Customs control: who shall pay for it?

Lines of sea containers in Ukrainian ports. Economic upturn and increase of goods circulation? No, customs control.

Despite numerous promises of Ukrainian customs authorities to apply selective customs control deviations often happen in practice. Yesterday the Southern Customs Office issued an internal order demanding total inspection in sea ports. This time-consuming procedure caused lines of incoming containers. In addition, importers bear extra expanses related with customs control procedures, i.e. container weighting. However, it contradicts Ukrainian Customs Code.

Do not pay for control procedures
Customs Code clearly provides that customs control procedures shall be conducted at customs authorities’ expense if no violations were revealed. Moreover, in several weeks a new Government resolution restating this obligation will come into force. Nevertheless, we can’t be sure that it will make customs pay for control procedures.

Necessity of precedent
It is likely that court precedent will solve this problem. Many forwarding agents don’t want to worse their relationship with customs authorities by initiating disputes for additional expenses of US 100 per container. Consequently, all importers suffer. An importer claiming for customs control expanses on the grounds of abovementioned laws will have a very strong position. Court decision will serve as a guide for all other importers and reduce such control expanses practice.

EUR 100 parcels: to tax or not to tax

Taxation of import goods of value below EUR 100 (‘100 euro goods’) is a white spot of Ukrainian legislation. No wonder customs authorities lost when tried to clarify this issue. Currently situation is still favorable for importers, especially for express carriers importing a great number of parcels but will it last for ever?

Under customs legislation import 100 euro goods are treated in special way. According to Government Resolution No. 1948 dated December 12, 2002 goods sent to legal persons via postal and express carriers services shall be taxed in case of application of cargo customs declaration. During customs clearance of 100 euro foods importer files special Letter instead of Cargo customs declaration. Consequently, clearence of 100 euro parcels sent to legal persons doesn't require cargo customs declaration and they are not subject to import taxes.

On April 7, 2009 State Customs Service of Ukraine issued the letter in contempt of Government Resolution. According to the letter all 100 euro goods, including parcels for legal persons, shall be taxable. Customs authorities shall issue unified customs receipt recording the sum of import taxes.

The letter greatly contradicted to the general line of customs authorities’ practice. 100 euro parcels were not taxable in many regions including Kyiv. Thus, regional Customs offices were unready to tax increased number of goods and to issue unified receipts in such quantity. Therefore, in few days the reserve of unified customs receipts forms exhausted. In order to solve this problem State Customs Service issued the letter which allowed issuance of M 15, M 16 customs declarations instead of unified receipts. This letter also violated legal provisions as M 15 and M 15 customs declarations are applicable only to parcels sent to natural persons, not legal ones.

On April 10, 2009 State Customs Service of Ukraine cancelled its previous letters without any explanation. Nevertheless, we may assume that obligatory taxation of 100 euro goods, including parcels for legal person requires amendments of current laws. Will it happen?

On one hand Standard 4.13 of Revised Kyoto Convention requires national legislation to “specify a minimum value and/or a minimum amount of duties and taxes below which no duties and taxes will be collected.” Consequently, Ukraine as a party to the Revised Kyoto Convention shall implement this transitional standards till October 2011. On the other hand Government is looking for new sources to fill budget and may initiate legal amendments aimed at temporary taxation of 100 euro goods. However, expenditures on additional administrating of such goods are likely to exceed tax revenues. It increases the probability of such government’s actions.

Large taxpayers

On 9 December, 2008 the State Tax Administration of Ukraine issued Instruction setting up new rules for selecting large taxpayers. Unlike previous instruction this one is public and companies may know whether they will be considered as large taxpayers.

Under new rules scoring system is applied for selection. Company receives ‘large taxpayer’ status, if it receives 1 point for each indicator and passes 5 point threshold.
Indicator
Point gross income assessed taxes paid taxes VAT refund
1 20M – 100M 200K – 1M 200K – 1M 3M – 15M
2 100M – 500M 1M – 5M 1M – 5M 15M – 30M
3 >500M >5M >5M >30M

The group of large taxpayers in Kyiv, Sevastopol and regions shall generate at least 50% of regional budget’s tax revenues. Otherwise, taxpayers gaining 4-3 points will also fall under definition of large taxpayers.

