EVOLUTION OF THE PROJECT. Customs issues encountered when arranging production in Russia

For production to be arranged in Russia, the relevant manufacturing equipment may need to be developed and made abroad. As the business subsequently operates, the chemical components needed to manufacture nanobitumen may have to be imported. Because this is an innovative product, it is highly likely to be in demand in foreign countries. As a result, the business that has been created will be active in carrying out import and export operations.

In this article, we examine: (i) the requirements that must be complied with in terms of customs, foreign currency and foreign trade regulation when goods are moved across the customs border; (ii) customs benefits and advantages available to a company that arranges for goods to be produced in Russia; and (iii) the assistance a Russian business may obtain from the state when it enters an external market with high-tech products. 

Importing manufacturing equipment

All goods that are moved across the customs border must be declared for customs purposes. The customs border is the boundary of the Customs Union formed by Russia, Belarus and Kazakhstan. Within this territory, goods produced in the above countries may circulate without customs control. So may goods that have been cleared for customs purposes and released for free circulation.

It is the declarant that bears the duty to declare goods for customs purposes.  Under the general rule, a declarant may be a Russian person or entity that is a party to a contract under which goods are moved across the customs border. A declarant may declare goods for customs purposes on its own or using the services of a customs agent (a broker) that is a Russian legal entity. In the latter case, the legal entity must be included in the register of customs agents, which is confirmed by a certificate to this effect.

When goods are declared for customs purposes, the import or export duties set for such goods must be paid, as must VAT, excise duties, and levies for completing customs formalities.   Along with the declaration, the declarant must supply to the customs authorities documents that confirm that it has complied with prohibitions and restrictions set in relation to the goods being moved. Examples of these include certificates, compliance certificates, licences and expert opinions.

To find out the amount of the customs payments that must be made and which documents are necessary for specific goods to be imported or exported, the classification code for the goods needs to be established in accordance with the Customs Union's Commodity Classification for Foreign Trade (CU CCFT). This may require technical knowledge of the composition, properties and functions of the goods, as well as a specialised knowledge of the classification rules and of the binding classification decisions taken by the Russian Federal Customs Service (FCS) and the Eurasian Economic Commission (EEC).

Machines for mixing mineral substances with bitumen fall under code 8474 32 000 0 of the CU CCFT. This corresponds to a zero rate of import duty. At the same time, since the amount of customs duty is equal to zero, VAT must be paid at a rate of 18% of the customs value.  A compliance declaration must be submitted by way of a document confirming compliance with safety requirements. If the equipment is to be delivered in a non-assembled or disassembled form (for example, because it is bulky and has been disassembled to make it easier to transport), then it is possible that the parts or components will have to be declared as standalone goods. Customs payments will then be made at the rates that correspond to the CU CCFT codes for such parts or components, and the relevant permission documents will have to be supplied.

By using Rule 2a of the CCFT Principal Rules of Interpretation, such a risk can be avoided. Under this Rule, goods may be classified under their own code when they are supplied in a non-assembled or disassembled, or even incomplete or unfinished, form provided that after assembly the goods will have the fundamental characteristics of the complete or finished goods.

If specific parts of the equipment are not delivered at the same time but in several batches over a protracted period, or if the parts in question will be purchased from different suppliers, then there is only one option that will allow the goods to be declared under a single CCFT code for the equipment. This is to apply the special customs procedure.  This procedure is applicable only to goods classified under commodity headings 7308, 7309 00, 8701, 8702, 8704 10, 8705, 8709, 9301, 9406 00 (except for mobile homes under sub-heading 9406 00 110 0) and under the headings of groups 84–86, 88–90 of the CCFT when the following conditions are complied with:

1) the declarant must obtain a preliminary classification decision, which only the FCS may issue;

2) the components of the goods must be delivered to the address of a single recipient within the framework of a foreign trade transaction that the recipient has entered into (it is possible for parts of equipment to be delivered under several foreign trade contracts, but only provided that each batch of goods which is imported separately is delivered within the framework of one contract);

3) the imported goods must be declared to a single customs authority in accordance with the 'release for internal consumption' customs procedure.

Thorough preparations need to be made if the special customs procedure for declaring goods is to be applied. Concerted, coordinated work is required from all persons involved (suppliers, technical specialists, logistics experts, carriers and so on). 

