Carmakers and LSPs getting to grips with the complexities of the new Customs Code unifying Russia, Belarus and Kazakhstan need a good eye for detail and a close relationship with customs officials if they are to tackle what remains a risky procedure full of compromise and hidden costs
When the new Customs Union Code unifying Russia, Belarus and Kazakhstan was officially enforced in July this year, no one thought it was going to be an easy transition.
It is the latest in a number of attempts by Russia to create an effective trade bloc with its neighbouring countries since the break-up of the Soviet Union, but disagreement over gas transit fees through Belarus at the last moment highlighted the precarious nature of the alliance.
The new procedures for the movement of goods the Union has created is also causing confusion for carmakers and LSPs, according to Wilhelmina Shavshina, legal expert at law firm DLA Piper. Speaking just ahead of the Union’s official formation at the Automotive Logistics Russia conference in St Petersburg, she told delegates: “Your sphere of activity is perhaps the one on which the Customs Union will have the most impact.”
Russian Transport Line’s general director Kostantin Skovoroda, also at the event, admitted there was little he could say at the time about its enforcement, a significant admission given RTL’s expertise as a customs broker. Skovoroda recounted a recent meeting he had had on the subject with a leading customs official at which he was told ‘you can ask anything, but if I don’t answer it is not that I don’t want to, it’s because I don’t know what to tell you’. Apparently for the rest of the meeting the official was largely silent.
At that point many were weary of what Sollers Auto’s head of logistics, Ivan Karasev, referred to as “certain obscurities” ahead as the new code was introduced. Not that the previous situation for moving goods into Russia was any less complex. The new customs procedure has compounded the often tortuous experience of many operators in Russia and is something that led its president, Dmitry Medvedev, to admit in September that the thought of having to deal with Russian customs officials was scaring investors away from the country. With 44% of shipments inspected in Russia compared with just 3% in Germany and 13 documents required to import goods, roughly twice what it is in neighbouring countries to the west, customs procedures are lengthy in comparison.
Shavshina sums up the situation by warning logistics operators that customs is one huge risk by itself, especially as a result of adjustments to customs value between the three states, and the liabilities that a provider would face if it does not comply. Ambiguities in the regulation, particularly between the old code and new one, will make things even more difficult for LSPs.
So what is a logistics provider to do? For Skovoroda it is a simple choice: be against the customs authorities or try to understand what they want from you and do something about it. “We suggest using the second step [but] sometimes it is hard to find a compromise,” he added.
Since then, RTL, like others, has made efforts at clarifying the code with a degree of success, though the process of finding a compromise continues as special procedures await finalisation.
The Customs Union between Russia, Belarus and Kazakhstan went into effect earlier this year following an agreement made the previous November when members adopted a unified system of tariffs to take effect on July 5th. It means unifying the legislation of the three member countries, but many references to Russia’s national customs regulations remain, causing some confusion. Technically, those regulations that apply to the Russian Customs Code that are in contradiction with the new Union Code should not be applied. However, regulation of the new code is still awaiting final approval from the State Duma, meaning that new and old rules are running in conjunction.
“Before the Federal law on customs regulation is enacted, Russian customs authorities will rely on the provisions of two laws,” confirms Shavshina, “the customs code of the Customs Union and the 2004 customs Code of the Russian Federation.”
This has meant that practical application of the provision for the customs legislation has become more complicated by discrepanicies between the two codes. In a number of cases guidance from the Union member countries does not tally with the same provisions provided by the new code, despite priority being given to the Customs Union.
While some operators have said they would hold off on imports until the procedure became clearer, for others any lack of clarity has been quickly resolved. Priority Freight, a specialist provider in emergency and premium freight logistics, says the new regulations have not affected its operation at all since its brokers have familiarised themselves with both systems and can coordinate preliminary paperwork with the necessary customs bodies.
Guidance is being provided by the Federal Customs Service until the final implementation so that logistics operators know which rules to follow from which code. But there still isn’t a document that contains all the necessary explanations concerning the new regulations and those provided only partially answer the questions raised. Likewise, the hotline set up by the customs authorities working on the Union issue is not able to provide answers to all the questions.
RTL’s Skovoroda says that the Federal Customs Service usually publishes many different injunctions with special explanations but admits that “not all the injunctions and explanation are ready”.
So while the situation is improving, the gradual implementation of the code’s many facets means it is a learning experience.
“Comparing the current situation to the beginning of July one must admit that customs entities have started to better understand and thus apply the new regulations,” says Pavel Kolesnikov, senior customs specialist at Gefco Russia. “However, there is still a long way to go. For instance, the new procedure for customs duties and tax payment only started from September 2010 and the unified form of customs declaration will be applied from January 2011. Also the special procedure of goods delivery to the Kaliningrad region is not yet finalised.”
