Newsletter - TerraLex Connections
By Alexander Kosov1
Most experts consider issues concerning the determination of customs value of goods imported into Russia to be especially problematic. This is because customs payments constitute around 50% of the federal budget’s income. Although the bulk of this is made up of export duties on gas, oil and petroleum products (around 60% of total customs payments), import duties and taxes represent a proportion which is nonetheless significant. Most of the rates of import duties are calculated as a percentage of the customs value of the goods and the amount of import VAT also depends on this.
The task of collecting customs payments is solved by the customs authorities within the framework of the Risk Management System, where so-called minimum/reference prices make up the core of the system. In theory the basic idea of the latter is to indicate to the customs authorities that – should the declared customs value be less than the so-called “minimum/reference price” - the transaction needs to be carefully scrutinized (e.g., by issuing a request to the importer to present additional supporting documentation etc.). There are two types of minimum/reference price:
- Minimum/reference prices established by the Federal Customs Service (FCS) in the internal customs documents called “risk profiles” (Type 1); and
Minimum/reference prices estimated by the local customs office itself based on the average value of the imported goods classified under a specific tariff heading as reflected in the database of the customs declarations (Type 2).
On a strict construction of the provisions of customs legislation, the minimum prices for imported goods cannot be considered to be a sufficient ground for the customs authorities to reject the customs value declared by the importer and it cannot be used for the final determination of the customs value of the imported goods. However, the customs authorities have the right to reject the customs value determined by the importer based on the transaction value method on condition that any of the restrictions imposed by customs valuation rules are applicable to the transaction.
As far as we are aware, those cases where the declared customs value is less than the minimum / reference price and the local customs authorities accept the initially declared customs value represent an exception from the general approach of the customs authorities. Irrespective of the fact that the declarant has presented the requested documents which confirm the declared customs value, in practice the customs authorities very often use minimum/reference prices for the final determination of the customs value. This is mostly applicable in situations where the “minimum/reference prices” for particular types of goods are established by the FCS (please see Type 1). Therefore, if importers wish to defend the originally declared customs value, they have no other choice in the majority cases than to appeal to the court. To do so requires significant administrative effort, may be very time consuming and results in additional costs for importers. The number of judicial appeals against decisions of the customs authorities to adjust the customs value declared by importers increases from year to year, but the results of such disputes have not changed significantly – in 95% of cases, the courts rule in favour of the importers. As a result of the above, the application of minimum/reference prices by the customs authorities is currently considered to be one of the main practical problems facing importers.
The Federal Customs Service understands its poor track record with customs value disputes in court and that the professional community focuses on this issue in increasing frequency. In response, recently the Federal Customs Service introduced the new criterion for estimation of the effectiveness of the customs authorities – the number of court disputes with customs authorities resolved in favor of the importers / exporters: an increase in the number of disputes, coupled with the view that the work of the respective customs inspectors is unsatisfactory may result in a loss by such inspectors of extra bonuses to their salary or even in disciplinary punishment. In this regard, the cases often arise where, after the importer appeals to the court, the local customs’ authorities start to inspect physically each shipment of the goods imported by such company with its unloading, weighing and etc. and take other actions that result in significant delays in the supply of the goods and extra costs for the importer. As result, the positive criterion, the goal of which is to exclude cases where the claims of the customs authorities have formal nature, has had a perverted effect in practice.
Also, in light of the fact that creation of the Customs Union between Russia, Belarus and Kazakhstan required that unified customs valuation rules be developed, we suppose that the Federal Customs Service decided to change the rules of game to rectify the overall picture.
The Customs Valuation Rules of the Customs Union
The creation of the Customs Union between Russia, Belorussia and Kazakhstan has substantially complicated the system of customs valuation. According to article 64(1) of the Customs Code of the Customs Union (the “CU CC”), the customs value of goods imported to the Customs Union’s customs territory is determined in accordance with an international agreement concluded between the member states governing the determination of the customs value of goods transferred across the customs border. In this case, this international agreement stipulating the methodology for determining the customs value of imported goods is the Customs Valuation Agreement for Goods Transferred across the Customs Union’s Customs Border, dated 25 January 2008. The CU CC governs only procedural issues in determining customs value; in other words, in which cases, in which circumstances and who must or may determine the customs value of imported goods. Decision No. 376 of the Customs Union’s Commission, dated 20 September 2010, specifies the rules for declaring, controlling and adjusting the customs value of goods. Article 112 of the Federal Law “On Customs Regulation in the Russian Federation” No. 311-FZ, dated 27 November 2010, clarifies cases when customs authorities may make decisions to adjust customs value without conducting an additional audit. Consequently, there are four legislative levels regulating customs valuation issues:
1. CU CC;
2. Customs Valuation Agreement;
3. Decision of the Customs Union’s Commission No. 376 dated 20 September 2010; and
4. The Federal Law On Customs Regulation in the Russian Federation.
The methodology for determining customs value stipulated by the Customs Valuation Agreement may be applied only to the commercial supply of imported goods. The rules on determining the customs value of goods imported by individuals for personal purposes are specified in article 361 of the CU CC. In relation to exports, all issues determining customs value are, as previous, governed by national legislation.