The aim of selecting is to focus effort on large taxpayers that account for a large percent of total tax collection. For example, about 4 thousand taxpayers, comprising only 0,6% of registered companies, generated up to 65% of the state budget tax revenues in 2008. Large taxpayers are serviced by special tax offices. They are characterized by the divisions specialized in work with taxpayers of the definite economic sector e.g. mining, banking, agricultural, etc. It enables the revenue administration to deploy their best auditors and investigators to scrutinize cases related to large taxpayers.

Post-Clearance Customs Audits

Since recently Ukraine as a party to the Kyoto Convention provides changes to customs control policy. In particular, customs authorities shift the main volume of customs control. Total physical examination at the border will be substitute by post-clearance audit based control of selected importers. of Consequently, as high customs officials declare, the number of post-clearance customs audits will increase soon.

Inspectors
Post-clearance audit system includes local and regional customs offices’ control subdivisions subordinated to central control body - The Department of analytical work and financial monitoring (The Department). Nowadays they inspect about 3% of importers and exporters selected by the Department.

Importers selection for audit
Such selection is made on the basis of importer’s risk profile, created by the Department. Risk profile consists of risk indicators. Combination of the following risk indicators increases the likelihood of importer’s selection for post-clearance customs audit:

- parties to import contract are:
o affiliated persons;
o dealers or distributors;
o registered in tax heaven;
o former lawbreakers.
- import contract:
o differs from purchase contract;
o financial leasing contract;
o contribution to the statutory fund;
o exchange deal;
o etc.
- imported goods are:
o often smuggled in;
o tax exempted
- etc.

Audit types
Post-entry audits are conducted on a scheduled and out-of-scheduled basis in the importer’s office. Customs authorities may also conduct desk audits without visiting importer by examining customs declarations archived in customs offices.

Schedule audits
Importers listed in the quarter audit plan are subject to schedule post-clearance audits. Audit plan is developed by the Department which primarily lists importers satisfying abovementioned risk indicators.

Customs and tax authorities simultaneously start schedule audits in 10 calendar days after sending notification to importer. Such audits last for up to 20 business days and may be extended by up to 10 days if there are valid reasons. Schedule audits are conducted maximum once per year.

Out-of-schedule audits
If importer is not listed in the audit plan customs authorities still may conduct out-of-schedule audit under following conditions:

violations of customs legislation by the importer are discovered;
importer does not respond timely to the request of customs authorities concerning cross-checking of information received from importer’s business partners;
importer claims violations by customs authorities during earlier audits;
importer fails to file obligatory reporting documents on time.

Currently no time limit for out-of-schedule audits is prescribed. There is draft legislation limiting duration of out-of schedule audits to 20 business days.

The Department may also follow up post-clearance audits of local control subdivisions by repeat audits.

The process of audit
Generally customs inspectors examine customs declarations, contracts, financial, accounting and any other import related documents which may verify customs declarations data.


During post-clearance audits customs inspectors may conduct other actions.

Seizure of documents Customs inspectors may seize documents in case they reveal facts of contraband; illegitimate exemption from, or reduction in taxes and duties. It is followed by the execution of Record on violation of customs rules enlisting seized documents.

Inspection of facilities Customs inspectors may examine, test, try and seal importer’s production, trade and storage facilities if it is necessary for consideration of questions related to imported goods.

Audit statement and tax assessment
The results of post-entry audit are documented in the audit statement which shall be presented to importer’s management. Customs authorities shall record the amounts of understated import taxes (customs duty, VAT, excise), if any, in the audit statement.

Importer may present written objection in respect of the facts and conclusions indicated in the audit statement within 5 business days after its receipt. Audit statement imposes no obligation on importer. Therefore there is no way to appeal audit statement via courts. Appeal process may be initiated only after receipt of tax assessment note.

Tax assessment note imposes on importer an obligation to pay extra import taxes and fine within 10 calendar days after its receipt. Amount of fine may be up to 100% of the amount of assessed customs duty and VAT.


P.S. i'm just training in the art of legal writing. will be grateful for any recomendations of improvement.

