretations, the customs authorities are required to decide in favor of entities;
  • The customs authorities may issue customs rulings at the request of entities. If an entity followed a ruling that was subsequently cancelled, penalties do not apply;
  • The Code makes the customs authorities responsible for losses caused to business entities. Upcoming legislation should establish the procedures relevant to this responsibility. A draft already exists and we are working on proposals to make this piece of law one that adequately protects business activities;
  • The Code introduces the authorized economic operator institution (AEO). Entities that have acquired AEO status will enjoy a simplifi cation of customs procedures. We do not expect that there will be many AEOs, as the compliance requirements are strict. However, the readiness of the customs authorities to simplify procedures for bona fi de entities is very much welcome in the business community;
  • The customs procedures (regimes) have been signifi cantly improved. This presents new opportunities for doing business in Ukraine. There have been updates related to the customs procedures of processing, temporary import/temporary export, re-import, and re-export;
  • And, fi nally, customs audit procedures have improved. The global tendency is to relax customs control at the moment of import and shift the bulk of control to the moment following the goods’ release into free circulation. If Ukrainian customs borrows this best practice, it would be a positive move. Otherwise, post-audit control will become another instrument for collecting more revenue.

The new Customs Code is certainly not perfect. It is diffi cult to create an ideal document that will satisfy both the fi scal authorities and the business community. The following areas call for further improvement:

  • The right of the customs authorities to set up specifi c locations for customs clearance of certain goods. In principle, there is a rationale for this provision. However, bad experiences in the past suggest that this could potentially create a problem for business;
  • Huge penalties levied on individuals for violations of customs rules. This is justifi ed neither fi scally nor economically. It is unrealistic for an individual (i.e., the declarant) to pay a penalty amounting to 100% of the value of the goods. The law does not establish higher or lower penalties that take into account circumstances that could mitigate responsibility. Logically, then, it would be better to penalize business entities, rather than individuals;
  • The list of cases when a declarant can release goods into free circulation by providing guarantees. At the moment this is possible only for cases when disputes about customs valuation or classifi cation issues arise. World Customs Organization guidelines, however, hint that if there is a dispute the declarant should have the right to release the goods by providing custom payment guarantees.

The Customs Code could be improved in other areas as well.

Below we summarize certain provisions we drafted towards making the Code more effective.

2. Customs valuation

Historically, customs valuation has been an area of dispute between importers and the customs authorities. The customs valuation provisions of the old Code were based on WTO principles (the Agreement on Implementation of Article VII of the GATT). However, the customs authorities have often misused these provisions in order to increase revenue collections, as:

  • The focus was not on the rules for determining the customs value of goods, but on the supporting documents;
  • Customs did not explain why they rejected declared values;
  • The authorities used information from their internal price database to defi ne customs value.

As a result, the customs authorities have challenged declared value without suffi - ciently explaining their reasons for doing so. The basis for such a challenge could be the availability of higher prices in their internal database. The next step was to request that the importer present additional documents to support the declared value. As a rule, customs was requesting documents that either did not exist (e.g., price calculations of the goods) or that were diffi cult to obtain (e.g., a foreign export customs declaration, even if the exporter could declare the goods electronically).

Should the importer fail to present the additional documents, the customs authorities have the right to defi ne customs value themselves. The old customs valuation rules were thus favorable for customs and denied the importer the ability to determine customs value.

We focused our efforts on changing this situation and making the customs authorities explain (preferably in writing) every step they take when rejecting a value as well as how they arrived at the new customs value.

We proposed the following minimum provisions (they were included in the new Customs Code).

1. Cases of rejection of a declared value

We suggested that a customs offi ce may reject declared value only in the following cases:

  • The declarant calculated the customs value incorrectly;
  • The declarant failed to submit the main supporting documents; • The declarant elected a
  • The declarant elected a customs valuation method incorrectly;
  • The declared value was proved untrue based on offi cial information obtained from foreign customs authorities.

However, practice shows that the customs authorities have often misunderstood these provisions. We would thus advise further clarifying the terms “incorrect calculation of customs value” and “incorrect election of a customs valuation method.”

2. Customs must substantiate a rejection of declared value

There are three different cases in which customs must present arguments if they do not accept a declared value:

  • The seller and buyer are unrelated entities — in this case, customs must argue that the declarant declared inaccurate or false information about the customs value or defi ned it incorrectly. Otherwise, the customs value is considered to be accepted automatically;
  • The seller and buyer are related entities — in this case, customs must argue that the relationship impacted the price. These arguments must be submitted in writing. If customs does not present any arguments, it is considered that the relations did not impact the price of the goods;
  • The declarant submitted additional documents supporting the declared value within 30 days after the release of the goods against fi nancial guarantees. If, within the next fi ve days, customs fails to explain why they cannot accept the declared value, it is considered that the declarant defi ned the customs value correctly. Customs must release the fi nancial guarantee.

