Before year’s end, Ukraine’s parliament managed to slip through one more proposal that will hurt businesses if adopted into law. The “Buy Ukraine” law favors domestic producers over importers in state contracts, in violation of free-trade agreements with the European Union and others.
The bill was approved at first reading on Dec. 7 and now goes to committee. In making state purchases, the proposal would favor suppliers who demonstrate that their products have mostly been made in Ukraine.
The bill faces stiff opposition from the Economy Ministry, the Cabinet of Ministers, import businesses and many others. Critics say that the idea embodies unfair competition and creates the potential for corruption. It also violates the conditions of Ukraine’s political and trade Association Agreement with the EU that went into effect in September.
“Restricting access to Ukrainian markets is an isolationist economic policy and violates a number of international treaties, including the principles laid out in our treaties with the EU,” VoxUkraine founders Tymofiy Mylovanov and Yuriy Gorodnichenko wrote in an open letter.
Source of income
But importers in Ukraine face even a greater threat than state-sponsored protectionism: In Ukraine’s shadow economy, smuggling is still both a viable business model and a source of income for many.
The retail sector in Ukraine has been swamped by electronics, clothes, and shoes brought in from abroad by individuals under tax and duty exemptions. The goods then find their way to stores and online shops for sale.
Existing customs laws allow individuals to bring into Ukraine each day no more than 50 kilograms of goods with a value of no more than 500 euros. But this still gives space for a lucrative business for many people in western Ukraine, who carry small consignments of goods across the border on a daily basis.
The smugglers use these “mules” to ferry contraband goods – from car tires to electronics – across Ukraine’s western borders. Others ship in products from international sellers by mail for resale in local online shops.
This illegal commerce deprives the economy of billions of hryvnias in taxes, as well as harming authorized importers. As a response, in December the Ukrainian parliament passed bill No. 6776-d with amendments to the Tax Code to cut down on such tax evasion. The law still has to be signed by President Petro Poroshenko, and lawyers are cautious about their assessments of it, as the final wording of the bill is yet to be published.
The amendments limit tax- and duty-free imports of goods by postal shipments. In addition, tax exemptions will apply to individuals’ imports of 50 kilograms of goods worth up to 500 euros once every three days, rather than every day as before – a measure designed to disrupt the “mule” trains of goods smuggled across the border.
Information exchange
But there are practical problems to implementing this law. Samopomich Party faction lawmaker Tetiana Ostrikova strongly opposed the amendments, saying there is no real-time information exchange between the State Border Guard Service and the State Customs Service.
“In order for this rule to work, the border guards have to have one database with the customs service. Only the Border Guard Service now can tell how long a person was absent from Ukraine, and I think they don’t want to share it,” Ostrikova said on Dec. 14.
But KM Partners’ Ivan Shynkarenko thinks the law could work if there is an exchange of information between the law enforcement agencies.
He said fighting illegal imports isn’t just about the fiscal interests of the government, but a matter of consumer protection.
“Let’s not forget that when importers go through customs clearance, it involves checking the origin of the goods and their quality control certificates,” Shynkarenko told the Kyiv Post, before describing one of the common ways of moving goods illegally across the border.
“A truck with goods is divided into smaller consignments carried by mini-vans. Some people cross the border checkpoints several times a day.”
Tracked packages
Other changes apply to tax- and duty free rules for individual imports by mail. Today, the law doesn’t specify the number of packages a person is allowed to receive from abroad tax-free for individual use per month. If the tax changes come into force in 2019, it will be limited to three.
According to the GfK market research consultancy, in 2017 Ukrainians received on average 13 packages from abroad. Most contain clothes, shoes, smartphones, and electronic gadgets.
The amendments stipulate that packages received in excess of the allowance will be taxed at a rate of 20 percent value-added tax, and an additional 10 percent customs duty, irrespective of the value of the goods in the package. In other words, if a person receives a fourth package in one month with a product, even if it is only worth one euro, they will have to pay taxes on it.
The state postal service Ukrposhta opposes the amendments, saying they will be ineffective and hard to implement. Currently, there’s no way to track how many packages have been delivered to a particular address or a person, although the State Fiscal Service of Ukraine has announced plans to set up a shared database between international and national express delivery and shipping operators.
Better ways
Tracking the numbers of packages delivered to individuals per month would also require the use of individual taxpayer numbers.
Ukrposhta estimates that building an IT system to store the personal data and registration numbers of private individual importers would cost Hr 150 million ($5.5 million).
And those involved in the import business believe there are better ways to fight illegal imports.
Oleksandr Lazarev, the director of Odesa-based Lamarin, a company that offers transportation and customs processing services, believes that the battle against illegal imports should take place not at the border, but in the market.
“We can’t close the borders – the smugglers will always find a way,” he said. “The problem with contraband and ‘gray imports’ is that it’s easy to sell those goods. The solution is to oblige all retailers to use cash registers.”
