Speech of the Finance Minister Natalie Jaresko on tax and customs regulation (on January 26, 2016)

1/26/16

Dear journalists,

we are entering the new year, and I hope that in 2016 we will be able to continue and to enhance the positive changes in our country which we managed to bring about last year.

As you all know, last year we were actively working and discussing the reform of the tax system. Our most important proposals were adopted by the Parliament in the end of December 2015 and include regulations almost halving the payroll tax, establishing chronological system in VAT reimbursement etc.

However, we are also aware that amendments to the tax regulations are only one of the important tasks we have to do to really improve the investment climate in Ukraine.

The most critical area for the time being refers to the improvement of tax administration and customs. The key task for the Ministry of Finance in this year as well as my personal target is a radical reform of the State Fiscal Service (DFS). We must turn our tax and customs authorities into a really transparent service and must minimize the opportunities for arbitrary approach and corruption at these authorities.

I invited you to my today’s press conference to discuss our crackdown on smuggling at the customs.

We have been receiving complaints from MPs and business lately stating that the simplified customs clearance system in Ukraine now contributes to smuggling despite the operating risk analysis system.

I want to remind you that according to our legislation we have a general and a simplified customs clearance procedure in place. Normally, goods imported into Ukraine cross the border and are transported to the domestic customs offices for examination. It is only after this examination that they are cleared and released to consignees.

For diligent companies which do not pose any risks in terms of customs rules violation, the Tax Code grants a simplified import procedure – ІМ40ЕА. Under this procedure, imported goods are cleared for free circulation at the border of Ukraine without being transferred for examination to local customs offices.

In 2015, 30 thousand customs declarations for goods with the total value of UAH 21.2b were cleared under the simplified procedure which is equal to 9.2% of the total number of the import customs declarations.

In 2014, 27 thousand customs declarations for goods with the total value of UAH 12.2b were cleared under the simplified procedure which was equal to 7.4% of the total number of the import customs declarations.

Such a simplified clearance process was made possible by deploying a risk analysis system automatically detecting potentially fraudulent companies and alerting the customs accordingly. As an example of such a risk I could mention a case when the founder, general manager and chief accountant of a company importing goods is the same person (there is a high probability that this is a fictitious company).

Thus, a customs officer can see at once if he can let this or that company apply the simplified procedure or has to have its goods checked at the respective domestic customs office.

At the same time, the Ministry of Finance does receive information that the so-called risk profiles are not perfect and sometimes enable customs officials to apply the simplified procedure to companies which actually do not have the right to enjoy this exemption.

Apart from diligent companies which apply the simplified clearance procedure and do not pose any legal risk, this procedure is misused by tax-dodgers who deliberately reduce the declared value and weight of their goods declaring expensive items as cheaper ones.

This is the reason for me today to order Head of the State Fiscal Service Roman Nasirov the following:

1. All customs declarations released under the ІМ40ЕА procedure in 2015 and in January 2016 are to be re-checked;
2. Customs officials are to be identified and to be made liable who released goods despite alerts generated by the Automatic analysis and risk management system;
3. In all detected cases where the customs rules were violated, duties are to be re-calculated and transferred to the state budget; internal investigations are to be conducted to start disciplinary proceedings against officials who took illegal decisions and against their superiors. Investigation materials are to be passed to the law enforcement authorities;
4. Risk profiles are to be elaborated and agreed with the Ministry of Finance to make it impossible to misuse the ІМ40ЕА procedure by non-diligent companies;
5. The automatic customs clearance system must be promptly improved to disable the customs officials from releasing import goods under the ІМ40ЕА procedure in cases when the risk analysis system generates a risk alert.

Also, we are planning a number of steps to make the Ukrainian customs more transparent which we are going to offer to our citizens.

First, in the beginning of February we are planning to present a draft law on authorized economic operators. This draft law is based on the obligations of Ukraine related to the Association agreement between Ukraine and the EU in the part of customs cooperation and adjustment of the Ukrainian legislation to the European regulations. It will let us implement a radical reform enabling Ukraine to adopt European customs clearance standards.