We recommend that an importer use these benefi cial provisions of the Customs Code. If customs fails to argue why they rejected a declared value, a declarant will have a good chance of winning a court case. There is no need to hold the goods under customs control until the dispute is resolved. It is possible to release the goods against fi nancial guarantees and then appeal against the customs valuation.

3. Documentary support of the customs value

As we mentioned above, the customs authorities have often demanded excessive documents, in the hopes that the declarant will fail to present them. In this situation, customs obtains the right to determine the customs value itself. Even when the declarant submits the requested documents, customs can disagree with it and reject the declared customs value.

We thus suggested determining the list of documents required to support declared customs value as follows:

  • There is a basic set of documents that should be submitted to the customs authorities. These documents include the cross-border contract, the invoice, the transport waybill, etc.;
  • Customs may request additional documents only where the main documents contain discrepancies or signs of forgery or do not contain complete information. These documents may include contracts with third parties, accounting documents, the seller’s price lists, etc.;
  • If customs has suffi cient grounds to claim that the relationship impacted the price (in transactions between related parties), it may ask for specifi c documents (e.g., price calculations, prices for identical/similar goods in the exporting country, etc.).

These Code provisions prevent customs offi cials from demanding arbitrary documents.

4. Format of a customs value adjustment

We proposed strengthening the requirement that the customs authorities must substantiate an adjustment of a customs value. Specifi cally, they need to provide the following information:

  • Arguments supporting the rejection of the declared value;
  • Available information that generates doubts about the truth or accuracy of the declared value;
  • What the declarant must do for customs to accept the declared value;
  • A numerical calculation of the value.

If customs fails to provide this information, it will be easier for the declarant to appeal against the adjustment.

5. Release of goods against fi nancial guarantees

The customs authorities release goods against fi nancial guarantees when:

  • The declarant disagrees with the customs value determined by customs;
  • The declarant is unable to submit additional documents as requested by customs.

We managed to improve the process as follows:

  • Originally, the Code proposed that the declarant had to ask customs to release the goods against guarantees (i.e., customs had to approve this). We proposed that the release against guarantees should be at the sole discretion of the declarant (i.e., there is no need to obtain consent from customs for this);
  • Customs had to explain why additional documents were insuffi cient for accepting the declared value. If such substantiation is missing, it should be considered that the declarant has determined the customs value correctly and that the customs authorities have to accept it and release the guarantee.

Also, we proposed that a fi nancial guarantee remain in effect until the fi nal resolution of a customs valuation dispute. For instance, even if the declarant cannot convince customs within 80 days, it will be possible to appeal to a higher customs body or to a court. Until there is a decision from these authorities, the fi nancial guarantee should continue to apply. Unfortunately, this proposal was not implemented in the Customs Code.

6. Implementation of the WTO’s Customs Valuation Decisions

We suggested that the Customs Code incorporate certain WTO Customs Valuation Decisions that Ukraine committed to following. In our opinion, this would facilitate the practical use of these Decisions.

Cases where customs administrations have reasons to doubt the truth or accuracy of the declared value (Decision 6.1)

We suggested that this Decision be broadly implemented by requiring the customs authorities to substantiate their decisions for rejecting and adjusting declared values. We proceeded from the fact that the Decision requires the customs authorities to have reasons to doubt the declared customs value. See above for how this was implemented.

We note that Ukraine did not commit to follow this Decision. In our opinion, a failure to follow it is not in line with the general principles of customs valuation.

Valuation of carrier media bearing software for data processing equipment (Decision 4.1)

This relates to customs valuation of carriers (e.g., CD, DVD, etc.) with computer software. In this case, for customs valuation purposes only, the value of the carrier medium should be taken into account. The customs value should not include the value of the software provided that it is distinguished from the value of the carrier medium (i.e., they are separate on the invoice).

The designation “carrier medium” does not include integrated circuits, semiconductors, or similar devices incorporating such circuits or devices. This rule thus will not apply, for example, when software is recorded on a laptop hard drive.

Treatment of interest charges in the customs value of imported goods (Decision 3.1)

This decision relates to the customs treatment of interest charges in the customs value of imported goods. It is particularly relevant to the import of assets under a fi nancial leasing contract. In this case, a question may arise as to whether interest charges should be added to the customs value of the imported assets.

