By the order #30 issued on 25 January 2013 by the Minister of Finance of Georgia, substantial amendments have recently been applied to the procedures on importing/exporting goods to and from the customs territory of  Georgia, as well as to the making and submission of official declarations. This has created serious problems for the entrepreneurs involved in the carrier business in Georgia.

A group of representatives of the companies involved in the carrier business have recently approached Transparency International Georgia (TI Georgia) with a letter. They stated that they were encountering serious obstacles in their activities and said interference was so severe that the future prospects of their continual involvement in the market were now under serious threat. The letter also expressed the suspicion that the newly enacted regulations were introduced with the goal of excluding the private companies from the market while consolidating the market share of the Georgian Post, giving it a monopoly over the carrier business.

TI Georgia has decided to look into the matter and to publish its analyses of the new regulations concerning the enactment of a new legal rule.

1.  What does the order of the Finance Minister entail and what are the problems associated with it?

The analysis of the regulations has revealed several problems which indeed can be regarded as undue interference in the carriers’ activities. In particular, pursuant to the order, for a carrier to continue its activities, it is required for the company to have access to the “Special Automated Data System of the Freight Customs Declarations” of the Revenue Service. The Revenue Service of Georgia, however, grants a carrier such access only if, along with the other terms, it meets the following requirements:

a)  A carrier is required to have respective experience and a good reputation in transporting goods in an organized manner. In our opinion this requirement creates a formal barrier for entering the market. It places a new business entity that is wishing to launch operations in this segment of the market in an unfair position as it restricts any newly established carrier from conducting their respective business activities. In addition to these concerns, the regulation gives the possibility of subjective judgment on the part of the regulators, which also should be avoided.

b) A carrier is required to have a customs warehouse. It is unclear to us why a carrier is required to have a customs warehouse when, based on the contractual terms, it can also use the customs warehouse services. This requirement does not clarify whether it is sufficient for a carrier to receive customs warehouse services through contractual agreement for it to continue the operations.

The warehouses are primarily rented by the small and middle sized carriers, since they can’t afford the use of the full scale warehouse infrastructure. Those carriers are primarily the ones who are supplying the goods to the wholesale markets in Tbilisi.

c)  A carrier can now connect to the respective server of the Revenue Service. It therefore has the possibility to declare preliminarily the goods through an electronic system. But in order for this system to operate, the companies had to write the program themselves which required considerable time and expenditure due to the complexity of the system. Furthermore, the carriers had only 7 days to comply with the requirements stipulated by the order N4257 that was issued on 6^th of February, 2013, by the head of the Revenue Service of Georgia.

In our opinion, given the time constraint it was impossible for a carrier to develop and test the software (completion of this process usually takes at least 2 months), as well as to obtain the consent of the Revenue Service on granting the access to its own system.

TI Georgia believes that it a positive development that the new electronic system is being introduced, but at the same time in our opinion the management and implementation process could have benefitted from a more optimal approach.  For example, it would have been more expedient:

• For the Revenue Service to develop a unified program, which all entrepreneurs in the transportation business could use after having obtained respective access to the automated system of the Revenue Service;

OR

• For the Revenue Service to grant the companies involved in the carrier business access to the ASYCUDA, an Automated System for Customs Data,  which was developed by the experts of the United Nations Conference on Trade and Development (UNCTAD). This could have been done with the help of proprietary software module that is available with the main software package. The module is adaptable to the foreign-trade procedural requirements of any country, and provides a possibility to conduct the declaration making and submission process in line with the international codes and standards;

d) A carrier must organize timely payment of import duties and the service fee by the importer. As a carrier only renders transportation services, imposing an obligation on a carrier to ensure the payment of taxes by other legal entity/physical person (importer in this case) cannot be justified. This regulation runs contrary to the Georgian legislation, as the carrier can’t be responsible for their clients’ conduct in the cases of possible withholding of taxes. Such monitoring is a prerogative and should be conducted by the Revenue Service of Georgia

It must be noted that with the introduction of the above-described requirements for the carrier business, the essential licensing/permitting regime is in fact being implemented under the sub-statutory normative act. This constitutes a violation of the Law on Licenses and Permits, which states that “introducing a license and permit by other statutory or sub-statutory act for activities and actions not regulated under this Law shall be prohibited” (Paragraph 1 of Art.4).

In addition to the conflict with the existing Georgian legislation, the imposition of the described requirements/legal barriers is inconsistent with the requirements of the World Trade Organization (WTO) concerning the simplification of bureaucratic import-export procedures and the simplification and reduction of number of documents required during the customs clearance of the goods.

2.  The advantageous position of the Georgian Post

According to our analyses, the Georgian Post is the only carrier that meets all the criteria listed by the order. It has, for example, the experience of conducting business in the goods transportation sector, possession of a customs warehouse, and a possibility to connect to the respective server of the Revenue Service.  