Importing goods as a contribution to a company's issued capital

For the factory to function, there may be a need for other manufacturing equipment classified under a CCFT code that corresponds to a non-zero rate of customs duty.  In this case, a declarant may examine whether it is possible to apply customs duty benefits in relation to goods that are imported as a foreign investor's contribution to the issued capital of the business. In particular, the investor may be a company specially created for this purpose, which imports the relevant equipment.

When an assessment is made as to the advantage of applying such a benefit, the complexity of this step needs to be borne in mind:   amendments made to the company's charter need to be registered twice (the first time concerning the intention to make the investment, then concerning the results), an expert opinion of a valuer needs to be obtained, while there are restrictions on using and disposing of the goods (it cannot be sold, including abroad, or leased out). The obligation to pay customs duty may also apply if the foreign investor ceases to be a founder or a member of the company. 

To apply this benefit usually takes six months or more of preparation. Moreover, a declarant must supply the customs authority with reports concerning the goods in question, at least once every six months or when the customs authority so requests. This requires extra administrative effort. The above restrictions and obligations stop being in force at the end of a five-year period after the customs authority releases the goods. However, the customs authority may, for a further three years, check compliance within the five-year period.  It is a waste of time and effort if the amount spent on meeting the above conditions for applying and observing the benefit is close to the amount of customs duty the declarant may save by applying the benefit or if the difference between the two amounts is negligible. 

A priority investment project

Business entities from Russia's Customs Union partners (Belarus and Kazakhstan) also apply a customs duty benefit in relation to manufacturing equipment, components of and spare parts for it, raw materials and goods. This benefit is available when the above items are imported in the context of an investment project being implemented that corresponds to a particular area of activity (sector of the economy) of a Customs Union member state. This benefit was introduced at the request of Belarus and Kazakhstan. For it to be able to be applied, the specified rules need to have been established in internal (national) legislation.   However, in Russia the rules in question have not yet been enacted, meaning that this benefit is not applied. This is due to Russia's obligations to the WTO (which Russia joined in 2012). These mean that the Russian Federation may not grant such benefits outside the framework of special economic zones (SEZs).

Special economic zones

As well as tax benefits and the state’s obligations to create infrastructure, special economic zones contemplate that the free customs zone procedure may be applied in relation to imported goods. In accordance with this procedure, manufacturing equipment as well as components of and spare parts for it, and raw materials for manufacturing, are exempt from customs duty and VAT when they are imported. They are also exempted from non-tariff regulatory measures (most notably, from payment of protective, compensatory and anti-dumping duties). As far as manufactured products are concerned, export duty is not payable when these are exported, though both export duty and taxes are payable if the products are released to circulate freely inside the Customs Union. However, the declarant will be able to select, depending on which option is more financially advantageous to it, whether this is at the rates applicable to the imported raw materials or to the manufactured products.

To apply the above customs benefits, a company must be registered as a resident in the relevant special economic zone and it must not have branches outside that zone. Companies must enter into an agreement with the Russian Ministry of Economic Development, and the amount of its investment must be at least USD 4.5 million. Of this, USD 1.5 million is to be invested within the first year after the agreement is signed.

In Russia, seven special economic zones of the industrial-manufacturing type have already been created, and this figure does not include those in Kaliningrad and Magadan Regions, or in Crimea. At present, the possibility of creating two more is still under consideration.

Exemption from VAT in relation to manufacturing equipment of which no equivalent is produced in Russia

For this benefit to be applied, the equipment must be referred to in the list approved by the Russian Government. Such list is amended and supplemented on an ongoing basis. Therefore, it is possible to initiate amendments to it if equipment that needs to be purchased is only produced abroad.

Particular aspects of setting the customs value of manufacturing equipment

Particular aspects may arise in setting the customs value of manufacturing equipment if it is designed abroad and the cost of such designing as paid by the Russian company is not included in the cost of the manufacturing equipment. In this case, when the customs value of the equipment is set, expenditure on designing should be added to the price of the equipment.

If the equipment is imported as a contribution to the issued capital of a company, the method for setting the customs value may not be applied in relation to the cost of the transaction, since the equipment is not the subject matter of a sale and purchase. Usually, by virtue of the equipment being unique and in view of the purpose for which it is imported, the customs value is set according to the reserve method, based on an opinion of an independent valuer and/or an insurance contract, if one has been entered into.

