On customs clearance problems that hinder the free movement of goods in Ukraine

Generally, the legislation of Ukraine, as a recently acceded Member of the World Trade Organization (the "WTO"), can be considered as being in consistence with WTO rules. Furthermore, state bodies are beginning to follow the provisions of respective WTO agreements in their daily work or are at least trying to take them into account.

This being said, exporters and importers still face situations when the interpretation or the application of the legislation by state bodies of Ukraine may lead to unjustifiable delays of international trade transactions, which de facto creates trade barriers. Unfortunately, it is not always taken into account that as WTO Member Ukraine is responsible before other Members both for the WTO-consistency of its legislation and for the de facto application of legislative provisions by state bodies. An irresponsible attitude towards this issue may lead to other WTO Members starting to use their right to refer to the WTO Dispute Settlement Body with claims against Ukraine.

The above perspective shapes the standpoint from which the present article analyses several problematic situations, which in fact may be interpreted as limiting free flow of goods and creating barriers to the international trade.

Changing the customs classification code

Defining an appropriate customs classification code is a prerequisite for fast customs clearance. Pursuant to customs legislation of Ukraine the ten digit code of Ukrainian Goods Classification of Foreign Economic Activity (the "UCG FEA") has to be attributed to all goods in the process of customs clearance. However, it happens that opinions of customs officers and importers concerning the customs classification code for goods may differ.

After the WTO accession, a change of customs classification code may be regarded as a violation of the WTO rules. In particular, in the practice of the Dispute Settlement Body this issue was considered in the case EC – Chicken Cuts1. According to facts of this case the European Union has adopted the Directive № 2003/97/EC (the "Directive") which provided that deep frozen chicken cuts previously classified under the code 0210 90 20 and ad valorem tariff 15,4 % were reclassified under the code – 0207 41 10. As a result, tariff of 102,4 EUR for 100 kg/net, which is substantially higher than previously applied tariff was charged on deep frozen chicken cuts. Brazil and Thailand imported deep frozen chicken cuts. The EU Directive was detrimental for them and beneficial for European producers.

Brazil and Thailand referred this issue to the DSB claiming that EU activities are inconsistent with Articles II.1(а) и II.1(b) of the GATT 1994, because importers started paying tariff higher than specified in the EU Schedule of Concessions (which is an integral part of the WTO commitments) violating rights of WTO Members. Having considered this issue, the Panel decided and the Appellate Body confirmed that such actions are inconsistent with Articles II.1(а) и II.1(b) of the GATT 1994.

This example confirms the necessity of deeper understanding of WTO provisions and that the State Customs Services of Ukraine (the "Customs Service") as the body responsible for the customs classification of imported goods should take into account respective WTO provisions including when issuing explanations concerning customs classification of goods in the process of customs clearance.


Improper customs valuation practices

Taking into account that tariffs are calculated on the basis of the customs value of goods sometimes the procedure of customs valuation can be problematic. For example, starting from August 2010 customs bodies have begun conducting additional checks of the customs value of imported flowers without an appropriate reasoning in writing. This resulted in the decrease of import volumes and caused losses for importers.

First of all, it is worth noting that pursuant to Article 262 of the Customs Code of Ukraine importers themselves define customs value of goods and the Customs Service only verifies the correctness of the customs valuation using prescribed methods. In the abovementioned example the Customs Service did not use certain methods for the customs valuation, nor did it duly substantiated its actions. Such practice may be regarded as inconsistent with WTO commitments undertaken by Ukraine, in particular with provisions of the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (the "Agreement").

In Colombia – Ports of Entry2 the Colombian Customs Service issued an order, which set forth indicative prices for textiles, footwear and other goods. Pursuant to the said order indicative prices were used as reference prices for the customs valuation of abovementioned goods (FOB delivery). Goods valued by importers below indicative prices were not cleared. Accordingly, taxes and other charges were collected based on the predefined customs value. The described above situation is very similar to the current practice of the Ukrainian Customs Service when during the importation of goods customs officers in most cases use only the internal reference database notwithstanding documents submitted by importers. Customs clearance de facto may be stopped in case of the inconsistency between the price declared by the importer and the reference price in the said database.

