Much to the joy of entrepreneurs an updated version of the customs regulations has been submitted for parliamentary consideration. This is the second most important, after the Tax Code, document for businesses, as it radically changes the principles of border-control operations. What will the new border procedures look like? Has a compromise been found with businesspeople over the code’s most controversial items? When will the updated version be adopted? Vitalii KHOMUTYNNIK, chair of the Parliamentary Committee for Finances, Banking, Tax and Customs Policies, answers these questions in an exclusive interview to The Day.
Would you tell us about the process of drawing up the new version of the Customs Code? What countries served as examples and what items triggered the most heated debates?
“Before the committee came up with its version of the code, two more had been drawn up: by the State Customs Service of Ukraine and by MPs together with businessmen. Yet neither of the two stood a real chance in parliament. The former would have been criticized and rejected by the business milieu and the latter by the Cabinet. With this in mind, the committee drew up its own version, taking the best from both documents and bringing it, as our neighbors did, as close as possible to the new (updated) Customs Code of the European Union and taking into account the rules of the International Convention on the Simplification and Harmonization of Customs Procedures. The experience of Poland was of noteworthy; before joining the EU seven years ago this country also changed its customs regulations and brought them in line with European standards. The updated Customs Code will speed up Ukraine’s movement towards the EU.
“What caused the most heated debates in the task force was the chapter on customs valuation, the procedure of transferring goods, and appealing against the decisions of customs bodies. Raising the untaxed worth of the goods an individual can carry when they cross the Ukrainian border also caused some discord. We suggest fixing it at 2,000 euros, but the Customs and the Ministry of Finance disagree.
In their view this will cause billions of hryvnias in budget losses. So I officially requested these bodies to say in clear-cut terms how many people came to Ukraine in 2010, what was the worth of the goods they cleared through customs, and what revenues the budget received from this.”
Can there be a compromise solution to this problem?
“We will be seeking a compromise if the Ministry of Finance and the State Customs Service present some serious economic evidence that this step will inflict heavy losses on the budget. They have not presented this evidence so far.”
“IT WILL TAKE NO MORE THAN FOUR HOURS TO PASS THROUGH CUStOMS”
What fundamentally new points are being introduced into the existing regulations?
“The current Customs Code has been in force for seven years. A lot has changed in this time in Ukraine and the EU. In particular, the latter adopted a new version of its Customs Code in 2007. It is for this reason that Ukraine has opted for gradually embracing the international law, for we want to be part of the European community.
“As for the new points, the code minimizes the list of customs examination documents needed for a contract or a declaration. Other innovations include the electronic declaration of goods and the rule that customs officers must tell the importer, if the latter wishes, about their tentative assessment of the goods’ customs value. This solves the problem of bribery, the shady handling of goods, and improves the effective work of the customs because from now on the customs value will be assessed on the spot when cargo arrives at the border: in other words, it is in fact impossible to separate the movement of documents and cargo. Electronic declarations and one more innovation, post-audit controls, will reduce the time of customs controls to four hours. Companies will also be allowed to have their goods cleared at any customs office in Ukraine.
“The code also has a clause on establishing the institution of an authorized economic operator. He will take over some of the customs officers’ duties, which will make it easier for bona fide importers and exporters to get customs clearance for their goods.
“The new Customs Code’s clause on automatic application of the method of customs value assessment by contract price is somewhat revolutionary. Today, an entrepreneur shows a contract at a border checkpoint, and customs officers assess on their own whether or not the goods price in the contract is correct, having at there disposal six methods of doing so. If the customs officers say, on the basis of just one of these methods, that the value is wrong, the entrepreneur can prove nothing and will have to pay more. Conversely, we suggest setting extremely clear rules for applying a method of contract customs value assessment. If a company has a good business history, if it does not constantly change partners, including those in from offshore zones, it will be eligible for a simplified border crossing procedure. We will further improve this mechanism before the second reading to prevent offshore companies from abusing it.”
You mentioned post-audit controls. Entrepreneurs fear that they will be a tool for customs officers to collect additional duties. How does the code minimize this risk? On what basis and how many times a year will inspections be carried out as part of this procedure?
