Upsetting the Balance or Deciding to Renege on the Development of a Law-Based State

On 22 May 2009, the State Duma of the Federal Assembly of the Russian Federation passed in a second reading a draft federal law entitled “On Amendments to the Customs Code of the Russian Federation”. If the draft passes through all approval stages, the amendments to the Customs Code of the Russian Federation (hereinafter referred to as the “Russian Customs Code”) will enter into force on 1 October 2009 and introduce far more stringent rules for the payment and administration of customs payments.

Foreign trade turnover has accounted for about 37-50% of federal budget revenues. However, this happened at a time of steady growth in exports and imports and rising prices for traditional Russian exports. Even in these circumstances, however, customs administration was subjected to relentless criticism. The customs authorities have lost over 65% of court disputes relating to the decisions of the customs authorities over the collection of customs payments. The percentage of contraband, counterfeit and so-called “grey” imports (where goods are declared for customs clearance at a material understatement of customs payments) is inadmissibly high. At a time when foreign trade revenues have fallen precipitously in line with other budget revenues, drastic measures are required to resolve the problems that have built up.

Countries apply a number of different approaches to tackle attempts to avoid customs payments. Customs administration in countries traditionally referred to as developed economies is implemented to attain two key objectives: facilitating trade (in other words a reduction in administrative costs), while at the same time enforcing compliance with legislation. Principles, instruments and mechanisms have been developed to simultaneously achieve these two goals. Three pillars serve as the basis for attaining a balance of business needs and state priorities: 1) partnership and active cooperation; 2) customs control based on risk analysis and risk management; 3) differentiated administrative procedures applicable to different persons and different types of goods. All these provisions were included as specific measures in the Concept for the Development of the Customs Authorities of the Russian Federation, approved by the Government at the end of 2005. Appropriate legal mechanisms and structures were included in the Russian Customs Code to implement these trends. At the same time, it should be stated here that far from all the provisions of the Russian Customs Code have been implemented appropriately, while measures stipulated by the Concept have not been discharged.

Instead, we are witnessing the emergence of a completely different approach: the government suggests that legislation should be toughened up. The main proposed amendments to the Russian Customs Code can be summed up as follows:

  1. A demand for payment precedes the enforced collection of customs payments. A person is notified by this formalised document of the obligation to make customs payments. The document also specifies the amount of these payments and explains the grounds for the demand. The person is accorded a specific amount of time to fulfil or contest the demand. If the person fails to fulfil the demand in time and fails to contest the demand in accordance with the established procedure, the wheels of the state activate enforcement mechanisms. Such a sequence (i.e. first a demand, followed by a sufficient period of time to contest the demand and finally enforcement measures) guaranteed provisional judicial control and protection of the payer’s interests during administrative procedures. Now the following model is proposed:
    1. A new definition is introduced: an updated demand for the payment of customs duties or taxes. What is at the actual goal of this measure? The deadline for implementing this updated demand may not exceed 10 banking days from the date of receipt of the demand, while a specific implementation deadline is determined in this demand by the customs authority. In other words, the deadline specified in the demand has deliberately been set at less than two weeks. Has this been done intentionally so that the payer does not have enough time to contest the demand before the payment deadline?
    2. Enforcement of advance payments or a cash deposit will be performed without the submission of a demand on the payment of customs payments and without the adoption of a decision on collection without recourse to a court. The customs authority only has to notify the payer within one day of the collection of the customs payments from the advance payments or cash deposit. At the same time, the contents of this notice are not established by the draft law. As a result, the payer only learns post factum that cash amounts have been debited from the payer’s account, whereas the notice on said execution may be insufficiently clear to substantiate the disputable nature of said enforcement. What does this mean? Is this legal subterfuge to complicate protection of a payer’s rights?
    3. If a foreign person is responsible for the remittance of customs payments, the customs authorities will be entitled to demand from the guarantor, which issued a bank guarantee, or from the surety payment of cash amounts equal to outstanding payments or will be entitled to enforce the pledge without submitting demands on the remittance of customs payments even if the foreign person has a branch or representative office in Russia. It can only be assumed that this innovation targets foreign carriers that are responsible for customs payments in the event of the non-delivery of international shipments. At the same time, however, the draft law refers to the ability of any foreign entity with branches or representative offices in Russia to perform foreign trade operations independently.
  2. Everyone involved in foreign trade is aware of the threat to business results caused by the arbitrary actions of bureaucrats. Customs officials apply one main weapon to tackle resolute importers: the so-called full-scale customs inspection, including the opening of all packaging units followed by the recalculation and repeat weighing of all goods. This customs inspection can take weeks in the case of a large consignment. At present, however, such a weapon may only be used when the goods are clearing customs. Now the customs authorities will be granted new powers to compel parties that have already received goods to make additional customs payments, namely:
    1. The introduction of a new mechanism that will suspend transactions on the bank accounts of the payer of customs payments. According to this plan, after issuing a decision on the collection of customs payments without recourse to a court, the customs authorities may block the bank accounts of a debtor for one month during which time the collection order on the uncontested direct debiting may be forwarded to the bank. Why isn’t the customs authority allowed to submit the collection order at the same time as the issue of the decision on the collection of customs payments without recourse to a court?
    2. The customs authority will be vested with the right to attach the property of a payer, if said person has the status of legal entity or individual entrepreneur and has run up a debt on customs payments. The tax authority should have sufficient grounds to assume that the payer “will take measures to disappear or conceal its property”.
  3. The deadlines for submitting demands for customs payments and for forwarding a decision on the collection without recourse to a court have been extended and will no longer be preclusive for the application of administrative coercive measures for payment. In particular, if the requirements and terms and conditions of customs procedures (customs regimes) are violated, the demand for customs payments is forwarded within one year of the date of the discovery of the violation (the date of the compilation of the protocol on the administrative offence constitutes such a day) or of the date of the expiry “of the customs regime or application of the customs procedure”. Currently, this term amounts to 10 days from the date of the discovery of the non-payment or partial payment of customs payments. Given the current shortfall in budget funding, one would have thought that the opposite would be happening: the customs authorities would be doing their utmost to collect debts more rapidly. There is an explanation, which is far from positive: throughout this period the customs authority will have the opportunity, if we call things by their proper names, to compel the payer to make a “voluntary” payment under threat of facing measures that will paralyse the payer’s business (attachment of property), or will involve collection of money from the payer through the enforcement of the advance payments or cash deposit.