One of the main discrepancies is between the codes enforced at the level of the Federal Customs Service and that enforced by the regional customs bodies. “Regional customs often have more relaxed or different interpretations than other regional posts or the Federal Customs,” admits Alexander Rogan, managing director of Priority Freight. He went on to say that these different interpretations, often the product of uncertainty over the enforcement of the codes themselves, can lead to stalemate.
“On the operational level a lot of pressure is being placed on field-level customs officers, making them risk averse to the point that they will not make any decision at all in situations where the law is unclear,” he says. “Customs laws are also written with enough flexibility that the authorities can retroactively decide that a law was bent or broken even if there was no intent to break customs regulations and the law did not offer specific direction.”
For RTL the lack of clear instructions for customs officers in line with new customs union code is a problem compounded by the poor regulation of state agencies. The absence of new job descriptions for regional customs officers in line with the new Customs Union Code is also confusing and remains so despite assurances by the customs authorities that responsibilities would not change significantly.
What is important in overcoming these obstacles is a commitment to regular dialogue with these officials. “Make a specific effort to have frequent contact with the customs officials at the operational level,” advises Rogan, “and demonstrate that you are trying to do things correctly and minimise the risk you present to them in terms of such things as bad paperwork or inaccurate cargo pick.”
This is important given the coordination required by the different customs bodies when handling signed agreements for the supply through the new border points.
“The key success factor for smooth border passing and then customs clearance is well-prepared preliminary documentation and advanced information provided by professional and experienced specialists,” says Gefco’s Kolesnikov.
Such preparation is crucial to avoid costly and timeconsuming challenges higher up: “The most successful way of resolving varying interpretations of the regulations is to work with customs at the lowest possible level as soon as the discrepancy has arisen,” adds Rogan. “Once a dispute has become official and gone up the chain of command, the importer will lose a lot of time.”
The pressure on field level customs officers is also down to the revenue made out of the customs payments, which brings in about 50% of the federal budget, according Shavshina. RTL estimates that vehicle duties represents about 6%.
The customs office picks particular companies from which to extract customs duties in an effort to recoup the money it has spent in the execution of its duty. And it is up to officers on the ground to restore that expenditure from somewhere. Often this is done by exploiting the existing lack of transparency; the mistakes that are made by customs–despite efforts at dialogue–are something compounded by a lack of insight into the automotive industry.
“There is too little transparency, sometimes it is difficult to approach customs authorities and sometimes difficult to explain to them the way car manufacturers operate,” says Jan Bures, head of group service at VW Rus. “To us it seems that customs are more interested in making money for the government instead of [being] the regulative force in trade.”
Gefco agrees. “Sometimes customs officers forget about the other fundamental functions which are related to protection of rights of foreign trade participants and acceleration of foreign trade activities,” Kolesnikov says. “Every day we face the subjective approach of customs bodies in regard to questions of customs value determination and that approach in our opinion is a result of fiscal politics.”
That said, attention to the details of such things as the coding of commodities and the careful preparation of documentation can prevent unnecessary costs, such as double payments on VAT (something RTL says it has had success with in its movement of vehicles for Toyota and Nissan).
“In practice we often come across situations in which the companies, when they are structuring their licensed contracts for delivery and including services provisions, divide this into several contracts,” says DLA Piper’s Shavshina. “Here the situation may arise in which there is double VAT–when there is a separate contract for the delivery of equipment and one for provision of specific services. Part of this must be allocated to the customs cost of the equipment.”
In this case, says Shavshina, companies will have to pay the VAT of provided services to the Russian tax authorities and then, on the basis of the cost that has to be allocated to the customs cost of the goods, also pay customs duties with import VAT, meaning services are subject to VAT twice.
“We always recommend that part of services that are obligatory to the customs cost are included in the contract for the delivery of the equipment and exclude them into a separate services provision.”
The need for inside knowledge at this level for all aspects of customs procedure in the new Union (not just VAT) lends credence to the old idiom ‘the devil is in the detail’. Carmakers and LSPs alike need customs professionals on board if they are not to fall foul of fiscal duplicity and border frustrations.
“The ‘customs risk’ can be significantly reduced if logistics, and especially customs clearance, is contracted to the professionals,” says Gefco Russia’s head of customs department, Igor Alyushin. “We don’t mean pure operation of customs clearance, but a complex approach to import and logistics, including design of information and document flows, creation of databases, automatic data handling, and preliminary check of all documents before goods departure.”
Professional help is also available for disputes over procedure via a consultative body called the Scientific and Expert Council to which companies can apply should a decision by the customs authority appear unfair.
The simultaneous existence of two systems in Russia complicates customs but the advice available to the automotive sector is already bolstering the confidence of those eager to grasp the opportunities promised by the union and extend their activities into Belarus and Kazakhstan.
