How the Ministry of Finance violates WTO’s requirements and raises the cost of the consumer basket contributing to inflation growth

FROM THE REDACTION

The recent war between the importers and the customs has been waged mainly from the viewpoint of determination of the customs value.

Until the present day the customs’ leadership illegally had a list of the prices of so called imported goods and importers had to carry out custom clearance only in accordance with this list (see Table1). It did not matter what accompanying documents the goods had. The dispute over this issue was useless. Moreover, in July the order of the Ministry of Finance legalized this illegal document, which, according to the words of the First Vice-President of the Georgian Chamber of Commerce and Industry – Shota Makatsaria, contradicts to the requirements of GATT. By doing so they do not only inflict losses to importers, but also rise the cost of the consumer basket contributing to inflation growth. In order to strengthen it, the Ministry of Finance issued a new order
In other words, this list will be adopted at a higher level and have a larger scale. What is the “reserve method” and when and how we can use it: six basic methods are applied for determination of the customs value. 80-85% of determination of customs value falls on the first and the most significant method, and in the developed countries this share is probably larger. This is the method consists in determination of the customs value in accordance with the transaction price;
Secondly – determination of the customs value in accordance with the transaction price of the identical commodity;
Thirdly – determination of the customs value in accordance with the transaction price of the similar commodity;
Fourthly – determination of the customs value in accordance with the price of the commodity unit;
Fifthly – determination of the customs value in accordance with the so called averaged cost;
Sixthly – determination of the customs value in accordance with the reserve method, i.e. rational method.
In this chapter we shall consider several issues – in what cases we apply these methods, in what case we substitute one method for another one or, to be more exact, in what case a customs officer is obliged to substitute one method for another one, and when the issue of responsibility arises.
The first and most important thing – a customs officer is mainly guided by the first method – the transaction price method if he has no doubts that transaction participants, importers and exporters, are not interested persons; if he has no doubts that there is no other connection between them except for this transaction, we shall speak about it separately; if he has no doubts that the given price is a dumping one, in this case he is obliged to exactly define the order of determination of the customs value in accordance with the transaction price.
Let us speak plainly in what cases a customs officer may have and obliged to have doubts concerning the given transaction price:
1. When he has similar commodity registered or there is a similar commodity in his database in the given time and space, but this commodity has a different price. Very important is the given moment of time related to seasonality and other issues having to do with the given lot in realities of commercial interests. In this case he is sure to have doubts, these doubts will have to do with the first method and here he is obliged to apply the second method.
The consecution of application of the methods for determination of the customs value is envisaged by the rules. If there are doubts in the efficacy of the first method, the customs officer applies the second one.
The second method – when the commodity is identical. Determination of identical commodity is a very difficult task. Identical commodity, for instance, does not imply that a chicken trotter is identical to “Sadia’s” chicken trotter. No, identical commodity implies the given lot, time, the country of production and the region. For example, in Brazil – the farther a producer goes along the Amazon river, the cheaper is chicken meat. However, then its transportation costs increase, etc. Thus, the price depends on many circumstances. So, if the trotters were bought in Rio de Janeiro or its region during this period of time, plus-minus 3 months, this period is very long and disputable. Let us suppose that at a time, during this period and in conditions of this lot, 3 thousand and 7 thousand tons are taken from Brazil, which is considered as medium supply, some took 20 thousand tons. It is ruled out that a cargo of 1000 tons should cross the Atlantic Ocean and be brought to Georgia.
If we received from the country 6 different lots by the renewed transaction, let us say 3, 3.5, 4 thousand, let us suppose within the limits of 2.5 thousand tons, and the cost of each of these lots creeps from 62 cents to 65, 67 cents, we should take the lowest of the identical transaction prices, this is a categorical requirement of the rule. In other words, the first important issue is that if we have doubts in this method, we switch to the second one, and this method obliges us to establish the identity from the viewpoint of the fact that it should the commodity pertaining to the concrete lot produced in the given country, during the given period of time, at the given factory, and we should take the lowest price of several transactions. Thus, in this case, we protect importers’ interests.
