New Code Heralds Era of Opennes in Making Modern Customs Administration
This article has been prepared by specialists of the USAID`s Trade Facilitation and Investment project
On April 5, 2003 President N.Nazarbayev of Kazakhstan signed into law a new customs code (NCC) intended to reform and modernize the operations of the Kazakhstan Customs Control Agency (CCA). The NCC became effective on May 1, 2003 (except for several provisions that will not become effective until January 1, 2004.) The new code provides an improved legal basis for reform and modernization of the Customs Control Agency and compliance with World Trade Organization (WTO) principles and agreements. During the development of the new code, the Trade and Investment Project, Pragma Corporation, U.S. Agency for International Development (“TIP”), provided technical assistance to the Customs Control Agency, the Ministry of Revenue, the Majilis, and the business community. This was specifically regarding applicable international treaties and international “best practices” included in World Trade Organization agreements and the revised Kyoto Convention*. TIP’s advice and comments were generally well received and many of its over 700 comments were ultimately incorporated in the new code.
*The revised Kyoto Convention is a multilateral treaty administered by the World Customs Organization (WCO) that sets forth customs administration “best practices.”
The essential prerequisite for a modem customs administration is a customs code that incorporates international “best practices” and applicable international agreements. In the absence of proper legal authority, customs administrations cannot implement the international “best practices” set forth in the WCO’s revised Kyoto Convention, nor can they properly put into effect international treaties and agreements governing customs procedures, such as the Harmonized System Nomenclature and the WTO’s Agreement on Customs Valuation. Moreover, archaic customs laws create significant non-tariff trade barriers and result in a substantial loss of tax revenue.
Perhaps the most positive development involved “process” rather than “substance.” The NCC was developed in a generally transparent manner, with comments accepted from a broad spectrum of interested parties. Drafts of the code were posted on the Internet for comments and several “experts’ conferences were held at which interested parties, including business groups and donors, could present their views and discuss issues with the CCA staff. In the final analysis, building the capacity of business groups, such as the Customs Brokers Association and Confederation of Employers, to actively participate in customs reform may have been a more significant development than the specific improved procedures included in the new customs code.
Some remaining problems: WTO compliance
Because GATT/WTO negotiations and agreements relate in substantial measure to the reduction of tariff levels, it is critical that the parties to those agreements use the same methodology for applying duties. Detailed rules on the valuation of goods for customs purposes are contained in the WTO’s Agreement on Customs Valuation (ACV), implementing Article VII of GATT 1994. The basic rule is that value should be based on invoice price – the price actually paid or payable when goods are sold for export to the country of importation (“transaction value”). When this is not possible, there are five other standards that must be used, in sequence: the transaction value of identical goods; the transaction value of similar goods; deductive value; computed value; and the fall-back method (a combination of methods based upon Article VII).
In some instances, these problems do not relate to the language of the code, but to how customs activities will actually be conducted. For example, the new code mostly contains the proper basis for customs valuation in accordance with the WTO’s Agreement on Customs Valuation (ACV). Unfortunately, the code also includes authorization for valuation methodologies that are clearly contrary to the ACV.
Most troubling, the code includes an article on the “conditional release of goods” (Art. 321) that has the potential to completely subvert the WTO’s ACV methodology. This article provides that if an importer does not produce sufficient documentation to establish the value of an import (notably, the documentation requirements are extensive), the imports will be entitled to conditional release only if the duties and taxes are secured based on a conditional value determined by Customs and determined in accordance with pricing information available to Customs. Moreover, if satisfactory documentation proving the value claimed by the importer is not submitted within 60 days, the conditional value determination becomes final.
Article 318 provides that customs value may be adjusted after the release of goods if the transaction value has changed due to state control over transfer pricing. While it appears that this control is intended to be applied primarily to the export of mineral, chemical and agricultural products, to the extent that it is applied to imports, it is contrary to the ACV.
In addition to a uniform method of customs valuation, a uniform system of identifying or classifying merchandise is also required by the WTO in order to ensure the uniform assessment of tariffs. The system used is known as the Harmonized System Nomenclature, or “HS,” and is derived from an international convention administered by the WCO (the Convention on the Harmonized Commodity Description and Coding System). The CCA applies the current version of the HS and TIP’s recommendation that this practice be required in the NCC was accepted. See Art. 44. However, TIP’s recommendation that precedent decisions regarding classification of goods be published was rejected. See Art. 46.
