Article: “Ukraine's Tax and Customs Regimes for Imports”

lntroduction

А s in other European countries, Ukrainian import-export operations are subject to vari-ous taxes, including, but not limited to, cus-toms duties апd value-added tax. Further, depeпding on the specific product, excise tax апd other official costs associated with obtaining licenses or necessary product labels may Ье applicable. The Cabinet of Miп­isters has also implemented а licensing system for the import of certain goods, such as chemical substances, fertilizers, pharmaceuticals, cosmetics and veterinary items, among others.

The various taxes associated with staпdard import operatioпs are SLІmmarized below.

Value-Added Тах

Ever since December 26, 1992, when the Cabinet of Miпisters executed its Decree No. 14-92, "Оп Value-Added Тах," the legislation governing value-added tax ("VAT") has changed freqLІentJy, arousiпg the ire of many compaпies, foreigп апd local, large апd small.

Staying true to its reputation for constaпtly amend-ing key legislatioп, оп April 3, 1997, the Parliameпt approved а пеw and improved VAT law, which became effective оп October 1, 1997 (as most receпtly ameпded оп July 24, 2009). Subsequeпtly, the Cabinet of Ministers passed Resolutioп No. 540, dated Juпe 9, 1997, implemeпtiпg а new VAT payment procedure.

Geпerally, the law coпtiпues to apply а 20% tax for аll busiпesses and other legal eпtities (such as funds) providing goods апd services оп the territory of Ukraine, but the calculatioп mechaпism has been lib-eralized somewhat. The пеw law fiпally closed one of the last loopholes Ьу сапсеlіпg tax holidays for пon­profit "Chemobyl-type" orgaпizatioпs, but kept the ex-emptioпs for products LІsed Ьу uпderprivileged children and the disabled, (e.g., childreп's food prod-LІcts, magaziпes and newspapers, etc.). The law also implemented а new mechaпism for effectuatiпg the payment of valLІe-added tax: The importeг simply posted а promissory поtе instead of effectuatiпg а cash paymeпt.

Ukrainian VAT legislation sets up а two-tier struc-ture, designed to effectively protect domestic markets &от foreigп imports. Below we describe each of the two VAT tiers separately.

lmport VAT

The VAT rate uпder Ukrainian lаw is 20%, as levied agaiпst taxable turnover, which does not include VАТ. Taxable turnover for import VAT is calculated as the customs value of the goods, includiпg cLІstoms duties апd any applicab\e excise taxes. This import VAT is due апd payable at the same time customs duties are Ьеіпg assessed (with а poteпtial 30-day extension made at the discretion of the customs office).

VAT оп Retail Sale in Ukraine

Of course, VAT is levied оп all products апd services manufactured and sold in Ukraine. Costs associated with obtaiпiпg!maiпtaining eqLІipment that are re-flected іп the final price of the goods also are subject to VАТ.

Any goods or services sold іп Ukraiпe а ге subject to а 20% VAT, which is levied agaiпst the costs of the ma-terials and is included in the sale/purchase price (і.е., sales tumover). Upon resale, sales VAT is levied оп the total difference between customer-paid VAT апd the VAT paid Ьу the seller for all compoпent materials. 

In the event that an imported product is re-sold in Ukraine, VAT is paid оп the difference between the sale price and the customs value (including customs duties and any excise taxes) plus import V АТ.

Excise Тах

The Ukrainian goverпment has always levied excise tax оп luxury items imported into Ukraine, such as al-coholic beverages and tobacco products, апd the letter from the State Тах Inspectioп "Оп Excise Тах," No. 16-1221110-7232, dated September 9, 1997, merely reaffirms this fact. Other legislatioп governing excise tax includes Decree No. 18-92 of the Cabinet of Ministers "Оп Excise Тах," dated December 26, 1992, and the Law of Ukraine No. 329/95-VR "Оп Excise Тах оп Alcoholic Beverages and ТоЬассо Products," dated September 15, 1995.

ln the past, there was по clear system of tracking the importation апd distribution of cigarettes and liquor products. Naturally, the sale of unchecked con-traband products resulted in а gold mine of tax-fтee opportunities for all types of traders, who supplied Ukraine with well-recognized vices with virtually по payment of taxes. 