If a foreign party is the owner of rights to the ‘secret formula’ of nanobitumen and to the method of manufacturing it (the invention / know how), to the trademark and/or the business name, but a Russian business will use these rights based on a licence agreement that provides for a fee (royalty) to be paid, the issues may arise on the part of the customs authorities of including the royalty in the customs value of the imported manufacturing equipment and also including the raw materials used to manufacture the nanobitumen. Licence payments like these should be included in the customs value only if conditions set by customs legislation are met. In each particular case, it is possible to assess whether such conditions have been met only after studying all the circumstances, including the contractual relationship between the right holder and the licensee, the seller and the buyer, or the right holder and the manufacturer.

Customs procedures for processing

Companies that site production facilities in Russia may be interested in the customs procedures for processing in the customs territory and processing for domestic consumption. Such procedures provide for a full conditional exemption from customs duty and taxes on raw materials imported for production. In addition, it is a condition of the procedure of processing in the customs territory that the manufactured products be exported outside the Customs Union, though without export duty being paid. This last factor may be extremely significant if such duties are set in relation to the manufactured products, such as bituminous mixtures based on natural or petroleum bitumen, or asphalt road surface mixtures classified under code 2715 00 000 0 (the export duty rate is 2.5% of the customs value).

The customs procedure of processing for domestic consumption aims to encourage import substitution, in other words the import of manufacturing elements rather than goods. This procedure allows raw materials and components to be imported without customs duty being paid. The customs duty is paid at the rate applied to the goods produced from such components. Accordingly, if there is a zero rate for the ready article, then customs duty is not paid either in relation to imported raw materials or components or in relation to the goods that are produced. VAT is paid when raw materials or components are imported, but, under tax legislation, this may subsequently be refunded.

The main conditions for applying the customs procedures examined in this section are that: (i) the relevant raw material must be included in the list approved by the Russian Government; and (ii) that the amount of customs duty for the imported raw material must be greater than the amount of customs duty for the manufactured goods (this latter condition is guaranteed to be met when there is a zero rate of duty for the manufactured goods).

 

Currency control requirements

When a Russian business enters into a contract with a foreign person and the contract provides that goods with a total value of more than the equivalent of USD 50,000 are to be moved across the Russian state border, the Russian business faces an obligation to open what is called a 'transaction passport' in the bank which it is using. Such a transaction passport must be opened in relation to each foreign trade contract (agreement). It is a mandatory condition that a transaction passport be opened and that reporting forms subsequently be provided to the bank (these being statements of foreign currency operations and statements concerning supporting documents). If this condition is not met, no payment abroad may be made and no payment received from a non-resident without penalties applying.

The transaction passport must be opened no later than the registration date of the customs declaration in which the goods forming the subject matter of the relevant contract are declared.

To pay in foreign currency, the company must supply the bank with an information sheet for a currency operation, the invoice raised by the foreign counterparty, and a request for the payment to be made in foreign currency.

The statement regarding the supporting documents must be filed with the bank within 15 days after the date on which the customs authority registers the customs declaration or on which it releases the goods, whichever is the later.

Moreover, the resident faces an obligation to ensure that the following are repaid: (i) funds that have been paid to a non-resident for goods to be supplied if such goods have not been imported within the time frame set by the contract; and (ii) currency proceeds that are payable for goods supplied for export.

Current legislation provides that administrative liability will be imposed for breaches of procedures, if deadlines for opening a transaction passport and supplying reporting forms are missed, and if requirements to repatriate currency proceeds are not complied with.  With a view to mitigating such risks, the following steps may be taken:

Support for exports

State financial support for exports takes the form of subsidies being granted to Vnesheconombank to make loans at competitive rates to foreign purchasers of Russian high-tech products, as well as to finance Russian exhibitors at international trade fairs.    The export of manufactured goods is eligible for support from the specially created Export Insurance Agency of Russia (EXIAR). It offers insurance against the risk of foreign buyers failing to pay for Russian goods. In doing so, it applies two main approaches:

1) insuring the supplier's credit (by providing them with financing, it protects Russian exporters and also banks from the risk that a foreign buyer will not pay);

2) insuring the buyer's credit (it protects a Russian or foreign bank from the risk that a foreign borrower will not repay credit granted to it to pay under a contract for goods exported from Russia).

Russian businesses that enter foreign markets may receive informational support from trade representations under the auspices of the Russian Ministry of Economic Development as well as the Analytical Center for the Support of Exports, recently created by the Russian Ministry of Industry and Trade.  If barriers are identified that prevent Russian products from entering the markets of particular states or that create unequal conditions for competition, Russian businesses may use WTO mechanisms to defend themselves against unfair competition.