The New Problem for Car Importers

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Posted by Constantine M on August 29, 2004 at 07:07:20:

Import Duty - The New Problem for Importers

by Andrey M. Tsvetkov

The Enactment of the Vehicle Import Duty Caused New Problems for Importers and Their Dealers

In recent years, the aim of legislation on the development of the automobile industry in Ukraine has been to make effective use of the industrial, scientific, technical and export potential of the domestic automobile production. The key point of adoption of the Development of the Automobile Industry of Ukraine Act of Ukraine of 18 March 2004, No.1624-IV by the Ukrainian parliament was the creation of favorable conditions for the attraction of investments to this sector. The other more global reason of the state for protecting a domestic producer was to bring national legislation into line with the requirements of GATT/WTO and Partnership and Cooperation Agreement between Ukraine and the European Communities as well as their member states. In future annual budget revenues shall determine the effectiveness of this policy in this priority branch for Ukraine.

First steps of the Development
of the Automobile Industry
of Ukraine Act of Ukraine

The recently adopted Ukrainian presidential Decree On amendments to the Decree of the President of Ukraine of 10 June 1997, No.503, of 28 May 2004 No.589/2004 resolved two vital points of conflict which existed within the legislative field. First, in accordance with the provisions of this decree two types of official printed editions have been established, and second, with a certain delay it resolved issues concerning the companies importing vehicles and their dealers in Ukraine, which represent world famous car trademarks. Namely, when the Development of the Automobile Industry of Ukraine Act, which introduces overstated import duty rates for imported cars, comes into force.
Paragraph 1 of Article 7 of the Act provides for that this Act comes into effect 45 days after its publication. Thus, the text of the Act above was promulgated on 8 April 2004 in the newspaper Golos Ukrainy and there were no legal consequences for the publication, as it was not considered to be an official edition. The formal date of publication was regarded as 15 April 2004 when the publication of the Act was presented in the newspaper Uryadoviy Kurier (No.71). A logical conclusion is that the import duty came into effect on 1 June 2004.
However, the State Customs Service of Ukraine decided otherwise and in its Letter of 23 April 2004 No.25/3-9-16/5116-ÅÏ (already lost effect) stated that the date of entrance of new customs rates for automobiles shall be 12 AM 24 May 2004 and, accordingly, this letter was the document the customs inspectors had to refer to at all Ukrainian borders. Their stance reposes on the publication of the Development of the Automobile Industry of Ukraine Act in the newspaper Golos Ukrainy and one should, accordingly, count 45 days from this time.
For today, the one positive point in this whole story is that with the above Decree the President dotted the i’s of official promulgation of the laws and other Ukrainian parliamentary acts in the newspaper Golos Ukrainy and resolved the needful but not the most delicate issue of the importer companies.

The basic provisions of the Act

Pursuant to Article 7 § 1 of this Act, this Act comes into force 45 days after its publication and is valid until 31 December 2008. It changes the import duty rates on vehicles, import duty rates on some vehicles, units, assemblies on certain group codes according to the Ukrainian classification of foreign trade goods, and, namely, excisable automobiles, engines and vehicle parts, etc.
According to the provisions of the Act, the import duty on vehicles produced abroad is increased for new automobiles — eightfold, for automobiles used less than 5 years — fivefold, for automobiles used more than 5 years — fourfold. It is sufficient to cite the respective rates for passenger car with the cylinder volume more than 1500 cm3 but not more than 2200 cm3 which were effective before the Act came into force. So for the new automobiles they are 0.1 EUR per cm3; for automobiles used less than 5 years — 0.2 EUR per cm3; for automobiles used more than 5 years — 0.3 EUR per cm3.
The newly introduced rates for a similar passenger car are as follows: for new automobiles — 15 % of the customs value but not less than 0.8 EUR per cm3; for automobiles used less than 5 years — 20 % of the customs value but not less than 1 EUR per cm3; for automobiles used more than 5 years — 30 % of the customs value but not less than 1.2 EUR per 1 cm3.

