Along with booming growth, Russia’s economy is gradually becoming diversified, shifting emphasis from oil and gas production to refining andmanufacturing.
It imports technological units and even whole plants. To encourage this trend, zero customs duties are set on more and more types of goods, primarily industrial equipment that is not produced in Russia.
This certainly is a reason for optimism, but there are also problems. Suppliers and importers often fail to draw up their contracts correctly or overlook important details, such as conditions required for obtaining the zero tax privilege, and therefore the customs service taxes their imports.
Targo Customs Technologies, a leading Russian customs holding, provides consultancy and represents the interests of companies involved in foreign trade.
Possible pitfalls The zero customs rate is only applied if you get the so-called Classification Decision, Kruglova explained. It is a document that lists all the components of a complex technological unit imported into Russia as a consistent production cycle. It is issued by the Federal Customs Service (FCS), which assigns a single customs code to the imported lot that should fall under the zero rate.
However, as we say here in Russia, it is all very simple on paper. Obtaining a Classification Decision from Russian customs authorities should be thoroughly documented and takes from three weeks up to three months. Moreover, it is not enough just to obtain the appropriate code. One should know how to use it to get the precious privilege, which is impossible without a well-coordinated effort on the part of supplier and importer.
Unfortunately, the implementation of a contract rarely proceeds without a hitch; our experience confirms that. For example, certain components of the equipment need to be replaced and the company has to reapply to the FCS for an additional Classification Decision. Imean, in practice, it is not so easy to obtain the zero customs rate.
Also, companies do not usually just buy a plant or a set of complicated machinery.
Most contracts include additional services such as installation or installation supervision, putting the equipment into operation, testing it and doing related research.
It is extremely difficult to single out specific costs – of the equipment or of the services proper. The contract usually contains the total. But if the equipment is declared at Russian customs with a document containing the total amount, the consequences might be disastrous: they will calculate the customs charges on the equipment, and the importer’s domestic taxes on the services it bought, on the same total basis.
Common mistakes It follows that the main difficulty lies in the way the equipment supply contract is drawn up.Most of such contracts combine elements of several different types of agreements: equipment sale, additional components supplies, compiling technological specifications, a works contract and a service contract. So what they do is list the equipment’s specifications as well as works and services indiscriminately in the same document.
The importer must know that all the works and services to be provided under a foreign trade contract can be roughly classified into two groups. One will include design-related works performed before importing and installing the equipment.
The other, services to be provided once the equipment arrives in Russia – installation, assembly, commissioning and startup, testing, putting into commercial operation, and personnel training.
I repeat – if the cost of equipment proper is not separated from that of works and services, the importer will run an additional risk of the customs tax being calculated on the total amount of the contract.
This creates an ambiguity in the contract – the customs officer cannot find specific costs of the equipment, of technical specifications, and each work or service.
This ambiguity often leads to higher customs charges. Let me also remind you that when a zero import duty is applied, there is a risk of failing to fulfil the Classification Decision. If the Decision is cancelled, the importer will have to declare each component of the machinery set separately. But how can that be done, if the contract does not even stipulate the cost of the equipment proper, let alone of each separate component? Along with the equipment and specifications, the contract often includes spare parts, replaceable items and consumable materials. However, what we often find in contracts is a simple statement that a certain amount of spare parts will be added to provide for successful operation of the equipment during one or two years.
Their specifications, quantity and prices are often left out. The customs interprets this as ambiguity, which is, again, fraught with higher charges.
In fact, Russian law does not provide for a zero import duty on spare parts at all, even if a company obtains a relevant Classification Decision and can therefore import the equipment at zero rate. Generally, spare parts can account for as much as15%of the amount of the contract ormore.
So are there ways of dealing with these problems? We at Targo have developed solutions for such cases, our own knowhow.
We suggest that companies include a clause that the price of spare parts, replaceable components and consumable materials can be unilaterally fixed by the supplier in the invoices accompanying the lot. The scheme fully complies with both parties’ interests, if both operate fairly. It is a clear and simple way tominimise risks.
Before and after crossing However, it is not enough to single out the costs of the equipment and spare parts as separate clauses in the contract.
The contract should also properly describe the works and services to be performed by the supplier, delineating them clearly, as I have already said.
The Federal Customs Service says that the costs of designing, drawing, developing technological specifications and other jobs performed outside Russia before shipment should be added up and then stated separately from the lot. It is indeed so, according to the Customs Code.
However, the law also says that the adding up is only possible in cases where these jobs are absolutely necessary for exporting the machinery to Russia, have been performed abroad by a third party and then sold by the supplier to the Russian importer.
But in reality, even if none of the above applies to the contract, the customs always rules that the addition should be made because the importer has paid for the work. Therefore, they add the costs up before calculating the import duty.
This results in amounts comparable with the price of the lot, because the VAT grows accordingly and a huge profit tax needs to be paid.
The customs’ decision can be disputed, of course. It is even possible to prove it wrong after a long and exhausting series of court hearings. But, in business, time is often worth more than money.
First, we suggest that the costs of works and services be clearly stated in the contract.
Second, if some sort of technological specifications are produced, whether advising on pipeline-laying or operating some complicated machinery, or specifying the roles of the personnel, the costs of the pre-shipment works and services can be stated as part of the resulting specifications’ cost.
Thus we are killing two birds with one stone – we link the cost of design to that of specifications, which are always imported at zero rate, and effectively exempt these works and services from domestic taxes, since, according to the way the contract is drawn up, we are importing technological documentation, not buying works or services.
Last but not least No major contract is limited to importing the equipment only.
Both the exporter and the importer need to bear in mind that the post-delivery services the supplier will perform will also be evaluated by the customs.
The Russian customs tariff law contains a list of post-delivery services whose costs are not added to the customs value of the equipment. Therefore, we recommend that companies use wordings that correspond exactly to what the law says. We even tell our clients to use the very terms found in the law to describe the works and services to be performed after the equipment crosses Russia’s customs border.
For example, personnel training and startup testing and commissioning mostly fit into the “technical assistance” term.
Generally speaking, these are kinds of technical assistance, which does not happen to be added to the customs value of the lot. As a result, the equipment crosses the border unimpeded and everyone is satisfied – the importer, the exporter and the customs.
