The balance between the business and the state: how the customs works in the EU and what Ukraine should implement

To improve the situation of public finance in Ukraine, there is a need for improvements in the area of administration and repayment of tax debt, because it is clear from analysis of the applicable legislation that in terms of debt collection, the state is even in a much worse situation than private debt collectors.

Vytenis Ališauskas, International Key Expert on Customs of the EU Public Finance Management Support Programme for Ukraine, shared his thoughts on this issue.

Vytenis Ališauskas
Key Expert on Customs

If Ukraine seeks greater economic integration with the EU, the priority should be to establish mutually clear customs rules and procedures.

As a matter of fact, customs is one of the most important factors for ensuring intensive international trade. In its turn, international trade is one of the most important factors of economic integration.

It is, therefore, no coincidence that following the signing of the EU-Ukraine Association Agreement, Ukraine has started to implement relevant changes, and the EU strongly supports this process through the EU4PFM Programme.

What are these changes about?

What does the business want, and what does the state want?

The basic principle that underpins the operations of customs offices in the EU is “the customs should never hamper international trade.” This is true, but not the whole truth. The second, no less important part of this principle, says “… and should protect the interests of the state.”

What does this mean in practice?

Businesses are interested in not wasting time and money when crossing the border. And the state is interested in businesses paying all customs duties in a fairway.

The state should organize the process so as to enable businesses to quickly go through the customs, and simultaneously to catch those who abuse trust.

Bonafide businesses should be given an opportunity to get ‘trust mandates’ from customs offices; in the EU, customs simplifications are akin to these mandates. And those purposefully dishonest should be criminally liable for smuggling.

The state seeks to get taxes in a fair way, while businesses seek to pay less.

The truth is not to overburden them with unnecessary payments (e.g., for services that they can perform on their own through IT solutions, or inflated duties, or arbitrary or fictitious customs values), simultaneously preventing evasion of customs duties.

If all traders pay correctly, the state’s revenues increase. Hence, the task of the customs is to ensure that everyone pays according to the law.

There are no ideal systems, but there are all reasons to believe that the system applied in the EU is effective enough.  

How do customs offices work in EU countries?

Businesses have the opportunity to carry out most operations online, in a self-service model. This applies to filing declarations, making payments, receiving administrative services, permits, communicating with the authorities, help desks, etc. Customs officers work via their own system, in which the vast majority of operations are automated.

Furthermore, customs offices of the EU apply the following three important systemic tools to speed up customs control:

– automated risk management system;

– automated customs audit system;

– system of simplifications for businesses.

How does this work? A truck arrives at a customs border. A customs officer, who can see a customs declaration in the system, should understand whether this truck must be carefully inspected, or whether it may be passed without spending time for its inspection.

It is the automated risk management system that helps to make a decision.

It has to be mentioned that it is neither the customs officer, nor his/her superiors, but the system that operates on the basis of data analysis of the cargo owner, the cargo, the country of departure, etc.

If the risks are low, the truck may be passed without being inspected.

In order not to delay the truck for no reason, the customs have a customs audit tool: the trader crosses the border without inspection, but later (even a month later) the customs has the right to check whether all payments have been paid.

The customs apply a special approach to bona fide businesses. Those who have simplification cross the border much faster.

What are the benefits of simplification?

First of all, a simplification is not an exemption from paying customs duties. This is actually a permit enabling not to go through unnecessary customs procedures (sometimes paid ones) at the border because the trader was inspected prior to arriving at the border.

The matter concerns a voluntary audit of a company for getting a simplification. 

Simplifications are important, as they cover the most popular customs regimes, i.e. exports, imports, and transit.

The Authorised Economic Operator Programme is used for exports and imports (it operates in almost 100 countries around the world, and has been implemented in Ukraine since August 2020). In the event of transit through the countries that are parties to the Convention on a Common Transit Procedure, simplifications in the NCTS system are applied.

To date, there are 35 such countries, and Ukraine has every chance to join them in 2022. Both systems provide a number of simplifications and advantages during customs clearance and largely overlap, though for different customs procedures.

Therefore, those who have the whole ‘package’ of simplifications, for transit, exports, and imports, i.e. under the AEO Programme and in the NCTS system, benefit the most.

Summing up, I must say that provisions of the Customs Code temporarily providing for a significant part of these benefits are effective in Ukraine. Yet the validity of these provisions of the Customs Code expires on 7 November 2022. So, the AEO Programme and the Common Transit Procedure (NCTS) will be the source of simplifications after that date.

The use of IT tools will enable to technically implement the above. A necessary condition for the operation of customs offices in the EU countries is the use of IT tools at all sites and stages of activities, ranging from filing declarations, providing administrative services, receiving simplifications to up-to-date databases (e.g. in respect of intellectual property rights, simplifications, customs value, etc.) and the above risk management and customs audit systems.

The use of IT solutions enables to reduce the time for communication with customs offices for businesses and individuals, by turning it largely into online mode, ensures the openness of customs data, reduces the human factor and potential corruption risks. Furthermore, the use of intelligent systems enables customs officers to perform much more skilled work than in the paper age.

The most effective way to counter corruption is to reduce the human factor.

Formerly, it was present at numerous stages at the customs. The EU’s ideology is to minimize the human factor wherever IT technology allows doing so and where appropriate.

And what about Ukraine?

The same systems that have proved to be effective in the EU are being developed in Ukraine with our help: a new Automated Risk Management System, a new One-Stop-Shop (for convenient work of external users with services), Customs Audit, a new Automated Customs Clearance System (for customs officers) and others.

We help with the development of IT solutions, as no matter how perfect the applicable systems may seem, the IT sector is developing so actively that it needs updating on an ongoing basis. Also, with our help, Ukraine has introduced the Authorised Economic Operator Programme and is implementing the New Computerised Transit System, NCTS.

Ukraine could definitely develop its own version of successful cooperation between the state and the business in the customs area.

Yet since Ukraine has the Association Agreement with the EU, it is logical that it introduces customs rules and procedures aligned with the philosophy of the EU. With regard to the Association Agreement with the EU, the application of a significant part of ‘European’ instruments has been integrated into national programs, including those on digitalization and European integration.

We do hope that we will contribute to the reform of the Ukrainian customs and Ukraine’s compliance with its commitments under the Association Agreement with the EU. The success of the result will depend on us as well, but first and foremost on Ukraine.

Vitjanis Ališauskas

International Key Expert on Customs Reform