In an attempt to control the illegal importatioп апd distributioп of cigarettes and liquor, оп July 12, 1995, the President executed Order No. 609/95, "Оп Excise Stamps оп Alcoholic Beverages and ТоЬассо Prod-ucts." Unlike the excise tax law, this order provided а new approach for collection of excise tax Ьу requiring importers to purchase special customs stamps and place them оп each bottle of alcohol and every indi-vidual cigarette pack. Without such stamps, по alco-hol or tobacco products could henceforth enter or Ье sold іп Ukraine and, if found in Ukraine, they are sub-ject to confiscation.

Entirely too much legislati,,e attentioп has Ьееп de-voted to alcohol and tobacco, as evidenced Ьу the Parliament's Resolution, dated September 15, 1995, "Оп the Procedure for Jmplementing the Law of Ukraine 'Оп Excise Тах оп Alcohol Drinks and ТоЬассо Products' "; the СаЬіпеt of Ministers' Resolution No. 1755 "Оп the Term of Validity of Licenses for Carrying Out Certain Types of Economic Activity and the Procedure for Calculating the Payment Amount for the Issuance Thereof," dated Novemder 29, 2000; Decree No. 666 "Оп Measures for Jmplementing Excise Stamps оп Domestic Alcohol Drinks," dated June 20, 1996; Decree No. 493 "Оп the Temporary Procedure for ls-suiпg Licenses for Jmport, Export and the Wholesale Trade of Ethyl Alcohol, Cognac Alcohol Drinks and ТоЬассо Products," dated Мау 13, 1996, among others.

Other luxury items are also subject to the excise tax, and they are identified in the Cabinet of Ministers' Resolution No. 1078, dated September 29, 1997, as caviar, crab, shrimp, chocolate, automobile tires, audio and video cassettes, televisions, among others. Jnterestingly, the minimum rates for television and video equipment imported Ьу Sony and Panasonic were higher than for Daewoo and LG Electronics, but по official explanation was given.

The excise tax rates and the listed products tend to change constantly, which keeps the importers оп their toes. Оп June 2, 1997, for instance, the Cabinet of Miпisters imposed miпimum customs values for certain foodstuffs (e.g., coffee, black caviar, frozen chicken and turkey legs, among others) and clothing (fur coats and leather jackets).

Customs Duties

As а rule, all imports are subject to payment of cus-toms duty (and, of course, the much-hated value-added tax). The only exception applies to foreign investors who contribute qualified foreigп iпvestment іпtо а Ukrainian resideпt compaпy's authorized capi-tal in exchange for the owпership rights in such саmраnу.

The Foreign Jпvestment Law expressly provides that in-kind iпvestment imported into Ukraine as а foreigп partner's coпtribution to the authorized capital of аnу Ukrainian company, such as а joint venture or а 100% foreign-owned subsidiary, is exempt from customs dtІty, but is stiJJ subject to value-added tax. If, hоwеver, the above foreign iпvestor's property is alienated within three years from the date it is credited to the Ukrainian compaпy's ЬаІапсе, the Ukrainiaп сomраnу wіll need to рау customs duty thereon. Importantly, the registration of foreign investment is mandatory from June 23, 2009, uпtil at Jeast January 1, 2011.

The specific rates for various products may Ье found in various laws, starting with the Customs Code of Ukraine, effective оп January 1, 2004, and the Cabi-net of Ministers' Decree No. 4-93, "Оп Unified Customs Tariff," dated January 11, 1993. Other legislation evidencing that import duty rates are subject to con-stant changes iпclude the Cabinet's Resolution No. 1648 "Оп Jntгoduction of Amendments to and Recog-nition of Certain Resolutions of the Cabinet of Miпis­ters of Ukraine Which Were Rendered Jneffective," dated December 13, 2001; Law No. 313/96-VR, "Оп Rates of Excise Тах and Jmport Duties оп Certaiп Products," dated July 11, 1996, as amended оп Ма у 22, 2003; the Law of Ukraine No. 2097-XJJ "Оп Uni-foгm Customs Tariff," dated Febгuary 5, 1992, amoпg others.

Оп December 21, 2000, the Parliament adopted amendments to the Law "Оп the Unified Customs Tariff," according to Which the Cabinet of Ministers по longer has the authoгity to establish rates of customs duties. Reactiпg swiftly, оп January 12, 2001, the Cabinet of Ministers adopted Resolution No. 16 "Оп Amending the Rates of Import Duties for Certain Types of Products and Certain Resolutions of the Cabinet of Ministers of Ukraine," which was thereafter rendered ineffective Ьу the Cabinet of Ministers' Resolution No. 1648 of December 13, 2001.