Panama importing to Colombia footwear and textiles referred to the WTO Dispute Settlement Body claiming violation of Articles 1, 2, 3, 5, 6 and 7.2 (b) of the Agreement. Panel has held that the practice of Colombia's Customs Service contradicts the abovementioned provisions because the application of indicative prices does not allow consecutive application of customs valuation methods or any method at all set forth in the Agreement.

Hence, Customs Service of Ukraine should duly substantiate its decisions and obey rules provided in the Agreement regarding customs valuation methods in order to avoid the risk of its actions being considered as de facto trade barriers by the WTO Dispute Settlement Body.

Establishing a place for customs clearance

Prompt and convenient customs clearance depends on the place where goods are cleared. The restriction on the quantity of such places may negatively affect import and export volumes. Unfortunately, such cases do happen in Ukraine. For example, pursuant to the order of the Customs Service of Ukraine No. 130 of February 18, 2010 (interestingly enough, not registered by the Ministry of Justice of Ukraine) importers are to declare pharmaceuticals and certain excisable goods in the specific customs office for excisable goods, which is located in a village not far from Kyiv.

Recently the Customs Service issued a similar order No. 1011 of September 3, 2010 (entered into force on October 1, 2010) that provides for the customs clearance of all goods within the commodity group 06 UGG FEA (flowers) only in the same customs office. Order of the Customs Service of Ukraine No. 563 of June 1, 2010 which obliges all importers of automobiles to clear goods only at the specialized customs office – Kyiv central specialized customs (the "Kyiv specialized customs") is another example of such practice. On October 5, 2010 the Customs Services liquidated the said office and adjoined it to Kyiv regional customs. The list of such examples could go on and on


The panel has already considered a very similar issue in Colombia – Ports of Entry where Colombia ordered to clear textiles and footwear from Panama only in Bogota airport or Barranquilla seaport. The Panel held that limiting the quantity of customs clearance offices only to two places is a quantitative restriction in terms of Article XI of the GATT 1994 because it modifies competitive conditions limits the competitive ability of importers. Additionally, the Panel held that such actions are inconsistent with Article V:2 of the GATT 1994 and Article V:6, first sentence, of the GATT 1994 as limiting transit of goods. Hence, Colombia was obliged to withdraw its legislation being WTO inconsistent.

All things considered, defining certain places for customs clearance by itself does not amount to the violation of the WTO rules. However, if such practice restricts competitive conditions for some importers as compared to others or impedes transit of goods then it may be regarded as WTO inconsistent. Hence, draft decisions of the Customs Service of Ukraine on limitation of customs clearance places should be analyzed from the WTO compliance standpoint.

Footnotes

1.Appellate Body Report, European Communities – Customs Classification of Frozen Boneless Chicken Cuts, WT/DS269/AB/R, WT/DS286/AB/R, adopted 27 September 2005, and Corr.1, DSR 2005:XIX, 9157 (the "EC – Chicken Cuts")

2. Panel Report, Colombia – Indicative Prices and Restrictions on Ports of Entry, WT/DS366/R and Corr.1, adopted 20 May 2009 (the "Colombia – Ports of Entry")

Vasil Kisil & Partners

Through relentless focus on client success, the Vasil Kisil & Partners team delivers integrated legal solutions to complex business issues. In Ukraine, the Vasil Kisil & Partners brand is synonymous with great depth and breadth of legal expertise and experience, which has created superior value for our clients since 1992.

Vasil Kisil & Partners is a Ukrainian law firm that delivers integrated business law, dispute resolution services, tax law, energy and natural resources law, intellectual property law, international trade law, labour and employment law, real estate and construction law, as well as public private partnership, concessions & infrastructure law.

The firm serves international and domestic companies, as well as private individuals, dealing in agriculture, banking, chemical, construction, financial, energy, high-tech, general commodities, insurance, IT, media, metallurgy, pharmaceutical, real estate, shipbuilding, telecommunication, trading, transport, and other industries and economy sectors.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.