President Signs the Law Providing 13% Surcharge to Import Customs Duty

On 20 February 2009 the President signed the Law providing legal amendments aimed at balance of payment improvement due to financial crisis. It is expected to reduce the volume of imported goods and consequently decrease the flow of currency abroad by provision of temporary 13% surcharge to customs duty on imported uncritical goods.

The Law defines the list of uncritical import goods subject to 13% surcharge. It includes meat and meat products, food and non-food products of animal origin, alcoholic beverages, textile and clothing, electric heaters, refrigerators, motor vehicles. This list is not exhaustive and may be amended at the suggestion of the Cabinet of Ministers adopted by the Ukrainian Parliament.

The term of application of 13% surcharge is 6 months and may be prolonged for up to 1 year by the Cabinet of Ministers. Notwithstanding this the Ukrainian Parliament may cancel 13% surcharge at any moment. The Law comes into force in 10 calendar days after its official publication.

The Law doesn’t explain applicability of 13% surcharge to import goods originated from states members to free trade agreements with Ukraine. For example, the Multilateral Agreement on Establishment of Free Trade Zone[1] provides customs duty exemption for goods originated from CIS states. Considering that the Law treats 13% surcharge as a customs duty it is subject to exemption under the abovementioned international agreement which prevails over national laws of Ukraine. Consequently 13% surcharge to customs duty on imported uncritical goods is unlikely to be applicable to goods originated from CIS and Macedonia.



[1] §1, Article 3 of the Multilateral Agreement on Establishment of Free Trade Zone, dated 15 April 1994

Parliament Insists on 13% Customs Duty Surcharge

Ukrainian Parliament amended by 328 votes the draft law providing law amendments for the improvement of balance of payment due to financial crisis on 4th February, 2009.

The draft law provides temporary 13% custom duty surcharge on imported goods in order to improve state payment balance. It is expected to reduce the volume of imported goods and consequently decrease the flow of currency abroad.

The President of Ukraine vetoed the draft law noting it contradicts to A. 12 of the GATT 1994 and Balance-of-Payment agreement[1]. The Head of Parliament Tax and Customs committee Mr. Teriyohin argued President’s note by explaining that abovementioned WTO treaties obligate member states to use the least disruptive price based measures for improvement of balance payment. Price based measures include import surcharge, import deposit requirement or equivalent measures with an impact on the price of imported goods. The proposed custom duty surcharge influences the price of the import and is likely to fall within the scope of ‘price based measures’. Consequently, customs duty surcharge may be applied by Ukraine in line with WTO rules.

Following Mr. Teriyohin’s explanation deputies amended the draft law by the list of import products subject to temporary custom duty surcharge: It includes meat, fruit, wine, coal, electric generators, motor vehicles and other goods.

The amended draft law was sent for signature to the President. Despite the possibility of repeat veto deputies had shown strong political will during last voting. The draft law was supported by the constitutional majority of deputies. Such tendency, if maintained, may allow Parliament to overcome President veto and enforce the draft law.

[1] Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994

A ship or a state

In recent years several companies (Feedom ship, The Seasteading istitute) claimed of their ability to construct great ships or semblances of vessels which would be of no need to enter seaports. An autonomos artificial territory in the high seas. What legal status will it have?
International law demands a ship to have a flag of the state. Otherwise it may be boarded and seized on the high seas. So let's assume our Giant Ship (GS) has a Mongolian flag. A genuine link between the state of the flag and the ship is demanded. It can be created by registrating an engineering company in Mongolia.
The GS is already constructed, it has permanent habitants. They claim to create new state. Article 1 of the Montevideo Convention on Rights and Duties of States lays down the following criteria of statehood: 1 - a permanent population, 2 - a defined territory, 3 - government and 4 - capacity to enter into relations with other states. According to the 3rd point goverment should exercise effective control over the territory. In our case GS government for sure will control "territory" much better than Mongolia, which is a sealocked country with no navy. Of course GS doesn't have territory in the classical meaning, but today boards of military aircrafts and ships are treated as the state's territory.
Thus we have some vague legal grounds for creating new states with artificial territory.


A ship or a state by lysogora is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 3.0 Unported License.