Currently, the Law "Оп the Unified Customs Tariff" bestows upon the Parliament the authority to have final approval over the Cabinet's proposals regarding the unified customs taгiff. Additionally, the Law of Ukraine No. 2371-JJJ "Оп Customs Tariff" was passed оп April 5, 2001, which гeplaced the old Commodity Nomeпclature for Foreign Economic Activity with the Ukrainian Classification of Goods of Foreign Есо­поmіс Activity.

Miscellaneous Costs: Labels and Certification

Several categories of import products are subject to special liceпses or "certificatioпs," such as pharma-ceutical, agro-chemical апd food products (e.g., the СаЬіпеt of Miпisters' Resolutioп No. 1996 "Оп the List of Goods, the Importatioп апd Exportatioп of Which is Subject to Liceпsiпg апd Оп Which Quotas are Established").

NaturaiJy, cigarettes апd alcohol are subject to а maпdatory "certificatioп" process uпder Orders Nos. 378 апd 379 of the State Committee оп Staпdards, Metrology апd Certificatioп, eпtitled "The Rules of Obligatory Certificatioп of ТоЬассо Products" апd "The Rules of Obligatory Certificatioп of Akohol Products," both dated Septembeг 13, 1996.

Food pгoducts wеге the next іп line fог certification. As of Jaпuary 1, 1997, all imported food pгoducts uп­dergo а "certificatioп" pгocess, duriпg which the required labels coпtaiпing vaгious іпfогmаtіоп (іп the Ukraiпian lahguage) must Ье affixed опtо the prodllct. The required iпformation iпcludes the pгoduct's паmе, volume, chemicals and additives, expiration date, and саІогіе content, among otheгs.

On November 4, 1997, the СаЬіпеt of Ministeгs' Resollltion No. 1211 "Оп Approval of the Procedure of the Customs Clearaпce oflmported Goods (Products) Which Are Subject to Maпdatory Certificatioп іп Ukraine" approved the pгocedure fог the customs clearance of imported products Sllbject to obligatory certification in Ukraine. Four years later, on December 13, 2001, the above procedllre was sligl1tly ameпded Ьу the Cabinet's Resolution No. 1671. 

The practical implemeпtation of the otherwise геа­sопаЬІе certification гeqlliremeпts continues to cause great апхіеtу among importers. Мапу foreigп companies complain, and rightfully so, that сІеаг and transparent compliance with this paгticular ріесе of legislatioп is often possible опІу after rewardiпg (in cash ог iп-kind) the state official(s) respoпsible for gгanting the necessary peгmissioпs. Regгettably, this viewpoiпt has meгit.

While product ceгtification is designed to ensuгe consumeг safety and quality standaгds, it can also become а good tool to protect domestic pгoducers fгom importeгs. А good example of this dichotomy is provided Ьу Ргосtег & Gamble's struggles with the llkraiпian authorities. Оп March 3, 1998, the State Committee for Standardizatioп, Certificatioп апd Me-tгology ("DerzhStaпdart") гevoked Proctor & Gamble's lauпdгy deteгgeпt certificates, which reportedly cost the соmрапу U.S.$135,000 to acquire. The Derzh-Staпdaгt asserted that the formula llsed to produce Procter & Gamble's soap powder was of iпferior quality апd was aimed at the poor Ukrainiaп public.

Procter & Gamble disagreed wholeheartedly, аnd lauпched а counter-attack оп March 20, 1998, Ьу requesting that the Presideпtial Indepeпdeпt Chamber оп Foreign Iпvestmeпts form an expert panel to resolve this conflict, апd initiatiпg а сгіmіпаІ iпvestiga­tioп to tгасе its paymeпt of U.S.$135,000 for the ceгtificates. In the meantime, the displlte had а negative side-effect on Pгocter & Gamble's activities.

Conclusion

As а rule, in апу import-export transaction, something can always go wrong at any momeпt. Еvеп а miniscule degree of пon-compliaпce with Ukrainian import rules may lead to sigпificaпt delays, incгeased costs, additional efforts, and еvеп lost profits (especially in case of perishable goods). As legislatioп іп this area changes all too fгeqlleпtly, foreign business entities wishing to sell their products in Ukraiпe must inform themselves abollt the latest applicable import taxes апd duties, ceгtificates апd licenses, coпtract formali-ties апd related matters.

 

News

Frishberg & Partners 2012