Foreign Economic Activity: Export and Import Operations

Entering the international market opens up new opportunities for business: new customers and suppliers, expanding sales markets and increasing sales volumes. At the same time, an agreement with a foreign counterparty is only the beginning of a foreign economic transaction.

As soon as the goods have to cross the customs border of Ukraine, the business is faced with additional requirements for contract execution, customs procedures, taxation and currency settlements. And it is at these stages that mistakes can cost much more than their prevention.

Incorrectly selected delivery terms can put the party at costs that it did not expect. An incorrectly determined product code can affect the amount of customs payments or the need to obtain permits. And violation of the terms of settlements with a foreign counterparty may result in the accrual of penalties.

Therefore, an export-import operation should be planned comprehensively even before signing the contract.

Where does export or import begin?

If a Ukrainian company plans to carry out transactions with goods across the customs border, it must be registered with the customs authorities.

Such an obligation is stipulated by Article 455 of the Customs Code of Ukraine, and the procedure itself is regulated by the Procedure for Accounting for Persons Carrying Out Transactions with Goods, approved by Order of the Ministry of Finance of Ukraine dated June 15, 2015 No. 552.

In practice, this procedure is still often called “customs accreditation”, although the legislation uses the concept of registering a person carrying out transactions with goods.

At the same time, even before concluding a contract, it is important to find out what exactly the company is going to export or import from the point of view of customs legislation. First of all, it is necessary to correctly determine the product code according to the Ukrainian Code of Foreign Economic Activities and check whether there are any special restrictions on it.

The customs duty rate, the need to obtain licenses or other permits, the application of quotas, benefits and other measures of state regulation may depend on the classification of the product.

Foreign economic agreement

The basis of relations between a Ukrainian company and a foreign counterparty is a foreign economic agreement.

According to Article 6 of the Law of Ukraine “On Foreign Economic Activity”, the parties have a fairly wide freedom in determining its terms. Therefore, the legislation does not require the use of one standard contract for all foreign economic operations.

It is much more important that the contract clearly defines the subject matter, characteristics and quantity of the goods, their price, currency and terms of payments, the procedure and terms of delivery, the moment of transfer of risks, the liability of the parties, the applicable law and the procedure for resolving possible disputes.

A foreign economic contract does not necessarily have to be bilingual. At the same time, in practice, a bilingual version is often convenient for the parties and allows reducing the risk of different interpretations of the agreed terms.

The provisions on applicable law and dispute resolution require special attention. If the parties have not properly determined them at the stage of concluding the contract, the question of which country’s law applies and where exactly they will have to protect their interests may arise after the breach of obligations.

Terms of delivery and Incoterms

In international trade, the terms of delivery are traditionally determined using the Incoterms rules. The current version is Incoterms 2020.

They help the parties to allocate responsibilities for arranging transportation, related costs and customs formalities and determine the moment of transfer of risk of accidental loss or damage to the goods.

However, Incoterms do not replace a contract. They do not determine, for example, the moment of transfer of ownership of the goods, the procedure for payment, liability for breach of obligations or the law that will apply to the contract.

Therefore, it is not worth mechanically transferring the delivery condition from one contract to another.

For example, EXW conditions provide for a minimum amount of the seller’s obligations and place the bulk of the transportation and related risks on the buyer. In contrast, DDP provides for a much wider scope of the seller’s obligations, including, as a general rule, import customs clearance of the goods.

Therefore, even three letters in the contract can significantly affect the actual cost and organization of the entire delivery.

Customs clearance of goods

The next stage is the movement of goods across the customs border and their placement in the appropriate customs regime.

The procedure for customs clearance is determined by the Customs Code of Ukraine. The declarant submits to the customs authority a customs declaration and documents and information necessary for a specific operation. These may be a foreign economic agreement, invoice, transport documents, documents on the origin and value of the goods, and in cases provided for by law – relevant permits or certificates.

There is no universal package of documents for each export-import operation. Its composition depends on the product itself, the chosen customs regime, the method of transportation, the country of origin and other circumstances.

One of the most common causes of disputes at this stage is the determination of the product code according to the UKT Foreign Economic Activity Code and its customs value.

