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How to combat smuggling at the Ukrainian border

Author : Oleksiy Kushch

Customs administration is a dream of any Ukrainian politician; it generates about 9,6 billion USD of the value-added tax on the cost of imported goods
17:55, 4 July 2018

Read the original text at 112.ua.  

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Customs administration is a dream of any Ukrainian politician. It is not surprising that this institution is that attractive; it generates about 9,6 billion USD of the value-added tax on the cost of imported goods to Ukraine’s customs territory, as well as records the value of export commodity flows for which exporters receive more than 4,6 billion USD in VAT refund year. Ukrainian elites trench on this institution. You bet; sure! A cumulative annual cash flow of up to 16 billion USD is at stake.

Just a few days ago, breaking news appeared that the government and the Ministry of Internal Affairs decided to establish order at the Ukrainian customs administration. After sitting in the offices for several years, they have suddenly found that the "customs deals with the goods." And they decided to make the D-day. Apparently, their subordinates are tired of watching how the largest financial flow in the country spreads through various groups of influence, and they decided to consolidate it. Although everything was served under the guise of struggle "for everything good, against everything evil." Moreover, senior officials have pushed too far, telling that literally on the second day after announcing the "customs crusade" some "creeps" check the "customs clearance" of prime minister’s wife's Mercedes.

Related: US abolishes anti-dumping customs tariffs for Ukrainian fertilizers

Following the idea of the authors on the introduction of the police units to the customs should bring a new investment charm to the domestic fiscal service. All that is left is to place armored vehicles at customs posts, to strengthen the cynological patrols and to launch helicopters, produced in France. Or assault aviation would be enough. It is possible to transfer the experienced forces of the National Guard, who have already defeated the "amber mafia," thank God, the western border is near. In fact, Ukraine has already lost more than 70% of its transit potential: the country-hub has gradually turned into a dead-end country, where fewer and fewer trains, ships, and trucks come. Potentially, we could earn billions of dollars on the logistics of Asian and, above all, Chinese goods to the EU market. But instead of launching free economic zones with China, Belarus creates multimodal logistics centers, which initially had less attractive transit parameters, not to mention the fact that the FTA with the EU was signed not by Belarus, but by Ukraine. In practice, natural competitive advantages are easily leveled by the lowest level of public management and at the same time the highest level of corruption.

Related: Police are given more power to control custom officers

According to the results of the last year (data of the National Bank of Ukraine), customs goods flows for imports were $ 49 billion and $ 39.7 billion for exports. Negative trade balance amounted to more than $ 9 billion. But this is only the tip of the iceberg.

In previous years, research was conducted on statistical discrepancies in the import of goods to Ukraine, based on data from our customs. The gaps in the statistical data were really huge. In different years they reached up to 45% of the official figures of the Ukrainian customs, and the amount of discrepancy ranged from 8 to 18 billion dollars per year. Let us take 2011 year for analysis. Based on information that was then published, the volume of imports to Ukraine from the CIS countries, according to the Ukrainian side, was $ 35.6 billion, the size of statistical discrepancies with the data of the trading partner countries was $ 3.7 billion or 10.3 %. This discrepancy was the smallest among the other world markets; after all, customs officers within the CIS have always been able to negotiate and coordinate the figures.

Speaking about the imports from the EU, it officially amounted to 27 billion dollars, and the discrepancies with Eurostat data were $ 6.7 billion or 25%. The highest level of discrepancy was recorded with China, which is not surprising, considering the number of Chinese consumer goods sold at various semi-legal markets: official deliveries amounted to 6.3 billion, and a deviation was $ 2.9 billion or 46%! A high level of discrepancies with the US has detected: 2.6 billion dollars against 0.42 billion, respectively, or 16%.

Related: Government eliminates Interregional Customs of Ukraine's Fiscal Service

In total, goods worth $ 71 billion were delivered in 2011, while the aggregate indicator of statistical deviations with foreign statistics was almost $ 14 billion (or more than 19%).

Given the parameters of 2017, the size of the deviations of the actual imports from the official (hypothetically) could amount to $ 12 billion. Of these, about $ 2 billion was not received from the budget in the form of taxes. In addition, $ 12 billion should also increase our negative trade balance. But through customs not only unaccounted imports are being made, but also fictitious/unaccounted export. Fictitious exports are when the amount of commodity deliveries is overstated in order to obtain additional amounts of VAT refund (20% of the overcharged amount). This happens when the FIGs have an effective tax optimization model and is not afraid to reflect inflated revenues. By the way, in Ukraine, the right to VAT refund is not tied with the fact the export earnings, that is, you can draw any export amounts and receive hundreds of millions of VAT reimbursements, while no one will check whether this revenue really returned to the country. My attempts to encourage some deputies, who like to publicly demonstrate their hatred of corruption, to link the fact of VAT refund to exporters with the date of return of export earnings to the country, caused a slight shaking of the facial nerve of these MPs. As for unaccounted export, it is recorded in FIGs’ operations, which accumulate part of the foreign exchange earnings on foreign-controlled companies: in Ukraine, their firms are almost bankrupt, but foreign trading houses located in offshore zones declare incomes of hundreds of millions due to receipt of up to 30% unrecorded trade revenue. But there is another unaccounted export - this is when excisable goods are exported, mostly cigarettes and raw materials banned for export (round timber). Since January 1, 2017, the export of round wood from Ukraine is banned. According to our State Statistics Service, this is the case: in 2016, 840,000 tons of round wood were imported into the EU, last year only a few thousand tons were imported. But according to Eurostat, in 2017 the import of round wood from Ukraine did not stop and amounted to 477 thousand tons, and in 2016 its deliveries were much higher than those declared by our customs authorities - 1.3 million tons against those mentioned 840 thousand. As for cigarettes, after the Belarusian side has installed the new software modules for processing information at the customs, it was found out that the difference in the cigarette deliveries in 2013-2014 was almost 53 million dollars.