In Georgia there is the only firm supplying “Sadia”. In this case we have no possibility to accept the data that has just been mentioned.
Since we have no identical commodities and the customs administration cannot confirm it, then the third method is applied. It is determination of the customs value, in accordance with the transaction price of a similar commodity. Here it is possible that a similar commodity can be supplied from the concrete region and not from the concrete factory, similar commodity may not physically coincide with the kind of this commodity, as it is the case with the previous method, but they should be functionally identical commodities.
In this case we can determine the price in the same commercial interests, in the same amount and in accordance with the same data.
If we have no commodity to apply the third method, then we switch to the fourth one – in accordance with the commodity unit price.
I would say that the fourth method is the most difficult one. Applying it, we, in fact, ask for calculation of the commodity. At the same time I want to point out – according to these rules and GATT’s requirements, we should get information from exporters, should keep it as commercial classified information, since this document is worked by many specialists. It has not been accepted as a variant up to the present moment, and we have the right to demand this document at some level. However, there are financial documents that we cannot demand and in this case an importer may not produce documentation.
Proceeding from this, we are deprived of the ability to establish this calculation. It will be very difficult to establish chicken calculation, i.e. the unit cost. Raw materials, feed, electric power, energy, transport will be spent on it. It is very difficult, but, in any case, there are commodities, according to which it is possible to do it. The fifth method is made up in accordance with the customs value. It is based on the previous part. In this case the matter concerns the fact that until this moment a customs officer is obliged to observe the order of priority, but he can change the fifth and the sixth methods at the importer’s request.
Determination of the customs value in accordance with the sixths method implies its determination by the correctly made up, i.e. reserve method, rational method. The fifth method implies determination of the customs value in accordance with averaged cost, and a customs officer can change the priority order of these methods. However, in fact, they have the same basis. They are based on the data of the previous methods. I will say that the fifth method normally applies systematized information of all methods, and then a customs officer determines the averaged price, which is called the comprised cost. The sixth method, the reserve or rational one, should be based on real facts and real documents. The price determined in accordance with all the five methods should be confirmed so that it would not be the interest of the parties, would not be far from the real price, the market, the lot supplied from the given region, the given quality and, let us say, the trade mark, which has a great importance. It is very important so that our system would form in accordance with the sixth method.
Let us listen to the other party:
Expert in customs issues Giorgi Pertaia made a review of the Georgian legislation and the customs procedures:
– A lot of changes is being made in Georgia concerning the customs legislation. In Georgia there is the Law on Customs Tariffs and Taxes, only the name of which will be changed and it will become the Law on Customs Taxes. Now it is being considered in the parliament and, apparently, it will be adopted in the near future. The idea of changing the Customs Code originates from the Agreement on Cooperation and Partnership between the European Union and Georgia. Georgia assumed the obligation to harmonize most part of its legislative acts, including the Customs Code, with the EU legislation. For this purpose the EU implemented two customs projects, the work started in 2002. Its final result was submitted to the parliament. The Customs Code is based on the customs structure of the European Union, new terms were introduced in it. Only 7 customs regimes are left instead of 15 ones, which is done with the purpose of procedures’ simplification. The new guarantee system is presented, which also simplifies the procedure. The institution of brokers and carriers is liquidated and there is only a representative that fulfills the same functions. There is no necessity to pay the duty any more, which is a certain privilege for entrepreneurs. According experts’ statement, the Customs Code complies with the EU’s Customs Code as well as the new Kyoto Convention, which is a very important issue, since they have been saying in the government that its adoption is necessary, though, it cannot be done in view of certain reasons. However, this does not imply the adoption of the whole text. Also, one of EU’s directives confirms that GSP+ preferences will be applied to the countries that joined the Kyoto Convention. This issue was raised at the Business Council existing under the Chairman of the parliament and we were given a promise that the Ministry of Finance would consider the mention issue. As to customs taxes, the Law on Customs Taxes was submitted to the parliament, according to which only 0.5 and 12% remain. There is the initiative to bring everything to zero. There are active debates on this issue in Georgia. There are certain thoughts and I would like to familiarize you with the considerations of the US Chamber of Commerce, in spite of the fact that most of members of their organization are contributors and 0% is a certain privilege for them, and they advise us not to decide the case with a stroke of the pen and carry out research at the level of macroeconomic investigation, making forecasts on the basis of which it is possible to take a decision. However, I believe that there is an excessive euphoria in our country, since Russia and Ukraine, which are exporters of agricultural products, bring products to our country at the rate 0% and no one has been ruined as yet, though there is another party – Turkey. That is why we should take a decision after carrying out of the research. We should make a lot of changes, and I think that we have taken the right direction, since there is cooperation with the business sector, but the most important thing is that it is not a barrier for the customs business any more and the Georgian borders are open for all honest importers and entrepreneurs.
