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2 June, 2011  ▪  Ivan Kostenko

Non-Stop Smuggling

Customs is being privatized through laws and court orders

The notorious story about the Livela company importing oil products to Ukraine under privileged terms is a perfect illustration of how the state border has been privatized meter by meter. According to official data, Livela’s share in the overall import of oil products reached 45-50% over September-November 2010. The State Customs Service once tried to force the company to pay taxes like most businesses do through court, but failed in the end. On 22 March 2011, the High Administrative Court turned down a claim from the customs administration, while three months earlier, on 22 December 2010, it had refused to send a resolution to close the case on the legitimacy of the privileged taxation of imports to the Supreme Court for review. The March resolution is final and not subject to appeal. It allows Livela to legitimately import oil products while evading all taxes, just like it did last year.

It would be nice to know which oligarch organized this scam and which Deputy Prime Minister protected him. Yet, the systemic problem is different: how did Ukrainian customs end up with a loophole undermining local oil refineries and stymieing powerful importers? The answer is strange, yet simple. Seven years ago, Wojciech Bednarz, a Pole who co-founded the Taistra Joint Venture with Livela as a subsidiary, appealed to the Avtozavodsky Court in Kremenchuk, Poltava Region, and obtained confirmation of the rights his business was entitled to under the 1992 law on foreign investments on 19 January 2004. Ukraine guaranteed the businessman that his joint venture would operate under the legislation effective at the time of his investment.

In August 2010, Livela reminded the Customs Service that it had the right, confirmed by the court, to import a shipment of oil products under privileged terms as the company had been partly exempted from taxes in the early 1990s. This was then approved by the High Administrative Court in March 2011, turning the case into legitimate practice.

The business of privatizing the border through court decisions is not new. Those in power are fairly experienced in such schemes. In March 2005, the government amended the laws on privileged tax rates for entities operating in special economic zones (SEZ) and priority development areas (PDA). This decision affected the interests of many politicians including those from the Party of Regions linked to Donetsk and Azov business entities, all qualifying as SEZs, and firms holding PDA status based in Donetsk and Luhansk Oblasts and Crimea. The latter had been exempt from VAT, duties, social contributions, investment taxes, land fees, and even partially exempt from income taxes. When she came to power, Yulia Tymoshenko started a massive campaign against these groundless privileges. According to official estimates, SEZ and PDA enjoyed privileges worth UAH 8.4bn over 1998-2005, which was three times as much as SEZ investment; they sold over 70% of their goods on the domestic market; and customs preferences accounted for 72% of all privileges granted, including VAT exemption. Eventually, the government confirmed in 2005 that the Vidrodzhennia Joint Venture, part of the Donetsk SEZ, had imported tons of meat – rather than the equipment in which the cash was reportedly invested – duty-free. The real outcome of the struggle of the government versus SEZ and PDA in 2005 was similar to what happened with Livela.

And the reasons behind this a similar. Article 25 of the main law on SEZ gives "investors" iron-clad guarantees: full retention of all material and non-material rights, including tax exemptions and other preferences. Investors in 2005, deprived of these privileges by the government and parliament, fought for their rights under the law all the way to the Supreme Court.

Sources claim that untaxed imports based on court verdicts did not cease and that some departments in the Customs Service even began making extra money by … failing to attend court hearings, thus allowing the importers to win uncontested cases.

It is clear that the state has failed to conquer this ill, symptoms of which appeared when Valeriy Pustovoytenko was prime minister in the mid 1990s. Under Pustovoytenko's tenure, customs duties for critical goods (without which the economy cannot function smoothly, such as Russian gas for Ukraine or Ukrainian manganese ore for Scandinavia) changed nearly every quarter.

At that time, government resolutions on strategically important goods even included herring. Clearly, any individual preference (exemptions from VAT, import duties and other fees) erodes the state's customs borders.

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