Overview of customs regulation developments Tax Flash Report

Tax Flash Report
by PwC experts
Overview of customs regulation
developments
March 2016 / Issue No.11
In these dynamic times many developments happen in legislation and in as well as in practice. These
changes also come by the customs regulation, which is an inseparable part of international trade and
commerce. Volatile economic conditions prompt the government to look for new ways to approach
new challenges. In this context we see a transition to the new reality in state regulation of foreign
trade, which includes different approaches to state control over international trade transactions.
We are pleased to present our customs flash report where we gather the latest information and
summarise the customs regulation trends. We believe our report will interest not only foreign trade
and customs specialists but also lawyers along with financial, accounting and internal control
professionals.
Technical regulation
In recent years, certain measures have been taken in Russia, which are
designed to regulate services associated with confirmation of goods’ compliance
with technical regulations. By applying a risk-oriented approach in 2015, the
government (more specifically, the Federal Accreditation Service) inspected
approximately 150 certification agencies and testing labs that accounted for
over 60% of all compliance certificates issued. Following the inspection
accreditations of some agencies and labs (over 25%) were revoked and some
accredited entities were charged with administrative fines. At the same time,
the customs authorities conducted counter reviews of compliance documents
and trial records that the companies or their representatives obtained from
these certifying agencies (labs).
We believe, that the government will continue its oversight of certification
agencies and labs that are placed in the risk zone (e.g. those issuing a large
number of certificates). Accordingly, we expect more statutory inspections and
resulting revocations of accreditation from the offenders.
Misconducting of certification agencies and test labs also create serious risks
for importers. In particular, the conformity documents obtained from such
accredited agencies could be held invalid by the authorities while the importer
will be charged with administrative liability for using these documents.
Furthermore, if the goods are deemed incompliant with safety requirements,
they even can be withdrawn from circulation.
How we can help
We would be pleased to assist you with the following:

review of available conformity documents to assess possible
implications for a company, if documents are held invalid;

provide information about inspections of certifications agencies and
test labs that issued compliance documents and assess the risks
arising for importers, should accreditations of the certifying agency or
the lab be revoked;
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
Country of origin
develop recommendations to mitigate risks related to importation and
sale of goods, where their technical compliance can be challenged (e.g.
if agency’s accreditation is revoked).
New free-trade zones
Further to the development of trade and economic relations of the EAEU with
third countries, determining the country of origin becomes one of the essential
tasks. In 2015, the EAEU entered into the first free-trade zone agreement with
Vietnam, which stipulates graduate liberalisation of customs tariffs applied in
mutual trade. This agreement is now being ratified by the EAEU members and
is expected to come into effect by the end of 2016. At this time, the decision was
also made to start negotiating a similar agreement with Israel.
Considering the list of countries that inquired about entering into a free-trade
zone agreement with the EAEU, we expect the number of these agreements to
increase.
Confirming the country of origin for export to third countries
Besides creating favourable conditions in mutual trade, the country of origin of
the goods could become a serious administrative barrier for goods accessing
other countries’ markets. For example, some countries continue to require
certificates of origin for the goods to be imported or for applying the most
favoured nation treatment (e.g. the UAE, Turkmenistan, Uzbekistan). Inability
to obtain such certificate in Russia due to strict origin criteria could imply for
some manufacturers/exporters the loss of market in such countries.
We believe that agreeing on a harmonised system for confirming the goods’
origin exported from the EAEU customs territory (currently being developed by
the Eurasian Economic Commission) could substantially assist inthis process.
This agreement is expected to stipulate a more flexible approach to determining
the Russian origin of exported products that will allow Russian
manufacturers/exporters to obtain non-preferential certificates of origin, which
then can be used to import the goods of Russian origin into a third country, or
to apply the most favoured nation treatment to such goods.
Confirming the country of origin for state procurement
Determining the country of origin of goods is important not only for applying
tariff and non-tariff regulation measures but also for state (municipal)
procurements.
In 2015, the Russian government introduced a number of restrictions
(limitations) disallowing certain categories of foreign goods to be procured by
state/municipal authorities (e.g. specific types of medical products,
pharmaceuticals, software).
At the same time, for some goods the state established special rules for
determining the country of origin for purposes of state/municipal procurement.
On 1 October 2015, the Russian Government Resolution No. 719 of 18 July 2015
became effective, which sets localisation requirements for products
manufactured in Russia by a range of industries in order to recognise their
Russian origin. These requirements are expected to apply when setting and
applying restrictions, limitations and terms for admitting goods to be
purchased by state authorities and when identifying measures for state support
of domestic manufacturers (as part of the industrial policy legislation).
