International Law office, April 13 2010

Although Russia’s foreign trade turnover contracted by 40% in 2009 compared with 2008, the Russian customs authorities still managed to meet the target budgeted for the remittance of customs proceeds, which was reduced by the Russian Government only by 20%. According to the Federal Customs Service of Russia, this became possible owing to the increased efficiency of customs administration of imports.

In the absence of effectively functioning new technologies of customs administration, the customs authorities solve the task of collecting customs payments within the framework of a risk management system. The so-called risk profiles make up the core of the system. Practice shows that this approach creates conditions for shifting dramatically to the side of unlawfulness and administrative abuse. Court disputes with customs authorities aptly illustrate this issue.

According to the Federal Customs Service, the number of judicial appeals against the decisions and actions of the customs authorities has more than doubled: in 2008, fewer than 8,000 appeals were filed, while in 2009, more than 16,000 appeals were filed. The categories of the lawsuits considered by courts allocated as follows:
- on the adjustment of customs value – approximately 46%;
- cases involving administrative offences – approximately 30%;
- on the re-classification of goods – approximately 7%;
- on the refund of overpaid customs payments (still, most of the decisions resulted fr om the adjustment of customs value) – 8%.

Statements of claim filed on other customs grounds amounted to 9% of the total number.
In 2009, the number of customs disputes considered on their merits by state arbitration courts soared by almost 40%, reaching 14,000 (in 2008, the number of cases was a little more than 8,000). State arbitration courts upheld more than 70% of the claims filed by foreign trade businesses.

Adjustment of customs value

In 2009, state arbitration courts considered almost 6,000 disputes relating to the adjustment of customs value. The courts upheld 95% of the appeals filed by companies. This result attests to a systemic approach taken by the customs authorities. Despite the growing number of appeals and the percentage of those being upheld by courts, the number of importers who made up their mind to take the authority to court makes up only a small fraction. The majority of importers, after comparing the onus of court litigation with the amount of additional payments required by the customs on the basis of the risk profiles, opt for the latter, which is less costly.

There is a more alarming sign in this situation: court judgments passed in the second half of 2009, where the courts dismissed the appeals against the decisions passed by the customs authorities adjusting customs value, for which the only reason was a considerable difference in the declared customs value compared with the transaction prices for similar goods. We would prefer not to see a trend here because, otherwise, the importers will have no hopes of protecting their interests even in court.

When the proceeds shrank dramatically in 2009, customs authorities had to deal with certain issues, complicated in terms of methodology, for example, the assessment of how the relations between the parties affect the transaction price or the inclusion of royalties for the use of intellectual property in the customs value of goods. The prevailing court practice on royalties shows that courts no longer confine themselves to consider whether or not the formal criteria for the inclusion of royalties in the customs value of imported goods are observed. Rather, they also assess the economic nature of relations between the right holder, the supplier and the buyer of goods.

When speaking of intellectual property from a customs perspective, one cannot but mention resolution No. 10458/08 of the Russian Supreme Arbitration Court dated 3 February 2009 in the case involving Porsche Cayenne. This resolution completely reshaped the practice of holding the importers of genuine goods administratively liable in terms of article 14.10 of the Russian Code of Administrative Offences for importing these goods in Russia without the consent of the right holder. According to this resolution, in this case the right holder was able to protect its interests only through a civil court action. However, the practice is ambiguous in this situation as well. While the courts of the North-Western Federal Arbitration Circuit uphold the claims of the right holders, the courts of the Moscow Circuit, on the contrary, dismiss such claims.

Resolutions on cases on administrative offences

Consideration of appeals against decisions passed by the customs authorities in cases involving administrative offences made up the second largest category of judgments passed by state arbitration courts, numbering 4,500 in 2009. This category of cases is the only one wh ere the number of disputes won by claimants is approximately the same as those won by the customs authorities.

Resolution No. 11875/08 passed by the Presidium of the Russian Supreme Arbitration Court dated 3 February 2009 is worth noting here. In this resolution, the Supreme Arbitration Court laid down the existing court practice: failure by the declarant to specify the correct classification code in the customs declaration, if such a failure does not relate to declaring false information as to the quantity, features or characteristics of goods that could affect the classification of the goods under a particular classification for said goods, may not serve as grounds for holding the declarant administratively liable for a false declaration. The declarant is not, however, exempt from the obligation to pay customs payments in the amount stipulated for the correct code of the goods classification. Thus, the court, when ruling on administrative liability, instead of establishing whether or not the declarant was guilty of declaring the wrong code, excluded the incorrect declaration of the classification code per se from the objective side of this offence.

Return of overpaid customs payments

In 2009, state arbitration courts considered almost 2,000 cases involving the refund of overpaid customs payments. Customs authorities lost over 90% of these cases. It should be mentioned that the disputes classified by the Federal Customs Service under this category are not always cases that directly relate to the refund of overpaid customs payments.

Many payers of customs payments, who have missed the deadline for appealing in court against the decision adjusting the customs value, try to claim the refund of the customs payments recovered on the basis of such an adjustment from the customs authority and after that they challenge the customs authority’s refusal in court.

When considering these cases, courts proceed from the premise that the failure to file a claim with an arbitration court for invalidation of a decision passed by the customs authority adjusting the customs value of imported goods does not deprive the interested party of the ability to defend its rights infringed by this decision by other means, for example, by filing an application seeking the refund of funds. Thus, a court, when ruling that the refusal was unlawful, decides, in fact, on whether the adjustment by the customs authority of the customs value complied with statutory requirements or not.

Classification of goods under the Russian Commodity Classification for Foreign Trade

State arbitration courts considered over 800 cases that involved challenging the decisions passed by the customs authorities on the reclassification of goods. The number of upheld appeals exceeded 60% of the total number of the cases considered.

Other disputes with customs authorities

Cases considered by state arbitration courts that do not fall within the above four main categories amount to less than 10% of the total number of cases considered in 2009. This category includes, for example, disputes arising in connection with the application of economic customs regimes, performance of activities by customs brokers, freight forwarders, owners of bonded warehouses and other entities operating in the sphere of customs; determination of the country of origin, etc.

Among these disputes, the cases challenging the decisions, actions of (or failure to act by) customs authorities relating to the violation of deadlines stipulated for the release of goods seem to be of greatest interest. In a number of cases, the courts take a formal approach in establishing whether or not the methods used by the customs authority to retain the goods were lawful. Some claimants even succeed in recovering the damages inflicted by the Federal Customs Service. For example, in 2009, two orders passed by the Federal Customs Service were deemed unlawful. These orders set restrictions on the number of cargo places, which a declarant may declare for certain goods (Resolutions of the Russian Supreme Arbitration Court No. 15092/08 dated 30 January 2009 and No. 4671-5327-9013/09 dated 12 October 2009). The court stated that, by introducing these restrictions, the Federal Customs Service failed to observe the criteria for setting them, i.e., customs legislation should have been breached on a regular basis when the relevant goods were imported.

The statistics vividly demonstrate what price foreign trade participants have to pay for the aspiration of customs authorities to meet their fiscal targets. Alongside the allocation of customs proceeds to the federal budget, nobody assesses how many payments were subsequently refunded under court judgments, what costs the importers incurred as a result of this “system” and how much the state has to spend on the consideration of obviously unlawful decisions passed by the customs authorities.

The Russian Finance Ministry has planned an increase in the customs proceeds to be allocated to the federal budget in 2010. Consequently, one can expect to see still increasing administrative pressure exerted by the customs authorities and, as a result, an increase in the number of court cases involving customs disputes.