“It is about a routine inspection once a year, with a due notice to be sent to the entrepreneur. The inspection can last for not more than 20 days with an option to be extended for another 10 days. Post-audit controls will make it possible to relieve customs checkpoints and avoid queues on the border. Businesspeople will no longer have to stand idle for weeks in order to pass through customs. Today, customs officers will not clear the cargo until they are finally convinced that the declaration is correct. But we suggest clearing and then coming over once a year and checking whether the declared customs value is right. If the inspection finds any irregularities in the customs value, the entrepreneur will have to pay additional customs duties equal to the amount to which the price was underrated.”
Why did the code opt for field checks rather than for document inspections, as international practice requires? One more thing: businessmen claim that mandatory post-audit controls resemble Soviet-era examinations, for customs officers are vested with the right to even examine the accounting documents of an enterprise.
“It will have been added by the second reading that post-audit controls will be carried out by way of a document or field check (if there are grounds to question the authenticity of the furnished information).”
But why does the updated Customs Code retain a lot of indirect-action provisions, which can only come into effect by adopting a string of by-laws? This leaves room for corruption on the border. For example, the plan of post-audit inspections is approved by the customs office and that of transportation vehicles and customs examinations by the Cabinet.”
“These provisions remain intact because, when the original text of the code was being prepared, no common vision was achieved. But we will, in collaboration with businesspeople, customs officials, and sectoral associations, have streamlined these clauses by the second reading, for the main objective of the code is to introduce as many direct-action provisions as possible.”
“UP TO 35 PERCENT OF IMPORTS WILL BE SUBJECT TO POST-AUDIT CONTROLS”
Who will be subject to post-audit controls?
“The entrepreneurs who are within the ‘risk area.’”
Could you explain?
“Today, 65 percent of imported goods are raw materials. In my view, there is no need to check whether their value is correct if the direct producer is involved in their import. On the other hand, one must take a closer look at the containers with Chinese-made clothes or other groups of risk goods, such as, for instance, alcohol.”
In other words, up to 35 percent of imports will be subject to post-auditing?
“Yes. Besides, post-audit control will help reduce the number of instances when simplified tax payment procedure is used to minimize taxes. But this produces an indirect effect. The border is crossed by entrepreneurs who sell their goods to ‘simplified-tax payers’ inside this country. So the simplified taxation system was used for a long time as a way to legalize contraband inside Ukraine. Actually, businesspeople themselves admitted this during the talks on a simplified system of accounting incomes and expenses. Businessmen used to say that when this happened they would be unable to confirm the goods’ origin. If the post-audit control system is introduced, the importer of these goods will have to declare their full value and pay all the taxes.”
Before entering the WTO Ukraine held a lengthy debate on the chapter on customs value and the ways of assessing it. So the final chapter in the current Customs Code of Ukraine is a compromise. Now it is being changed. Can this lead to additional negotiations with the WTO?
“All the WTO is concerned with is changes in the rates. There will be more liberal rates for the goods imported by natural persons and no other changes. I do not think this will cause the WTO to object.”
What economic effect do you think the introduction of the new customs regulations will have on the budget?
“It will be good if introducing the Customs Code makes budget revenues and expenditures break even. But, what is more, the code is supposed to ease the life and working conditions of businessmen because the current customs regulations are so rigid that they do not allow entrepreneurs to have their goods cleared ‘honestly’ by the customs. We hope that trade between Ukraine and other states will increase. The main goal of the Customs Code is to forestall budget losses and simplify the procedure as much as possible for businesspeople.”
Everybody is raving about the Georgian model of economic development, that it is almost a panacea. Did you take it into account when drawing up the new customs regulations?
“Indeed, Georgia has made progress as far as customs reform is concerned. Instead of six methods of customs value assessment, they have only one — by contract price. What customs is to do afterwards is keep an eye on whether the VAT has been fully paid on the imported goods.