Privileges for stimulating car production in Ukraine

In this discriminative situation for an importer of vehicles, the privileges for domestic automobile production are also provided for by Articles 2, 3, 4 and 5 of the Stimulation of the Automobile Production in Ukraine Act of Ukraine of 19 September 1997, No.535/97-VR with changes and amendments thereto made by Ukrainian legislation.
Simultaneously, Article 7 of the Development of the Automobile Industry of Ukraine Act sets out certain peculiarities of the taxation of the income of automobile enterprises which have investment programs approved by the Cabinet of Ministers of Ukraine until 1 January 2004 and have investment (including foreign) only in money which is registered in the order provided for by the law and according to the official currency rate of the National Bank of Ukraine on the date of such an investment to the charter fund of a mentioned enterprise is equal to a sum equivalent to not less than USD 150 million — if passenger cars are produced; not less than USD 30 million — if trucks and buses are produced; not less than USD 10 million — if component parts to automobiles and buses are produced.
Also, this Act supplements Article 2 of the Decree of the Cabinet of Ministers of Ukraine On a Single Customs Tariff of Ukraine of 11 January 1993, No.4-93 with the provision that temporarily, since the Development of the Automobile Industry of Ukraine Act comes into force and until 31 December 2008, import duty is not levied on goods and component parts used by the enterprises below for production of automobiles, motorcycles, component parts and repair parts with their sources in Ukraine as well as for construction, reconstruction, technical equipment and/or refurbishment of productive capacities, creation and/or modernization of production facilities upon entry to the customs territory of Ukraine by the enterprises which produce automobiles, motorcycles and/or component and repair parts and act in accordance with this Act.
It is only part of the privileges granted by this Act to enterprises like the CJSC “Zaporizhya automobile plant” (CJSC “ZAZ”) and CJSC “Lvov automobile plant” (CJSC “LAZ”). Thus, these companies shall be exempted from import duty as well as from VAT on the operation of entry (transfer) of goods (including car complexes) used for construction and production of automobiles and repair parts by the enterprises with investment (including foreign) only in money which according to the official currency rate of the National Bank of Ukraine on the date of such investment to the charter fund of a mentioned enterprise in the order provided for in the legislation is equal to a sum equivalent to not less than USD 150 million.
Back in September 1997 when this Act was adopted, CJSC “ZAZ” and CJSC “LAZ” obtained these “groundless” (as the work of these enterprises shows) privileges (as for VAT, payment for land and income tax). By the way, we should say that right form the very start of process EU representatives strongly criticized the applied preferences for domestic automobile production as they do not meet the requirements of GATT/WTO and Partnership and Cooperation Agreement between the EU and Ukraine. Still, the legislator in the preamble to the Act says it “tried” to bring Ukrainian legislation into conformity with these requirements.
From 1997 onwards, the JV “AutoZAZ-Daewoo” (now — CJSC “ZAZ”) has not presented a single new modern model of a Ukrainian vehicle, and only full-scale production of two models — “Tavriya” and “Slavuta” — is being carried out. The large unit installation of foreign automobiles is being carried out at this plant.
We should emphasize that in 1999 the European Business Association underlined the need for changes to be made to Ukrainian legislation as to privileges of a discriminative nature. As stated in the EBA Report On Barriers to Investment in Ukraine (April 2004) any preferences must be provided on equal terms for all producers and not be granted just to certain companies. In our view, as regards adoption of the Development of the Automobile Industry of Ukraine Act these derogatory terms for importers and their dealers have been generalized on the territory of Ukraine.
Apart from two domestic enterprises, the Russian transport producers VAZ, GAZ and UAZ also enjoy preferences in Ukraine. According to the provisions of the Agreement between the Government of Ukraine and the Government of the Russian Federation on Free Trade of 24 June 1993, special terms are implied for the import of goods in Ukraine on quota conditions. This year, pursuant to § 1 of the Order of the Ministry of Economy and the European Integration of Ukraine On Transfer of Non-Used Remains of Quota for Import of New Passenger Cars in Ukraine of 28 January 2004, No.29, the unused balance of an annual quota was transferred for the import of new passenger cars into Ukraine (which are registered according to the Ukrainian classification of foreign trade goods) upon agreement with the Russian Federation in the amount of 109 cars for 2004.
Also, pursuant to Article 16 § 4 of the Special Measures for Imports into Ukraine Act of Ukraine of 22 December 1998, No.332-XIV and the Decision of the Interagency Commission on International Trade On Special Measures upon the Import into Ukraine of New Passenger Cars from the Russian Federation of 6 December 2002, No.ÑÏ-54/2002/52-49, special licenses shall be issued for import of these vehicles in the order provided for by the Order of the Ministry of Economy and the European Integration of Ukraine On the Procedure for the Licensing of Goods Imported into Ukraine Which Are Subject to Special Measures of 1 September 2002, No.232.
Thus, there are enough reasons to evaluate all the potential of domestic automobile production until the end of 2008. But the only thing we can say for sure is that since 1997 nothing has changed in this direction, and only the production of foreign automobiles is increasing. As for the issue of Ukrainian membership of the WTO, this will be difficult for the country in the next few years as one of the requirements made to our state is ending privileges as to the collection of indirect taxes. ¢



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