Mate Melia, economic expert: – Mr. Patrice Pille spoke of the changes taking place in Europe, and Mr. Giorgi – of what kind of changes take place in the customs sphere. Mr. Giorgi, from which legislation were the changes enumerated by you taken from, the ones that used to be in Europe or the ones that should be changed now?
Giorgi Pertaia: – I want to specify that taking over, as such, is not copying out. The matter concerns the basic principles of the EU’s Customs Code. It is clear that taking over will not give normal results, since their and our customs specificities differ. The work on georgianization of these principles was carried out in the Ministry of Finance in order to make it real. As to the changes, they are taking place in the EU all the time, and they are constantly working on new projects. Proceeding from this, I believe that it is right when the customs law is not copied out, but its basic principles should be approximated to the Georgian reality, on which the Georgian Customs Tax is based.
Mate Melia: – Interesting is the project, which was submitted to the parliament and which complicates the customs procedures. Determination of the customs value is the biggest problem. Frequent are the cases when prices are fixed beforehand and custom clearance is made according to them. In spite of this fact, application of the well-known methods, which are applied both by Europe and the whole world, does not take place. When you say that only 7 regimes are left out of 15 ones, we know that these regimes are extended ones and their number was reduced at the expense of it, though application of all the fifteen regimes did not take place. We are making it more complex in the documentary aspect as well, we have already switched to cameral control, which, in my opinion, is the function of the tax administration and not the customs one. Moreover, I do not see the changes caused by liquidation of brokers’ institution, i.e. we are trying to change the façade while we have to implement more serious changes. The “one window principle” has made complicated many things. It is a progressive method but has not brought a good result because of imperfection of details. In the end, we have worse results from the reform. As to the customs code I agree with you that the project should have been based on concrete calculations. What are you going to do with some agricultural products?
Giorgi Pertaia: – We are not members of the government and our cooperation with them takes place at the level of remarks’ submission, though we can easily say that we can be considered as co-authors of the Customs Code, since 85% out of 140 remarks have been taken into account. As to the customs value, I shall tell you that it is a fixed value that mainly applies to the commodity imported from Dubai, which is a violation. The Chairman’s act was issued apropos of this, which he was not authorized to do it, though the Customs Code envisages six methods of determination of the tax value and it is the issue for consideration by the higher echelons. If you purchased a commodity in Dubai, which costs 1500 USD in Tbilisi, it is taxed at the customs proceeding from 1500 USD, since there is the list issued by the Department’s Chairman with indication of prices, which is illegal, since joining the WTO we assumed the obligation that we would not apply fixed customs tariffs. In fact the agreement is being violated. As to the customs regimes, it is the EU’s method. I will not agree with you that they are extended ones. The matter concerns the fact that reexport will not need declaration; five of the tax regimes were not applied, now declaration is simplified. I do not want you to think that I protect the Code. We made remarks and criticized it since the work on it was started. The institution of brokers was liquidated and there is nothing bad in it. Maybe the 1000 GEL duty is a drop in the ocean for some people, but it is a big privilege for others. As to the customs taxes, I would tell you that they require a serious examination, though this kind of import is already implemented from Russia and Ukraine, which has not entailed any problems.