“In other words, if customs has cleared something on the border, the Tax Inspection is sure to monitor the adequate payment of taxes. There is no rivalry between the two bodies, for they are serving a common cause. By contrast, in Ukraine one can see a fierce competition between the State Customs Service and the State Tax Administration because the customs is supposed to collect as many duties as possible on the border — the yardstick for its effective work — while the tax administration should do so inside the country. So, to introduce the Georgian option, the two bodies should be merged. But this is not the only obstacle. The problem is that there are two ‘holes’ on the Ukrainian domestic market, which will not allow the tax administration to monitor VAT payments. The first is bogus firms which import goods across the border, declare their liabilities to the tax administration, hand the goods over to other entrepreneurs, usually those subject to the simplified-tax, and… disappear. The other ‘hole’ is the simplified system that allows any goods to be cleared and, accordingly, sold without documents, for these entrepreneurs can only keep a book of incomes.
“This is why the Georgian option will not work in Ukraine, and we must look for a different way to balance things. Or we should take a radical step: introduce the accounting of incomes and expenditures for simplified-tax payers and merge the national customs and tax services.”
“GOVERNMENTAL AMENDMENTS TO THE TAX CODE WILL REDUCE BUDGET REVENUE BY FOUR BILLION HRYVNIAS”
You mentioned the simplified taxation system. What effect do you think the government-proposed changes to the Tax Code will have on the budget?
“Governmental amendments to the Tax Code will reduce the budget by around four billion hryvnias. But this amount may be much higher. All depends on whether legal entrepreneurial entities will want to break their business into smaller parts and make them subject to the simplified taxation system.”
So are you for or against the taxation changes submitted to parliament?
“I will be supporting these proposals if they include certain financial compensators for the budget. In other words, we should not just halve the rate but see at what expense these budget losses are being compensated for. And, what is more, we should bust the scheme of using the simplified system to minimize taxes.”
“THE COMMON SOCIAL CONTRIBUTION MAY BE HALVED FOR ‘SIMPLIFIED-SCHEME ENTREPRENEURS’”
Small and medium business owners are complaining that the increased tax pressure forces many to fold up their businesses. Would you comment?
“A total of 1,200,000 people worked on a simplified tax payment basis in 2010, and 800,000 of them had nothing to do with legal entities. Out of the remaining 400,000, 170,000 were employed fulltime by legal entities (as cleaners, food deliverers, etc.). In other words, about a half of them worked under a primitive tax minimization and simplification scheme. The remaining 230,000, the simplified-tax payers, had something to do with legal entities at least once a year. Now, let us analyze the impact of the fact that the expenses the legal entities bore on account of buying goods and services from ‘simplified entities’ were not made part of gross expenditures. In January-April 2011 the number of the ‘simplified entities’ dropped by 80,000 (out of 1.2 million). I think they also include some former partners of legal entities. Incidentally, most of them did not fold up their business, they just switched to the standard system of taxation. Statistical data also proves this: in the first four months of 2011 the number of natural persons employed under the standard system of taxation grew by 136,000, i.e., another 56,000 entrepreneurs appeared since the beginning of 2011. Therefore, all the talk about mass-scale closures is political speculation.
“As for small business, the state is even prepared to make concessions. The problem of paying the common social contribution has been solved for pensioners and the disabled — they are exempt from it now. A proposal is being discussed to halve the common social contribution from 34 to 17 percent for simplified-scheme entrepreneurs. But this is a very disputable idea, for it means the budget will be automatically lose three billion hryvnias a year.”
Until when do you receive suggestions about the code? When will the finished draft be submitted to parliament?
“We receive proposals and remarks until June 1, 2011, and we are planning to submit the document to the Verkhovna Rada before June 12. I do not rule out that the Customs Code [parliamentary] debate will be postponed until the autumn. It does not matter for me if MPs will pass this document now or in the autumn. What really matters is that they should be convinced that they are adopting what we need. The code will take effect on January 1, 2012.”
Postponing the debate on the Customs Code until the autumn... Do you want to leave more time for dialogue with business so as not to see a repeat of the Tax Code scenario?
“It is impossible to make the same blunder as in the case of the Tax Code because a task force, consisting of entrepreneurs, representatives of Ukrainian and international business associations, customs officials, and economists, has been working on the Customs Code for six months now.”