Related: New customs cash limits in Ukraine: Now you can bring as much cash as you want

As for the import schemes, we have already mentioned the so-called "scheme cross-picking" or "import twists". A certain delivered brings imported goods into the country, which are in high demand, for example, building materials, clothes, shoes, fruits, vegetables, fish products, meat, makeup products, etc. Most of this commodity is sold in markets and "gray" outlets for cash. When importing a consignment of imported goods, the importer is obliged to pay value-added tax in the amount of 20% of the declared value. For example, a certain company brought Turkish fruits to the Odesa region for the amount of 2,3 million USD, paying 0,4 million VAT at the customs and obtaining in accordance with the current legislation the right to extract tax invoices for the benefit of their counterparties for the amount of VAT paid (that is 0,4 million USD). Physically, the goods went to the black market, where they were sold for cash. So some 2,3 million USD are left (and this is only in terms of the return of the cost of goods), a nominal product that was not written off from the balance sheet (because the sale was unofficial), and the right to issue tax invoices to counterparties amounting to 0,4 million USD. To use all these ingredients, the importer company finds a company that would like to get the right to a tax credit of 0,4 million USD. The real movement of the goods does not happen, everything is formalized by means of fictitious acts of acceptance-transfer or commodity-transport waybills. So, not a product is sold, but official documents for it. But the buyer gets the right to form a tax credit for VAT for 0,4 million USD and reduce the tax obligations to the budget. Now it is up to the calculations. The counterparty transfers the importer 2,3 million USD under the fictitious contract, and the importer transfers to the counterparty 0,4 million USD of cash (minus commission).    

In 2012, amendments to the 55th article of the Customs Code were introduced. Legislative changes were carried out under the banner of fighting bureaucracy and under the motto of protecting a legal business. The following problem was declared: very often the price of the goods, which was declared by the importing company, was significantly different from that which the inspectors exhibited during the customs inspection. Importers, of course, tried to understate it, because based on the price base, amounts of customs duties and value-added tax are calculated.

Related: Odesa customs may jeopardize a 280 mln USD investition

From now on, the importer, who does not agree with the decision of the customs authorities, could make a deposit that covers the fiscal requirements, take the goods and put them into commercial circulation on the territory of Ukraine on quite legitimate grounds. And if the court recognized that the requirements of customs authorities to increase the assessment of the customs value of goods were unreasonable, the importer received part of his deposit (minus the payment of tax obligations based on the declared value of goods). It seems that the civilized model of interaction between the customs and business in our practice has turned into another loop for flooding the country with "gray" imports.

There are also special schemes for exporting cigarettes to the EU when one volume is declared on the Ukrainian border, and on the Hungarian one, totally different figures are recorded, "good" Hungarian customs officers are not authorized to check our excise stamps.

The problem of fictitious import/export could be resolved not only by the legislative changes mentioned above but also in a simple but very effective way: if by the month results, the import/export data reflected in Ukrainian statistics differ by more than 1% from the data of the foreign trading partner, the customs employee will be dismissed.

Related: Ukraine’s fiscal service reveals a one-third increase in violations of customs rules in 2017

The question is whether the current government really needs such a simple, effective, and most important not demonstrative methods of struggle. In order to fight corruption, you need to sit at the computer monitor, as it is done within the framework of the EU customs agreement, where most of the documents are made in electronic form, and the interaction of the customs inspector and the entrepreneur is carried out remotely. Belarus launches the Inspection Complex of the Brest Customs in the area of the Zarechitsa Park, built within the framework of the intergovernmental agreement of the Republic of Belarus and the PRC. The complex worth 5.5 million dollars is a whole network of infrastructure and logistics complexes, as well as a scanning tunnel that is equipped with technology of rapid customs control and rapid self-adaptation, in simple words, it can shine through the goods without stopping the freight trains, for example, blocks of cigarettes in sawn timber.

Meanwhile, we experience a wild medieval, with "black customs hundreds," cops who have access to an automated system of customs clearance, and an extraordinary political dialogue.

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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