Despite all the judicial obstacles, the tax and customs services will soon receive new leaders. But if the work of the tax service will change little after the dissolution of the State Fiscal Service of Ukraine (SFS), the customs will have to go a long way of transformation to become really capable. The previous reform, which united the departments into one body, lasted six years and all this time the customs was only losing – its bases, structural units, premises, functions, and most importantly – specialists. The “tax” part of SFS was systematically pulling over the blanket of powers, and the customs, without exaggeration, did not even have a profile deputy chairman of the SFS on customs issues for years. So, the newly elected head will now have to not only build the central office of the department, in fact from scratch, but also to bring back regional customs into the structure, some of which had turned into small-town centers of “border bribery” over the years of anarchy and forgot that the central office of the department exists at all.
Considering that the coming reform of the tax and customs services is aimed at returning the service functions to both departments, the opinion of business should serve as a certain reference point for new heads. And if the tax service cooperates closely with all payers without exception, the focus group of the customs officers that is importers and exporters, which ensure the receipt of the so-called import VAT and customs charges, the volume of which directly affects the country’s foreign exchange reserves and the stability of the hryvnia. Recently, within the framework of the project “Trade Facilitation Dialogue”, the Institute of Economic Research and Policy Consulting had completed the fourth wave of the annual survey of the Ukrainian exporters and importers. The data of this analytical report shows not only the problems faced by the business at the customs on a daily basis but also the vision of how customs should be transformed to really help the business by providing service assistance in international trade.
In the Ukrainian realities, even banal reduction of bureaucracy at the stage of transporting the goods through the border is a significant contribution to improving the business climate, creating conditions for the investments attraction and increasing the trust of business to the state. Despite the general declarations on facilitation and deregulation, the number of problematic issues, according to the real sector, has not decreased. And both exporters and importers are dissatisfied.
The number of complaints from exporters in 2018, compared with the previous year, increased from 19 to 24%. That is, almost every fourth company could not work properly last year. The positive dynamics is noticeable only with VAT refund and the currency regulation, where the number of complaints has been significantly reducing for two years in a row.
Exporting entrepreneurs complain mainly about the poor quality of infrastructure, bureaucracy and the unpredictable state policy in the field of trade. Despite deregulations, exporters still need to prepare a significant number of permits and they have noticed no simplification of customs procedures. Customs clearance is time-consuming, not all the goods can be passed on the basis of the simplified rules. And when all the circles of the customs hell are passed, the business has to face non-transparent and unjustified audits by the tax inspection.
But in addition to the “standard” problems for exporters, new ones were added last year: the complexity of compliance with technical, sanitary and phytosanitary requirements (12% vs. 8% in 2017 and 9% in 2016), corruption at customs (11% vs. 9% in 2017 and 5% in 2016) and imperfection of the judicial system (13% vs. 6% in 2017 and 10% in 2016). We can trace the classic causal link – complex procedures create conditions for the growth of corruption, and when exporters try to defend their rights in the courts, they do not find proper protection there, because the judicial system, the reform of which has not yet finished, cannot guarantee the impartial consideration of their complaints to everyone.
Interestingly, there are even more dissatisfied businesses among the importers – more than 28% of companies faced some obstacles in their activities over the past year, although the exchange rate stability of the recent years should have facilitated their work greatly.
The main problems for importers are the complexity of legislation and the lack of transparency in determining the customs value of goods. Approximately every fifth importer (21%) sees long waiting time at customs during the processing of the imported goods among the obstacles to its own activities. Almost the same proportion of the surveyed importers consider the insufficient quality of transport infrastructure (17%), the lack of transparency of procedures at customs (16%), a significant level of bureaucratization at customs (15%) and unfavorable currency regulation (15%) as obstacles. Importers have also indicated the presence of “gray” imports in the market (14%) as an “obstacle” during the survey for the first time, which is also an indicative marker of problems at customs.
Accordingly, the business’ request for changes in the work of customs is huge, as evidenced by the three-quarters of the surveyed companies. So, how does business see the customs?