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What do these developments mean for you?
The above changes in the rules of origin directly affect companies engaged in
exportation/importation and operating on the Russian market. More
specifically, compliance with certain rules of origin (depending on the area of
application) will allow companies:
 to save on customs duties upon importation of raw and other
materials as well as finished goods under current free-trade
agreements;
 to ensure market access for their goods in third countries and to
improve its competitiveness by reducing customs duty costs.
 to guarantee participation in government tenders;
 to claim certain support from the state.
How we can help
We can analyse the current rules of origin applied both in Russia and in third
countries and provide our expert opinion on applicability of certain criteria of
origin depending on the category of manufactured products and company’s
business targets; we can also assess the feasibility of these criteria considering
given technological processes and production operations, advise on further
steps to ensure compliance with applicable criteria subject to available
resources and components, and to assist with obtaining documents to confirm
compliance with the set criteria.
Risk management system
of the customs authorities
In 2015, many companies faced delays during customs clearance due to
additional checks performed by the customs authorities, including customs
inspections of the goods. This was due to revision by the Federal Customs
Service of Russia (FCS) of certain criteria for assessing ofcompanies which
import/ export goods. After introducing automatic categorisation of companies
into the risk management system some importers lost their status of
“companies with low risk of violation of customs legislation”. Please note that
the criteria for assessing foreign trade operators are set in the FCS internal
guidelines, not available in the public domain. Along with automatic
categorisation, the FCS also applies the industry-based approach (importers of
auto components, meat and fish products and local manufacturers can be
categorised as low-risk if they meet certain requirements).
The status of an authorised economic operator (AEO) is another factor taken
into account by the customs authorities in their risk management system when
performing selective control, although technically this status only gives a
company the right to use certain simplifications, unrelated to the degree of
customs control.
The concept of AEO will be improved in the future when the EAEU Customs
Code will be further developed. In particular, it is expected that companies with
AEO status will be able to use more simplifications (depending on the AEO
type), which, inter alia, foresee minimisation of customs control. The
requirements to obtain the AEO certificate are expected to become stricter.
It is important to note that if AEO status is obtained under the current Customs
Code of the Customs Union, the period that a company possesses this status
will be considered when obtaining the AEO status under the new law.
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If an importer obtains the status of “a low risk company and/or the AEO status,
the selective control can be performed during the customs clearance with focus
on post customs clearance control. We believe that with stricter customs
control and regular revision by the FCS of assessment criteria applied to
companies, obtaining the AEO status could ensure the company maintaining its
status of a low-risk operator.
How we can help
We will be happy to assist with assessing the possibility and feasibility of the “a
low risk company” status as applies to a company core activity and to assess
whether the company qualifies for the AEO status (which will include our
professional expert opinion regarding its eligibility).
Customs value
The recent practice shows a trend to stricter control by the customs authorities
over the accuracy of the declared customs value. We are aware of the FCS
instructions (issued to subordinate local customs authorities) to conduct more
efficient additional checks over the customs value of imported goods. The new
FCS campaign, which is designed to prevent understatement of the customs
value, is implemented, inter alia, through updating the so-called risk profiles
for a broad list of goods, and through conducting customs audits (desk and
field).
The customs authorities also demonstrate more aggressive approach to
interpretation of provisions of license and franchise agreements. For example,
some customs authorities try to challenge non-inclusion into the customs value
of the goods the payments for using various intellectual property rights, which
are not related to trademarks (e.g. payments for the rights to use know-how and
IT-systems). We are also aware of cases when Russian customs authorities
required to include license payments/royalty in the customs value of imported
components to be used for manufacturing of the licensed products in Russia.
Besides broad interpretation of the law by the customs authorities, we would
also like to note some troubling developments in the court practice, which
pertains to cases regarding the goods’ customs value. In the past the courts
usually indicated that the burden of proof with respect to validity of customs
value adjustment and circumstances, based on which the adjustment was made,
lies with the customs authorities. At the same time, the court practice regarding
adjustment of the customs value that was shaping for many years, could
change, including due to the judicial reform that recently ended.
The recent Ruling of the Supreme Court of Russia passed regarding one
unremarkable case regarding customs value adjustment of imported goods
could serve as a vivid example (Russian Supreme Court Ruling No. 303-КГ1510416 of 23.12.2015 regarding case No.А51-32919/2014).