When importing, the main method of determining the customs value is the contract price for goods imported into Ukraine, if the conditions established by the Customs Code of Ukraine are met. At the same time, in cases provided for by law, certain costs may be added to the price, and the customs authority has the right to verify the correctness of the declared customs value.

Therefore, the price indicated in the invoice and the customs value of the goods are not always identical concepts.

Customs payments and VAT

When importing goods into the customs territory of Ukraine, depending on the specific transaction, customs duty, VAT and, in the case of importing excisable goods, excise tax may be paid.

The amount of payments depends, in particular, on the UKT ZEA code, customs value and origin of the goods. The latter may be of significant importance if a free trade agreement is in force between Ukraine and the relevant state. If there is proper confirmation of the origin of the goods, in some cases a reduced or zero import duty rate may be applied.

Different rules apply to exports. In accordance with subparagraph 195.1.1 of Article 195 of the Tax Code of Ukraine, transactions involving the export of goods outside the customs territory of Ukraine under the export customs regime are subject to VAT at a rate of 0%.

At the same time, a zero rate does not mean that the transaction is not reflected in tax accounting at all. The fact of the export of goods must be duly confirmed in accordance with the requirements of the legislation.

Transactions with non-residents regarding the provision of services should be assessed separately. They usually do not need to undergo customs clearance, but it is important to correctly determine the place of supply of the service for VAT purposes and take into account other tax and currency consequences.

Foreign exchange settlements: how much time does a business have?

A separate stage of a foreign economic transaction is settlements with a non-resident.

In accordance with Article 13 of the Law of Ukraine “On Currency and Foreign Exchange Transactions”, the National Bank of Ukraine has the right to establish deadlines for settlements for operations on the export and import of goods.

During martial law, special rules established by the Resolution of the NBU Board of February 24, 2022 No. 18 apply. For most operations on the export and import of goods carried out starting from April 5, 2022, the deadline for settlements is 180 calendar days.

For the exporter, this means that the funds due to him must arrive within the established period. When importing with prepayment, the resident, in turn, must ensure the delivery of the goods within the appropriate period.

However, 180 days is not a universal rule for each foreign economic transaction. The NBU establishes exceptions and special periods for individual goods and industries. Therefore, the permissible settlement period should be checked directly for a specific transaction.

The consequences of a violation can be significant. Part five of Article 13 of the Law of Ukraine “On Currency and Currency Operations” provides for the accrual of a penalty for each day of delay in the amount of 0.3% of the amount of unreceived funds or the value of undelivered goods. The total amount of the penalty cannot exceed the amount of the relevant debt.

Therefore, the terms of payment and delivery in a foreign economic agreement must be agreed not only from a commercial point of view, but also taking into account currency legislation.

If a dispute arises

Even a properly planned delivery does not exclude the occurrence of disputes.

With customs authorities, they most often concern the customs value of the goods, its classification according to the UKT FEA, confirmation of origin, application of customs benefits or refusal of customs clearance. Decisions, actions and inaction of customs authorities can be appealed administratively or in court in accordance with the Customs Code of Ukraine.

Another category is disputes directly with a foreign counterparty. The supplier may delay delivery, the buyer may delay payment, and the received goods may not meet the agreed characteristics.

It is at this point that the provisions of the agreement, which at the time of its signing may seem like a formality, acquire practical significance. The applicable law, the liability of the parties, and the choice between a state court and international commercial arbitration can directly affect the ability to effectively protect one’s interests.

Conclusions

A successful foreign economic transaction begins long before the goods cross the customs border.

Even at the stage of negotiations with the counterparty, it is worth understanding how the goods will be classified, what customs payments will arise, who will organize its delivery and customs clearance, when payments are due, and what the parties will do if the agreements are not fulfilled.

A foreign economic agreement, Incoterms, customs value, taxation, and currency terms do not exist separately from each other. Together they form the legal and financial model of the future supply.

That is why the main task when planning an export-import operation is not to solve problems after they arise, but to build a cooperation model in advance, in which the main risks will be understandable and controllable.

Are you planning an export or import operation? We will help you check the contract and legal terms of delivery before it is carried out.