Ukraine's WTO Accession— Opportunities for Foreign Investment, Trade Expansion
Journal of International Taxation, March Issue 2009
John Kay, Tax Partner with Ernst & Young, Oleksii Manuilov, Tax Senior Consultant with Ernst & Young
Ukraine became the 152nd member country of the WTO on May 16, 2008, after 15 years of accession negotiations. WTO accession has put Ukraine in the spotlight with new opportunities for foreign investment and trade expansion, as already evidenced by the commencement of formal discussions regarding EU-Ukraine free trade agreement negotiations. Also, WTO accession has led to significant reforms to conform with WTO rules and commitments. While these reforms will lower trade barriers, they will also mean new laws, processes, and procedures for businesses.
What WTO accession means to Ukraine. Overall, Ukraine's accession to the WTO means:
- Introducing internationally recognized rules and norms that are applied in 151 other countries.
- Facilitating access to the majority of foreign markets.
- Improving the attractiveness of Ukraine for domestic and foreign investors, and increasing the flow of investment to industries, services, and agriculture.
- Increasing competitiveness in the domestic market, and widening the assortment of goods and services, quality, and price ranges for customers.
- Reducing state support programs, which are subject to limitations under WTO regulations.
- Developing an up-to-date system of technical standards, speeding up harmonization with international standards.
- Getting the opportunity to defend the interests of Ukraine's producers according to the WTO's dispute settlement procedure.
With its commitments to trade based on market forces, transparency, and the rule of law, Ukraine is bringing significant reforms to its trade laws. Some reforms were already implemented before or on accession, while others are in process.
Recent reforms. On WTO accession, Ukraine implemented various WTO agreements relating to the trade in goods, such as the WTO Customs Valuation Agreement and Rules of Origin Agreement. Overall, most aspects of trade underwent some reform.
Import tariffs. Ukraine now uses the harmonized tariff system, replacing the Ukrainian Foreign Economic Activity Commodity Classification (UFEACC), and applies the privileged (most-favored nation or MFN) rate of import duty to all goods originating from WTO member states. In many instances, significant duty reductions have already taken place, with additional gradual reductions to follow. For instance, import duty rates on cars decreased from 25% to 10% as of the date of WTO accession. Moreover, import duties on some cars will continue to gradually decrease from 10% to 5% (1% every year for five years after accession). Ukraine exporters are already benefiting from MFN duty rates for trade with WTO member states.
Quantitative import restrictions. Ukraine has committed to eliminate and not introduce, re-introduce, or apply quantitative restrictions on imports or other non-tariff measures that could not be justified under the WTO Agreement.
For example, while preparing for WTO accession in 2006, Ukraine adopted Law No. 404-V, "On the Establishment of the Tariff Quota for Importation into Ukraine of Raw Cane Sugar (November 30, 2006). This legislation established an annual TRQ for raw cane sugar of 260,000 tons (subject to 2% import duty) allocated exclusively among WTO member states from the date of WTO accession. Outside the quota, the import duty on sugar remains stably high at 50%.
Export duties and restrictions. Ukraine will gradually reduce export duties across a range of goods over the next ten years (e.g., oilseeds, live cattle, animal skins, and ferrous and non-ferrous particles). Some level of export duties will remain for certain products. For instance, on accession, Ukraine eliminated export bans on non-ferrous scrap metal and substituted it with export duties.
Ukraine has also removed export restrictions on grains, as well as those on precious metals and stones other than gold, silver, and diamonds. Ukraine has removed export restrictions on steel products exported to EU countries.
Going forward. The customs environment in Ukraine is transitioning quickly. Ukraine importers and exporters need to adjust to this new environment and proactively prepare for further changes. Below are some additional reforms to expect going forward:
- More simplified procedures for customs clearance and declaration of good. A recent reform implemented the first stage of electronic customs filings that allows eligible traders to submit preliminary customs declarations electronically to the customs authorities; further stages will be implemented to expand these types of simplification measures.
- Increased use of post-entry customs audits. Rather than delaying goods at the border to perform controls, the customs authorities will conduct more reviews after customs clearance of the goods.
- More focus on the accuracy of customs value. The customs authorities have implemented control procedures to verify the accuracy of the declared customs value under the new WTO-consistent rules. To this effect, Ukraine will eliminate mandatory minimum prices on imported and exported goods.
- More effective protection of intellectual property rights at the border. Ukraine will implement its commitments under the TRIPS Agreement5 to permit action against acts of infringement of intellectual property rights.
- Further reductions to mandatory third-party certifications. Ukraine will harmonize its national certification standards with international and European standards by 2012.
For many global traders, the reforms will make Ukraine's trade rules and customs procedures more consistent with those that apply in the major markets where they do business. Nonetheless, traditional practices will not disappear overnight, which will mean, at least for a while, an environment of evolving and conflicting jurisprudence. For instance, aspects of inconsistency in the interpretation and application of the customs valuation rules are already being seen, particularly concerning the treatment of royalties and other intangible payments. Also, the decreasing import duty rates arising from Ukraine's accession to the WTO increase pressure on the Customs Service to maintain its contribution levels to the national budget.