The Code (following Decision 3.1) stipulates that interest charges will not be a part of the dutiable value when the following conditions are met:

  • The charges are distinguished from the price actually paid or payable;
  • The fi nancial arrangement is made in writing;
  • The buyer can demonstrate that the goods are actually sold at the declared price and the interest does not exceed the market level.

It is not relevant whether the fi nancing is granted by the seller, the bank, or any other legal entity or which customs valuation method is applied for valuing the goods.

Treatment of payments in respect of broadcasting/distribution rights of sound or cinematographic recordings

3. Other provisions

While working on proposals for the new Customs Code, we focused on a number of other important areas. We discuss these proposals below. Many of them were developed further based on our initial ideas.

1. Customs rulings (consultations)

The Tax Code allows the controlling authorities (including customs) to issue rulings on the application of tax legislation. We thought it would be good to oblige customs to grant rulings on the practical application of customs legislation. Thus, the customs authorities can now issue rulings on a wider range of customs issues (not only tax ones). The important points about the customs rulings are as follows:

  • Like tax rulings, customs rulings can be of an individual nature (for use by particular taxpayers that requested them) and of a general nature (these may be used by any taxpayer);
  • Customs may issue rulings verbally, in writing, or electronically;
  • If an entity has followed a ruling issued in writing or electronically, it cannot be held responsible if it was subsequently changed or cancelled (i.e., penalties will not apply);
  • The requestor can appeal against a ruling to a higher authority or court. Recognition of the ruling as invalid by a court is grounds for the authorities to issue a new ruling based on the court’s conclusions.

2. Conflict of interest

If the customs legislation is unclear and may be interpreted in favor of both the declarants and the customs authorities, the decision should be taken in favor of the declarants. This provision allows for favorable treatment of the customs legislation if it lacks clarity.

We supported this provision and recommended including it in the Customs Code.

3. Single window

This concept is not new. Rather, the Ukrainian customs authorities have long known about it. We proposed that the customs authorities follow this concept and it was included in the Customs Code.

According to this concept, various types of control over goods should be performed using a single customs information system (Recommendation UNECE/ CEFACT № 33, 2005). The customs authorities would coordinate all communication with other state authorities. Thus, the importer would need only to provide all information about the goods to customs. The latter would then connect with other authorities regarding licenses and permits.

The customs authorities have already committed to start implementing the single window concept from 2013.

4. Electronic declaration

According to the WCO’s approach, introducing the e-declaration of goods is an area of priority development for customs administrations. We have supported the Code’s provisions concerning introducing e-declaration in Ukraine. Ukraine’s customs authorities have committed to fully introducing e-declaration by the end of 2013.

We fully support the following approaches:

  • Minimum supporting documents should be fi led together with the edeclaration. Other documents should be available at the declarant’s premises for review by the customs authorities during post-entry audits;
  • Circulation of documents between customs, other authorities, and declarants happens in an electronic format.

E-declaration represents a signifi cant facilitation of cross-border trade. At the current stage, trade is hampered by outdated IT systems and by the absence of electronic circulation of documents between various state authorities. E-declaration may be fully implemented within four to fi ve years.

5. Amendments to customs declarations

We support the following provisions of the Customs Code:

  • A declarant can amend a customs declaration for three years after customs clearance;
  • If the declarant has revealed undeclared goods and disclosed this to the customs authorities by amending a customs declaration, penalties will not apply.

6. Customs brokerage activities

The draft Code envisages insuring customs brokers’ liabilities for a minimum of EUR 300,000. This could be a serious blow to customs brokers’ activities in Ukraine. We actively moved against this provision of the Code and it was excluded.

4. Conclusion

The general conclusion is that the new Customs Code is a rather progressive document. Much will depend on how the customs authorities implement it. The likelihood of improper implementation will rise if business fails to demand that the authorities follow the rule of law.

There is no ideal document, and the Code has room for improvement. The main areas for improvement include:

  • Customs valuation;
  • Responsibility for customs offences (the current fi nes are unrealistically high);
  • Introduction of centralized customs clearance;
  • Re-introduction of zero VAT on re-export after processing based on contract manufacturing (except for tolling) and sale for export of earlier imported goods from a customs bonded warehouse;
  • Bringing foreign exchange control in line with new customs regulations.

We have already started polishing the customs law in the following areas:

  • Customs treatment of royalties;
  • Compensation of losses caused by the customs authorities.

As active members of the Chamber’s Customs Committee, we will continue making all efforts to lobby for the interests of the business community.