If we look at the changes that have affected the methodology of determining customs value, we should mention, first and foremost, that unlike article 12 of the RF Law “On Customs Tariffs,” article 1(3) of the Customs Valuation Agreement for Goods Transferred across the Customs Union’s Customs Border, dated 25 January 2008, contains an express reference to the use of the principles and provisions pertaining to the valuation of goods for customs purposes stipulated in the 1994 General Agreement on Tariffs and Trade (GATT 1994) of the World Trade Organization, of which Russia is not yet a member. This makes it possible to specify the international standards in even more detail not only in Russia’s legislative regulation but also in its court and administrative decisions, making them both closer to what is accepted internationally. Bringing the Russian rules of customs valuation into line with the Agreement on the Implementation of Article VII of GATT/WTO, including notes to its articles, has become the theme line of virtually all the amendments introduced to the rules on the determination of the customs value of imported goods. For this purpose, the Customs Valuation Agreement contains, in particular, the wording of the definition of a “transaction value;” the interrelationship between parties to a transaction and the influence of that on the transaction value; the inclusion of intermediaries’ remuneration, insurance expenses and royalties in the customs value; and other issues.
At the same time, it is difficult to agree with all the amendments made. For example, according to article 4(1) of the above Agreement, it is possible to take the transaction value as a basis for determining the customs value of imported goods when simply ‘any’, and not all, of the criteria listed in this rule are met. This means that the observance of only one of the criteria suffices for Method 1 to apply (for example, there are no restrictions in respect of the buyer’s rights to use and dispose of the goods), while other criteria may be disregarded. This approach seems to be at odds not only with the spirit but also with the letter of GATT/WTO.
However, a more critical issue from our standpoint is the change in approach to the burden of proof - that the relationship between the parties has no influence on the price of goods.
Article 1(2)(a) of the Agreement on implementation of Article VII of GATT/WTO (Customs Valuation Code) envisages that the fact that the buyer and the seller are related for customs valuation purpose shall not in itself be grounds for regarding the transaction value as unacceptable. In such case, the circumstances surrounding the sale shall be examined and the transaction value shall be accepted, provided that the relationship did not influence the price. If, in light of the information provided by the importer or otherwise, the customs authority has grounds for considering that the relationship influenced the price, it shall communicate its grounds to the importer and the importer shall be given a reasonable opportunity to respond. If the importer so requests, the communication of the grounds shall be in writing. In a sale between related persons, the transaction value shall be accepted and the goods valued in accordance with method 1 whenever the importer demonstrates that such value closely approximates to one of the test values stipulated by the Agreement. In other words, it is not a question of method 1 being able to be applied only if the importer complies with an obligation to prove that it may be applied; rather, it is the obligation of the customs authorities to accept the declared customs value should the declarant exercise its right to supply such proof.
The Russian Law On customs tariffs reproduces more or less precisely the above provisions. The last sentence of article 19(3) and article 19(4) directly provides that a declarant has the right (but not the obligation!) to prove that the relationship does not affect the value of the transaction, and for the customs authorities to be obliged to accept the customs value should the declarant exercise its right and prove that the relationship has no influence. Under this approach, when the declarant does not make use of its right, this does not automatically signify the opposite – i.e., that the relationship did affect the value of the transaction. Accordingly, in this case, the customs authority did not have the right to reject application of the transaction value method purely on the ground that the customs value declared by the importer is less than the minimum price for comparable goods determined by the FCS. The customs authorities should still prove, in accordance with the rules established by law, that the relationship had an effect on the transaction value. This includes assessing the commercial terms for the sale of the goods being valued and for goods comparable to them. Bearing in mind that using this methodology is a complex and time-consuming task, there were virtually no cases in which the customs authorities have refused to accept a customs valuation on this basis.
However, in the near future, this practice may change radically. This is due to the fact that, under points 3 and 4 of article 4 of the Customs Valuation Agreement, an importer must (not may!) now prove that the relationship between the seller and the buyer has not influenced the price actually paid or to be paid, and the customs value may be determined on the basis of the transaction value only if the declarant proves that the value of the transaction with the imported goods is close to one of the test values. Therefore, now the importer bears the burden of proof and should it not supply the proof, the influence of the relationship will be deemed automatically to have existed and the customs authority may then make a decision to adjust the customs value. In our opinion, this approach contradicts the above-mentioned provisions of GATT/WTO in full. We have already come up against this approach by the customs authorities in our practice. And if the courts take a formal position which puts the letter of the law ahead of the spirit of the law, then this could lead to a situation in which the direct supply of goods into Russia by multinational corporations through their Russian subsidiaries acting as distributors with transparent flow of funds may be disadvantageous for such corporations. The market may then return to supply models using special purpose firms that perform the importer’s technical functions, with all the implications that entails. This would be highly undesirable.
1Alexander Kosov, PhD in Law, Head of Customs and Foreign Trade Regulation Practice Group, Pepeliaev Group (Moscow).