We believe that the trade community will need to exercise their rights aggressively as contained in Article 319 and 320 in those instances where Articles 318 and 321 are applied. In accordance with the provisions of the revised Kyoto Convention, the declarant has a right to a written explanation from Customs when the value presented by the declarant is rejected by Customs and the value determination may be appealed. Customs has an obligation to respond to the written request for an explanation. This right to an explanation and obligation to respond is contained in the new code in Articles 319 and 320. Of particular concern to multinational companies is an issue in the code related to national treatment.
GATT 1994, Art. Ill, requires that an imported product be treated the same as a domestic product after importation. Along with Most Favored Nation (MFN) treatment, this is a cardinal principle of the GATT. However, at least one provision of the new code - Art. 309, paragraph. 5 subparagraph 2 - appears to discriminate against some imported products by possible requiring a different valuation treatment for goods delivered by a foreign legal person to their branch offices located in Kazakhstan than for identical goods sold to a Kazakh-owned business. On the other hand, Article 8 of the code gives all persons an equal right to import. This appears to provide a legal basis for registered foreign entities in Kazakhstan to be importers. Article 374 has a more liberal definition of who may be a declarant including representative offices of foreign organizations registered in Kazakhstan in certain specified circumstances. This is a liberalized policy, incorporating GATT 1994’s national treatment principle.
Provisions in Article 19 of the code provide a legal obligation for Customs to facilitate and promote trade. In addition, Article 24, 30, 31 and 32 includes obligations for Customs, on a regular basis and in a timely manner, to provide participants in foreign economic activities with information and consultancy services. Will Customs meet this challenge? This remains to be seen, but legal rights have been created as a result of inclusion of these provisions in the new code.
Cooperation with the trade community and preliminary decisions
The establishment of formal consultative relations with the trade community is one of the three primary doctrines of the revised Kyoto Convention. Over the last four years Customs has made great progress on the issue of relations with the public. TIP has provided substantial support for this. Article 28 contains strong language involving the business community in the regulation formation process, and this is the best opportunity businesses have for further “pro business” development of customs law and administration.
Articles 47, 48, and 49 of the new code cover binding preliminary decisions (Advanced Rulings). Preliminary decisions were in the former law and the good features of the old code were continued in the new code. The new preliminary decision provisions cover classification, origin and valuation methodology and preliminary decisions are now valid for 3 years instead of one year. Additionally, Customs must issue a preliminary decision within 10 working days. The application of the process of preliminary decisions holds high promise for limiting arbitrary decisions by customs officers at the time the import arrives. Based on international experience, the preliminary decisions process can also simplify and expedite customs clearance, particularly for repeat shipment of the same merchandise for the importer.
We believe that additional improvements to the preliminary decision process should be made. Preliminary decisions should only be issued at the headquarters level or at a minimum all preliminary decisions should to be forwarded to a single location for review and validation. This provision could be included in implementing regulations to prevent conflicting interpretations and inconsistent decisions by lower level officers.
“Line release”
Article 57, which covers preliminary customs clearance, includes a provision that could have far-reaching consequences for the implementation of “line release,” an advanced customs procedure. “Line release” is a provision that allows goods to be cleared for release at the time of crossing the border rather than having to go to a secondary location for clearance. Article 57 includes the following provision. “3. The main customs clearance of goods may be performed at a checkpoint on the customs border of the Republic of Kazakhstan provided there are appropriate conditions for conducting customs clearance, or at any other customs authority in compliance with this Code.” This provision opens the door for the development of line release as a simplified procedure without further modification to customs. For importers that have a documented low risk, the procedure of line release can greatly speed the process of customs clearance.
Voluntary disclosure
A significant amount of debate took place during the code drafting process regarding voluntary disclosure. Voluntary disclosure is an important component of modem customs administration. It is a process that permits companies to be self-regulating and make disclosure to Customs when errors or omissions are discovered by the company, without incurring a penalty. Without a strong voluntary disclosure provision, other components of a modern customs administration, such as self-declaration, due diligence, risk management and post-entry audit are less effective. Unfortunately, the final provision adopted in the new code is quite limited. Voluntary disclosure is permitted on the payment of a penalty equal to double the official interest rate on the underpayment from the time of the underpayment until the time of the voluntary disclosure and resultant payment under Article 318.
Insurance guarantees
Article 339 of the new code includes a provision for the use of insurance guarantees (customs bonds) in the form of securities that must be provided to Customs. This is a major achievement because the other alternatives to customs bonds of guarantees against property, cash deposits, or bank guarantees are generally far more costly for small and medium enterprises. An effective, affordable transit guarantee system is an essential prerequisite to transit facilitation. Insurance is more fully defined in Article 344- Insurance guarantees.