According to case No.А51-32919/2014, the declared customs value of goods
imported by a company was substantially lower (between 3.5 and 5 times) as
compared to the customs value of similar goods. Furthermore, during the
additional checks the importer failed to provide most of the documents
requested by the customs authorities (including the seller’s price list and export
declaration). The customs authorities decided that documents provided by the
company are insufficient to confirm the customs value and adjusted it.
Although arbitrazh courts resolved the case in favour of the importer and
invalidated this decision of the customs authorities (since customs authorities
failed to prove that customs value was declared inaccurately) the Supreme
Court sent the case for retrial. Further to that, the Supreme Court claimed that
the importer must gather the evidence of a low declared price, should it
substantially different from the value in a transaction with goods of the same
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kind. So, the bottom line of this case is that the “presumption of accuracy”
principle with respect to the declared customs value of goods has been revised.
The Supreme Court expressed an opinion that in these cases the courts must
perform a more thorough analysis.
We believe that the customs authorities will continue to tighten their control
over the customs value and will look for the new reserves to improve fiscal
performance further to falling volume of imports into Russia and budget deficit.
In this context, the chances that many companies may be soon subjected to
additional audits (during the customs clearance and after the goods are
released) are high. The practice suggests that these audits often result in
requests for a large number of documents both from importers (declarants) and
from foreign vendors (sellers and/or manufacturers). Further, it is important to
note that failure to provide additional documents or submission of incomplete
documentation by importers, as well as failure to submit documents to the
customs authorities by foreign sellers/manufacturers of goods, could result in
adjustments of the customs value and lead to administrative fines.
How we can help
Our team of customs specialists is ready to assist with drafting responses to
requests from the customs authorities, including preparation of a company’s
technical position on the entire range of issues raised during audits. We are also
ready to assist in situations related to information requests of Russian customs
authorities submitted to foreign suppliers of the company, which includes the
analysis of validity of such requests, responsibility of foreign suppliers should
they fail to provide such information and implications for Russian importers.
Our specialists are also ready to assist with analysing the license/franchise
agreements, to identify potential customs risks and elaborating practical
recommendations to mitigate them.
Statistical declaration
At the beginning of 2016, the new rules for maintaining statistics of the mutual
trade between Russia and members of the EAEU have entered into force. From
10 January 2016, the FCS started acting as an authority responsible for the
statistics with respect to goods being moved under transactions within the
EAEU countries (Rosstat was performing these functions before).
The key changes in the new rules concern the completion of the statistical form,
information about the documents regarding transferred goods and the
timelines for submitting the form to the customs authorities. More specifically,
the new lines were added in the statistical form (e.g. line 19 “Additional
information”, line 20 “Customs declaration”) and the scope of required
information to be completed was expanded. For example, the new statistical
form must contain information about the documents confirming compliance
with restrictions and limitations, currency legislation, whether the goods were
processed, etc. The new version of the rules leaves many questions regarding
completion of certain lines of the statistics form and sufficiency of provided
information, which complicates preparation and submission of these forms.
Please also note that at the end of 2015, changes have been made to Article
13.19 of the Russian Code of Administrative Offences, which expanded the list
of cases for violations in submitting the statistical form. In particular, the
administrative fine can now be imposed on companies if the statistical form
contains inaccurate information. Furthermore, the administrative fine under
Article 13.19 increased from RUB 3,000-5,000 to RUB 20,000-70,000 for the
first violation (RUB 100,000 - 150,000 for repeat violation). As of now, the
customs authorities are not empowered to charge entities with administrative
liability for violations in statistical reports (currently it is the responsibility of
the local office of the state statistical bodies). In the near future the Code of
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Administrative Offences will be amended to specify the competency of customs
authorities to consider cases related to the above administrative violations.
The new version of the Code could lead to more administrative cases due to
technical errors and misprints or due to failure to include certain information
in statistical focus (e.g. absence of a number of the customs declaration related
to foreign goods purchased and imported into Russia from the EAEU countries
in the statistics form).
How we can help
Our specialists are ready to assist with analysing new legislative requirements,
to obtain clarifications from the FCS regarding the necessity to provide certain
information in the statistical forms, to develop recommendation on obtaining
information from contractors necessary to complete the statistics form and to
change the terms and conditions of contracts made with the contractors (to
avoid the risk of administrative liability). We also will be happy to assist with
tuning the process of data retrieval from company’s internal IT systems to
complete the statistics forms.
Administrative Liability
In practice cross-border activities of companies is often associated with various
errors and mistakes. This in turn, exposes commercial issues for the companies
(e.g. inability to pay to the supplier the entire amount in case of surplus
supplies of goods) as well as risk of administrative liability. Unfortunately, the
sanctions for customs violations still do not correspond to the nature of mistake
and the amount of incurred damage.
