Ukraine's customs reform: What changes are expected?

Ukraine's Customs Service is set to undergo significant reforms as part of the country's efforts to combat corruption and increase revenue. The reforms are a key condition for continued international aid and are expected to address long-standing issues within the service.

The United States has urged Ukraine to focus on reforming its customs service and tackling the gray market before considering tax increases.

"You have revenues that you are not collecting and that you should be collecting today. Focus on that first," said Penny Pritzker, the U.S. Special Representative for Ukraine’s Economic Recovery, during a briefing in Kyiv in early June.

The overhaul of the State Customs Service (SCS) is one of the structural benchmarks Ukraine must meet this fall to continue receiving international assistance.

A relevant bill has already passed its first reading in the Verkhovna Rada, despite objections from the Ministry of Finance. However, changes appear inevitable.

What сhanges are expected for the customs service?

Given the urgent need for funding for defense and social needs, bill №6490-d, which has already been adopted as a basis by the legislature, has become a priority.

The bill was registered in the Rada in May 2023 and passed its first reading. It is expected to gain support from both the ruling party and the opposition.

"I think we will bring it to the floor (session hall) in September," Yaroslav Zheleznyak, the first deputy chairman of the Committee on Finance, Tax, and Customs Policy and an opposition MP, told LIGA.net.

According to Zheleznyak, the bill is currently undergoing final revisions to address concerns raised by the Ministry of Finance.

The bill proposes a restructuring of the SCS through commissions with decision-making power, including international experts, business representatives, and a business ombudsman. This also applies to the appointment of the SCS director. Additionally, the bill mandates the re-certification of all personnel.

Currently, the SCS does not have a permanent head. Since February 1, 2023, the duties have been temporarily assigned to Serhiy Zvyahintsev, who has held various positions in the Ministry of Economy.

Specifics of the reform

The core of the reform involves appointing independent leaders. "There are several elements (to the restructuring - ed.). First, it's about a transparent selection of the leader. Everything starts with the head. If there is no trust or issues with the first person, then talking about changing the rank and file is rather ironic," said former SCS head Max Nefyodov.

The bill also includes an algorithm for conducting an independent assessment of the effectiveness of the customs service's operations, defining criteria for the effectiveness of the renewed SCS, and controlling these criteria.

Importantly, the future head of the SCS will have the authority to appoint subordinates without the need for approval from the Minister of Finance.

Additionally, an annual external independent audit of the customs service's effectiveness will be introduced. A negative audit result will be grounds for dismissing the SCS head.

The customs reform will be synchronized with the recently approved project to restructure the Economic Security Bureau (ESBU), which was also part of the Memorandum with the IMF. Specifically, the new customs head will be selected by a commission of six members, half of whom will be international experts with decision-making power.

The Ministry of Finance did not support the bill in its first draft, citing concerns about increased salary levels for customs employees without a clear plan for additional budget expenditures and their coverage.

According to Yaroslav Zheleznyak, discussions with the ministry are ongoing. One option being considered is a phased increase in salaries to motivate and ensure the effective work of new customs officers.

If the bill is approved, the entire process will take at least three years.

"Of course, some time is needed to prepare for the competition. But I think we have all the prospects to select a new leader within the next six months," Nefyodov said.

Over the next three years, more than 90% of the 10,000 employees will undergo re-certification.

Current schemes at the State Customs Service

According to the Ukrainian Business Council (UBC), schemes to evade tax payments through poor customs work cost the state budget between 120 and 150 billion hryvnias ($2.9-3.7 billion) annually.

The UBC categorizes current customs schemes into several types:

1. False Declarations: Moving goods while concealing them from customs control. This involves customs fraud and corrupt schemes, with customs officials often complicit. This allows for the manipulation of reporting, permitting, and accompanying documents to lower customs value, weight, quantity, characteristics, and quality of goods, or to substitute codes or subcategories of goods to avoid or reduce customs payments.

2. Movement outside customs control: Black market smuggling.

3. Abuse of privileges: Masking the import of industrial batches of goods as postal or courier shipments, or as personal imports or personal belongings.

4. Interrupted regime: Goods are imported (or exported) under customs regimes that do not require customs payments (transit; temporary import or export; customs warehouse; processing on customs territory or outside customs territory), and then disappear or are fictitiously exported.

"Business says – no tax increases until you start with yourselves. And I agree with this. The state must first overcome the schemes at customs. Yes, this is a complex reform that will take years. That's why the involvement of business, the business commissioner, their goodwill, and control are important here," Zheleznyak said.