Inconsequential error
Article 364 includes provisions for inconsequential error. This is a major step forward in limiting the ability of Customs officers to solicit unofficial payments, and in meeting transparency concerns. It limits the ability of individual officers to reject declarations for inconsequential errors. We believe that this section is broad enough that inconsequential error can be a successful defense in many cases. When the inconsequential error defense is raised, the burden of proof should then shift to Customs to prove how the error would have influenced the decisions made by Customs. The wording is: “3. The customs authorities shall not be authorized to refuse to accept documents because of minor inaccuracies, technical and spelling mistakes that do not alter the main information stated in the documents, which influence decisions made by the customs authorities in the course of conducting customs clearance.” As an example of how this article could be applied would be a passenger declaration where the declarant claims to be transporting $300 dollars and in fact it turns out there was a forgotten extra ten dollars in the declarant’s wallet. Previously, this discovered violation would put the passenger at the mercy of the customs officer. Based on this new provision, an argument can be made that Customs must now show that the $10 difference is a consequential error and would have influenced the course of the customs clearance.
The problem of original document requirements
There was definite progress made in the new code regarding the submission of documents in the clearance process. This is covered in Article 382. But this is still one of the most onerous provisions of the new code. The submission of original documents in the customs clearance process in all cases is a practice that was eliminated decades ago by most modern customs administrations, and this requirement facilitates “rent seeking” requests by unscrupulous customs officials. It can also lead to the use of the alternative valuation scheme, discussed above.
The burden for record keeping in modern customs practice has shifted to the stakeholders of the international transactions. The new code does not fully recognize the critical factor of truthful information as the primary issue. Records, whether original or copies, are only evidence in support of statements by declarants. The record keeping requirements in the new code are still too vague to permit this shift of responsibility to the private sector. The code imposes a very weak requirement for maintenance of the record keeping systems that are essential to modem customs administration emphasizing post entry control. However, it is possible that these record keeping requirements may be improved by regulation.
The Code does permit the development of simplified procedures for documented honest traders in Article 371. Potentially, stakeholder record keeping rather than submission of original documents might be one of the developed simplified procedures based on a complete record keeping compliance review of the stakeholder. The simplified procedures are strongly tied to Chapter 60, Articles 468-470.
Risk management
The code also includes provisions establishing a legal basis for the application of risk management. Risk management is an essential component of modern customs administration and a key to reduced and more effective inspections. Article 468 defines the concepts of risk and identifies the objectives of identifying both high and low risk. Article 470, point 5 in particular is based on tip’s work with Customs and the private sector on due diligence concepts and applications. The trade community will participate in the design of the definitions of low risk.
In summary, although some serious problems remain, the new code has many “diamonds in the rough” - major principles of modem customs administration have been introduced in very general terms. In the future it will be up to business and the public, in partnership with Customs, to cut these diamonds - to refine the general principles and apply them to the specifics of customs administration in Kazakhstan.
The USAID`s Trade Facilitation and Investment (TFI) project is implemented by the Pragma Corporation.
TFI in Central Asia seeks to accomplish this mission by identifying existing constraints on investment and helping government at both national and local levels draft, adopt and implement liberalized, transparent laws and regulations that encourage investment and growth of businesses. Mission of The Trade Facilitation and Investment project, (like it’s predecessors – The Trade and Investment Project), is to reduce the number of licenses and permits required to conduct business activities and to simplify the regulations and procedures governing small and medium enterprise activities. Ultimately we hope to contribute to the process of creating sustainable economic growth and long-term prosperity in the region.
Table of contents
Railways Need Investments Yerlan Atamkulov, Nigmatzhan Isingarin
ASTEL is Number One! Vladimir Breusov
International Transport:Problems and Outlook Makhsat Saktaganov
German View on the Investment Potential of Kazakhstan and Prospects for Regional Development Andreas R. Kerting
Kazakhstan in the System of Eurasian Transport Corridors Kubat Rakhimov, Alexander Sobyanin, Alexander Maly
Kazakhstan and China: The Outlook for Co-operation Yao Peisheng
Legal Issues of Using Foreign Communications Satellites in Kazakhstan Yuliya Mitrofanskaya, Ivan Zaitsev
Kazakhstan IT Sector: An onrush of technology and a lag of legal space Katerina Kozlenko