At the same time, the business initiated attempts to liberalise the
administrative legislation that applies to customs violations. For example, from
February 2015, the Code of Administrative Offences (the Code) stipulates the
principle of “voluntary admission of an error”, which allows the companies to
avoid administrative liability in cases of provision inaccurate information about
the goods resulting in underpaid customs payments (Article 16.2, part 2 of the
Code). But this principle applies only in some cases (e.g. if the customs value
does not include some mandatory expenses or license payments).
It should also be noted that the principle of “voluntary admission of an error”
can be applied only when certain conditions are met (e.g. if no administrative
violations have been identified with respect to the goods, no audits of the
declarant are being conducted and no overdue customs payment exist).
Although, in our opinion, the risk of administrative liability still remains. For
example, at the moment when the customs declaration is amended it is not
always clear whether the audit has already commenced since under the customs
law the desk customs audits can be performed by the customs authorities
without informing the declarant. In these cases there is a risk that amending of
the customs declaration may result in administrative sanctions.
However, as before, voluntary admission does not relieve the company from
administrative liability for the failure to declare the goods in cases of



goods re-sorting/excessive weight;
surpluses;
“gifts” from suppliers.
In these cases the declarant will still be subject to administrative liability while
identifying incorrect information about the goods in customs declaration and
applying to the customs authorities to correct the errors and pay the customs
payments due. The draft Federal Law that stipulates voluntary adjustment of
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mistakes without being charged with administrative liability for nondeclaration of goods (Article 16.2 part 1 of the Code) was approved by the State
Duma in the first reading. The second reading of this document is scheduled to
March 2016.
How we can help
We are ready to assist companies to evaluate the possibility of apply the
“voluntary admission of an error” principle in specific situation and thereafter
to develop approaches to introducing retrospective changes into the customs
declarations. Our specialists are also ready to participate in negotiations with
the customs authorities to agree on an approach to the customs declarations
adjustment. Our team may assist with developing or improving the internal
control system to timely identify mistakes and make adjustments in customs
declarations so as to mitigate the risks of mistakes being identified by the
customs authorities during post customs clearance control.
Reorganisation of
customs authorities
Under the Russian Presidential Order No. 12 of 15 January 2016 “On Matters of
the Ministry of Finance” the Russian Ministry of Finance was assigned to
handle customs regulation matters. Accordingly, the FCS was technically
subordinated to the Russian Ministry of Finance (before, the customs
authorities were overseen by the Russian Government). The next step is to
develop the unified system for administration of tax and non-tax payments.
This step is expected to include development of a common IT database for the
FCS and the Federal Tax Service of Russia (FTS), which is needed for quick
exchange of data.
The officials believe that the decisions of the Russian President to subordinate
the customs authorities to the Ministry of Finance, and the common system for
administration of tax and non-tax payments will increase collection of customs
payments. This step involves creating a common IT database for the FCS and
the FTS, which will ensure the control over goods at all stages of its movement,
starting from procurement from a foreign supplier and ending with sale to the
end-customer in Russia. We assume that these structural changes will affect
the approach of the customs authorities to control over the customs value of
goods.
Although, the Presidential Order set only three months for resolving
administrative issues, there is still no clear understanding how the
responsibilities will be transferred to the Ministry of Finance and which
functions will remain with the FCS.
Pilot project for marking
fur articles with control
marks
The Agreement for implementing in 2015-2016 a pilot project for labelling
goods with the control (ID) marks (the Agreement) was signed on 8 September
2015 during the Eurasian Intergovernment Counsel meeting at Grodno.
The Agreement provides that starting from April 2016 the EAEU countries will
launch a pilot project for marking fur articles: all articles must be labelled with
RFID chips. The marking requirements apply to both producers and importers
of fur articles. Each mark will contain its own ID number and information
about the category and name of the article, its country of origin, producer or
importer. The labelling procedure has not been fully developed.
The pilot project will continue through the end of 2016. If the project is
successful, the list of products will be expanded in 2017. According to the
available information, to combat counterfeit products, in February 2016, the
Russian Vice-Prime Minister , Igor Shuvalov, instructed the Federal Tax Service
to implement electronic marking of pharmaceuticals, consumer goods and food
products. Since the list of goods on which control marks should be placed, is
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expected to expand, we advise to monitor the status of the pilot project. This
will allow properly assess the legislative changes that could affect a wider range
of goods.
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Tax Flash Report
by PwC experts
Contacts
We would be happy to answer any questions you may have.
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