The above law, in line with the European practices, shall set a procedure for companies to be acknowledged as authorized economic operators, i.e. establish an exhaustive list of criteria for companies to be allowed to import goods using simplified clearance regulations. This draft law, if adopted by the Parliament, will prevent companies which do not comply with the mentioned criteria from using these simplified clearance procedures. Thus, there will be fewer opportunities left to minimize tax obligations and to smuggle goods through the border.

After our presentation of this draft law we hope to discuss it with the public and business and to pass it to the Government and to the Parliament as an urgent one.

Second, next Wednesday we want to submit to the Government tender documents issued to engage international companies in the management of a number of Ukrainian customs offices at our Western border. Our objective is to engage international companies with the experience of organizing transparent and service-oriented work of customs offices in the customs reform.

Third, the Government of Ukraine signed a loan agreement with the Government of Poland. The subject of the agreement is a loan amounting EUR 100m to be given to Ukraine under preferential terms. A part of this funding is to be used to improve the quality of the customs infrastructure at the Ukrainian-Polish border.

Fourth, we are actively negotiating with the governments of other countries to receive funding necessary to implement software which can minimize the human factor in the operations of the tax and customs authorities.

Finally, a technical IMF mission has been working in Ukraine for the second week already. Its task is to study all customs procedures and operations in Ukraine and, based on that, to issue recommendations on the improvement of the customs operations in our country.

I also want to comment on the issue recently raised by MPs regarding the purpose of separation between the customs service and the State Fiscal Service.

The Ministry of Finance agrees with the tasks set for the customs authorities of Ukraine by the authors of the MP’s draft law No. 3763, including the following ones:

- steps to secure the correct application, rigid compliance with and prevention of violation of the customs regulations of Ukraine;
- steps to establish favorable trade conditions, to foster transit through Ukraine, to increase goods and passengers movement through the customs border of Ukraine; cooperation with the customs authorities of other countries aimed to improve procedures for the transfer of goods and vehicles through the customs border of Ukraine as well as for their customs control and clearance;
- risk analysis and management aimed to define the forms and extent of customs control etc.

However, we do not think that turning the customs service into a separate body of executive power is the best way to fulfill the above tasks. The Ministry of Finance is convinced that the integration of the customs and tax services within one authority which is underway now shall:

- bring about a better risk assessment for all taxes and charges including customs duties and enable us to monitor the transactions of tax payers related to all taxes and duties. This should significantly improve the effectiveness of our fight on tax evasion. This is also confirmed by the experience of other countries, for example, Great Britain, where the integration of the customs and tax service under the rule of one deputy head of the state revenue service helped increase the tax revenues by more than 30% within five years due to the improved risk assessment system with the breakdown by different kinds of taxes;
- remove the overlapping of processes and functions at the customs and tax authorities. This should help us reduce the number of personnel, lower the administrative backlog and make the tax system clear for all users;
- create a "single window" for tax payers;
- better coordinate the tax and customs policy;
- improve tax collection without additional administrative burden.
Hence, if we fail to integrate customs and tax service and create a separate customs authority instead, we must count with the following consequences:
- loss of the above listed advantages;
- increase of the administrative personnel both at the customs and tax authorities (due to the necessity to create the same units within both authorities like risk assessment or internal security);
- increased need for funding;
- lower service quality and higher administrative burden on tax payers.

I want to remind you that till December 2012 the customs service existed as a separate body of executive power integrated in the Cabinet of Ministers but failed to fulfill the tasks listed in the above draft law, which was the reason for the following integration of the customs and tax service.

It is also important to mention that the key problems of the customs and tax service including administrative burden, arbitrary approach in their relationship as well as high corruption risks cannot be solved by the integration or separation of tax and customs offices – it is more about reforming business procedures inside them.

This is why the Ministry of Finance is now pursuing a systemic reform of the State Fiscal Service (DFS). The reform process was launched in June 2015, when the Government adopted the draft reform of the DFS. This document was agreed with the IMF, it is aimed to significantly remove corruption risks and arbitrary approach in the work of the tax and customs authorities.

The reform of the DFS shall contribute to the solution of major problems in the work of tax and customs authorities – it is aimed to overcome corruption, to reduce opportunities for taking arbitrary or biased decisions by the DFS officials, to significantly lower the administrative burden and thus to transform the DFS into a service-oriented entity which does not hamper investments into Ukraine.

This is all I wanted to tell you today.
I thank you for your attention and am ready to answer your questions.

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