First of all, the business expects the improvement of customs legislation, 46% of the surveyed companies mentioned it. The ambiguous interpretation of certain provisions of the customs code and regulations does not give companies confidence that they are doing everything correctly and in accordance with the letter of the law on the one hand, and on the other – creates the ground for the unfounded claims from the regulatory authorities and for local corruption. And oftentimes neither party is able to prove their case in courts, because some rules contradict others. Of course, some sporadic changes are made constantly in the customs code, but the last global revision of its compliance with the realities of doing business was long ago. To make matters worse – we have not heard about such initiatives from either the executive or the legislative branches.
The second problem of the customs, which needs to be confronted first of all, from the business’ point of view, is corruption and bribery. The share of enterprises that complain about corruption in the customs authorities has been growing for three years in a row. All measures on strengthening the control over customs officers and the involvement of law enforcement officers in their work had not yielded the expected results. Today, every third of the surveyed enterprises is confident that it is necessary to have “important friends” either in the tax service or in customs for normal work. None of the anti-corruption campaigns in the SFS was able to break these trends. We hope that the next reform will be successful.
The Finance Ministry decided to approach the problem from the other side. One of the main tasks of the new head of customs and his team is to refresh the staff of the department. And their plans are quite ambitious – to attract up to five hundred new employees with an untarnished reputation every six months. Unfortunately, the experience shows that without proper incentives in the form of competitive wages and control by management, new employees will quickly master the old corrupt practices of the experienced customs officers. So here everything will depend on how skillfully the new head of customs will be able to organize the staff reform in his department.
In addition, the attraction of new employees can affect the overall level of professionalism of inspectors, which directly affects the solution of the third “customs” problem – the overstatement of the cost of goods.
Despite the fact that companies need to provide a significant number of additional documents (including those that contain a trade secret) to determine the customs value of the goods, this does not guarantee that the cost will be determined fairly. The customs officers, consciously or accidentally, do not consider the discounts that suppliers give to entrepreneurs, do not consider changes in the exchange rate and other market factors that directly affect the price, even the prices of identical goods in the market are not always considered. But they can, for example, include the payments that the company did not carry out into the customs value. And most of all, the entrepreneurs want the base on which the customs determines the value of goods to become public, so that entrepreneurs could clearly understand what criteria the customs officer is guided by in determining the value, and most importantly – to have grounds for challenging his decision in case of disagreement.
Well, now the business is convinced that the overestimation of the cost at the stage of customs clearance is a conscious step of customs officers, due to the need of the state for additional customs revenues, and we do not exclude that in some cases this statement is fair. But new employees may overstate the customs value due to the banal inability or fear of making a mistake.
In addition, entrepreneurs expect that the reformed customs will take control of “gray” exports and imports, which significantly distort the competitive environment in the market, because while some work fairly, transport their goods across the state border with a lot of time and effort, others do it without any problems and semi-legally. According to the business, simplification and cheaper customs procedures will prevent unofficial imports, but the success will not be achieved without more action from the law enforcement and regulatory agencies. In particular, it is possible to finally introduce a system of control over the movement of goods from the moment of theirs importing to the final domestic sale, for which the customs and tax services have been uniting over the past six years, as well as to begin to control the activities of the so-called “cargo”-companies that systematically understate the customs value of imported goods, distorting the market.
Of course, it is not a full list of the business’ wishes. Entrepreneurs are waiting for the update of the material and technical base of the customs, elimination of problems with the classification of goods, acceleration of the procedure of preliminary customs clearance, reducing the number of additional documents required to determine the customs value, the removal of documents containing a trade secret of companies from this list. But given the previous experience of the long-term reform of the SFS, the reformers will not be able to fulfill all these wishes throughout two or three years, and even if they manage to fundamentally refresh the customs personnel and to strengthen control over their work locally – it will be only a relative victory. The Ukrainian entrepreneurs note that their expenses for customs clearance grow annually, as well as their tax and customs payments to the state treasury, so respectively, for this money they want the state represented by the customs service to help them work, providing quality services, but not to keep putting up roadblocks before them at each stage of the border crossing.
By Valentyna Yushchenko