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Is the state willing to prevent tax-free import using the scheme of splitting the dispatches at last?

author: Ivan Shynkarenko

source: “Kyiv Post Legal Quarterly”,vol. 3, issue 3

03 October, 2016 Press

Amidst falling real incomes of consumers, caused by drastic devaluation of hryvna and economic slow-down, the business of importers of consumer goods is fragile. However, not only economic reality resulted in diminishing of the market. Many importers report that their business is damaged by unprecedented proliferation of schemes of tax-free import of goods without customs control.

The situation with baby diapers is a good illustration. Usual leaders in the market see their consumers flee to less well-known brands whose principal advantage is the price. The main source of this advantage is import without paying taxes at the border and often internally. The goods are sold in the open markets or from vans without normal taxation and reporting. Import VAT alone thus accounts for 20% of the import price advantage.

Reportedly, one of the private brands of the Polish low cost supermarket network occupies up to 10% of the baby diapers’ market. According to the State Fiscal Service of Ukraine (SFS), such diapers have never undergone customs clearance for entry to Ukraine except for solitary recent occurrences.

According to the estimates of SFS, losses of the budget in taxes not paid at the border due to such schemes amount to billions of hryvna.

This problem is not limited to fiscal interests of the state, distorted competition and lost profit of importers. Besides fiscal function, the customs is also in charge for protection of internal market of Ukraine.

Under the schemes of tax-free import, the goods enter internal market without customs control. In effect, even basic check of the origin of such goods could not be done. In other words, nobody checks where the person that brings the goods have obtained them. It may well appear to be the work of some underground producer without any requirements to safety, to which a “businessman”, wishing to raise the margin, would eventually shift from a well-known brand.

One of the most widely spread (specifically, at the western border) schemes of tax-free import is splitting the dispatches. It exploits the loophole in the law, created by the rule on tax-free import to Ukraine of the goods with the value under EUR 500 and/or weight under 50 kilo (for entry points other than by air) carried by citizens. A van with six passengers may carry goods with the value up to EUR 3’000 without paying any taxes. In case of 100 travels by a van per year, the value of potential tax-free import would reach remarkable EUR 300’000 annually.

Reportedly, this scheme often employs complex logistics, where large dispatches of goods are carried to the border of Ukraine by trucks. Then the goods are reloaded to vans, which enter Ukraine, and then are loaded to trucks for carrying within Ukraine.

Until recently, this situation appeared to trouble only law-abiding business that unified efforts to bring it to attention of respective state authorities. Yet, state authorities have not showed much initiative in this respect.

This situation seems to change. The government and the SFS started to take real steps to fight it. Thus, fiscal service takes immediate actions such as bringing to liability of citizens, engaged in such schemes, for example stricter control of the weight of goods carried. Moreover, SFS is also working on closing exiting loopholes in the legislation. Thus, SFS has supported amendments to the Customs Code of Ukraine, suggested by business community. These amendments introduce extra conditions for tax-free import – a citizen may apply the relief once per week and on condition of absence in Ukraine at least 48 hours before entry. SFS has sent respective draft law to the Cabinet of Ministers for submission to the Verkhovna Rada.

If finally adopted, such amendments would be a powerful step towards prevention of the tax-free import using the scheme of splitting the dispatches. Let us wait and see!

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