According to the local carriers (Star Group LLC and Kara LLC,) the rule of having to ensure the payment of the taxes by their clients is not enforced in the cases when the carriers are Georgian Post’s customers. Also, some carriers (Kara LLC) were offered to move their goods to Georgian Post’s warehouse and were  told that if they complied, then a timely customs procedure would be assured. Authors of the letter point out that the cost of the transportation of the goods offered in this case was several times higher than those of the other national carriers.

Taken into account the aforementioned circumstances, we have reason to believe that the introduction of the respective regulations is an attempt to impose regulations in favor of the Georgian Post, so that the operational conditions for competing domestic carriers in this market segment would become so complicated that they are eventually be driven out of the market.

3.  What is happening in Customs Terminal

For the last several days TI Georgia has been conducting an observation of the situation at Customs Clearance Economic Zone (CCEZ). Our representatives have addressed the management of the CCEZ for the permission to conduct monitoring of the enforcement of import procedures on the goods. Unfortunately, management of the CCEZ did not allow this, which clearly highlights the transparency problem in this process.

Furthermore, TI Georgia would like to emphasize that before the new system could be introduced steps should have been taken by the authorities to ensure its full and effective functioning by carrying out the relevant measures. These include providing timely updates about the ongoing reform to the current operators engaged in the market, taking steps to ensure their compatibility with the system in order to avoid disruptions, and securing the sustainability of this process.

In our opinion, before this order came into effect the ministry should have provided a reasonable timetable for the preparatory works. As the Ministry of Finance of Georgia has failed to carry out the indicated measures, the process of the introduction of new procedures on the movement and customs clearance of goods has been launched and has consequently experienced serious problems: cargos of a group of domestic carriers were delayed in the customs clearance authority and administrative authority representatives did not take respective measures for resolving a problem. This resulted in complete confusion. The carriers (Stargroup LLC and Kara LLC) were only able to get their goods through customs after moving their cargo to the Georgian Post warehouse. As prospects of their continuous business activities came under serious threat, the carriers have resorted to the court.

The organization believes that the risks should have been assessed by the ministry of finance prior to the enactment of the described amendments. Just as in the case of customs administration, there is always an element of risk present when the procedures regulating the movement of goods in the country's customs territory are changed. Hence, finding a balance between the introductions of new customs procedures as well as ensuring adequate control is a significant challenge for the administrative authorities.

4. The clarifications of the Ministry of Finance

Representatives of TI Georgia have also met with the Minister of Finance of Georgia and discussed the organization's comments on the movement of the goods in Georgian customs territory andthe new procedure of their declaration. The violations, through which the new regulations were introduced, were also discussed. The minister stated that the order was necessary for halting the transfers of contraband goods. But for us, the connection between the enactment of  bureaucratic barriers for the carriers and the fight with contraband goods seems to be dubious in this case given that it is the law enforcement agency’s sphere of activity rather than the Ministry of Finance’s.  The contraband goods can be imported by both older and newly registered carriers and the existence of the separate warehouse of the carrier does not exclude the possibility of importing the contraband goods.

In the customs administration process, the international practice of the risk management (including the risk of illegal transfer of goods) is different from the model chosen by the Georgian government. The international practice entails the implementation of the customs procedure with the usage of 4 gate types: Green, Yellow, Red and Blue. The selective checks are being undertaken and are guided by the use of the integrated risk profiles and in each case the appropriate gate is accordingly being determined by the system. The key idea behind the risk management system is the exclusion of subjective approach or the interference by the personnel of the customs in the process.

Regrettably, despite the fact that the organizations representatives have given the minister a detailed report, there was no follow-up from the Ministry of Finance on this meeting whatsoever.

The Minister of Finance has expressed the readiness and positive attitude towards the involvement of TI Georgia in the process of the further harmonization of the regulations on the customs procedures. Nevertheless in our opinion it is imperative that the problems at the customs be sorted out in a timely manner.

5.    TI Georgia’s Recommendations

TI Georgia recommends that the Ministry of Finance of Georgia and the Revenue Service ensure:

a)  The annulment of the customs regulations on the movement of cargos and declarations that were put in place by the order N30 of the Finance Minister issued on 25^th of January 2013 and order N4257 issued on 6^th of February, 2013

b)  The undertaking of timely measures so that the new system of customs control and monitoring is consistent with the international standards of risk management;

c)  The observance of the World Trade Organization (WTO) requirements concerning the simplification of bureaucracy in import-export procedures and the simplification and reduction of the number of documents required during the customs clearance of goods;

d)  The observance of effective legislation and the introduction of a transitional period during the implementation of a new system, so that the carriers can feasibly  adapt to a new legal rule on the procedures of import/export of goods to and from the customs territory of Georgia and making official declarations;

e)  The creation of a free, fair and competitive business environment in this market segment by introducing an adequate system of customs control and monitoring.

It is also recommended that the Free Trade and Competition Agency start investigating this issue to evaluate the position of the Georgian Post on the market, and undertake measures to alleviate the risk of the improper use of the dominant position by this company.

In order to settle the issues underlined in this blog Transparency International Georgia is planning to conduct a meeting today, on 26^th of March with the appropriate state agencies.