Starting from 1 July, the benefits for customs clearance of cars from abroad will be cancelled. What will change?What alternative proposals were submitted by MPs and what is their essence?

Since 1 April 2022, Ukrainians have been able to clear their cars for free. However, MPs decided that such ‘generosity from the state’ was enough and on 21 June passed Bill No. 7418, cancelling the benefits for importing cars from abroad that had been in place during the war.

On 15 June 2022, the Cabinet of Ministers submitted draft laws No. 7466, No. 7467 and No. 7468 to the Verkhovna Rada, which changes the formula for calculating the excise tax on the import of passenger cars. What other changes are envisaged by these draft laws? Will it really reduce taxes on car imports?

What have the MPs passed and how much time do we have to take advantage of the benefits?

Draft Law No. 7418 (now the Law) cancels the provisions of the final and transitional provisions of the Tax and Customs Codes of Ukraine, which established exemption from value added tax, excise tax and import duty for the import of cars, motorcycles and vehicles for the carriage of goods for 10 or more people.

The rule on customs clearance of these types of vehicles within one hour was also cancelled. Instead, a benefit was added and the pension fee for electric cars was cancelled.

Customs duties and value added tax on imported goods have also been refunded, which should be subject to a separate review.

The benefits will cease to apply from 1 July 2022. There are 9 days left for duty-free importation of cars into the customs territory of Ukraine.

The Law does not provide for any exceptions, nor does it contain any transitional provisions. Thus, the benefit will no longer be available to everyone.

Why was it cancelled?

The first reason, in our opinion, is the loss of the state budget. In the explanatory note to draft law No. 7418, the figure of UAH 13 billion appears. That is, it is argued that if everyone paid customs duties and the privileges were not in force, the treasury would be replenished by this amount.

It is difficult to agree with this statement, given at least the fact that under the rules that were in force before the cancellation of the privileges, it is unlikely that citizens would have imported 119,000 cars.

Consequently, customs payments would have been lower. Therefore, this amount is unrealistic, as the large number of imported cars was due to the very existence of these benefits.

The second reason is the importation of luxury cars and the so-called abuse of privileges. According to the customs, at the request of the Ukrainian MP Aliona Shkrum, as of the beginning of May, only 240 out of 30,000 cars could be classified as elite (worth more than UAH 1 million).

Thus, less than one per cent of cars fell into this category. So this reason should not be decisive either. But one way or another, these were the arguments that led to the cancellation of the privileges.

Consequences for Ukrainians

Ukrainians lost a large number of cars during the war. Figures vary - from 90,000 cars (KSE figures) to half a million cars.

Even with the minimum number of losses of 90,000, this is a significant vehicle fleet that will not be restored in the near future. The number of destroyed and lost cars is growing every day.

The introduction of benefits has revived the used car market, which has allowed citizens to rebuild their own car fleet. All of this has helped to provide the army with the cars it needs, as their prices have fallen.

As long as there were benefits for cars, they were imported into Ukraine en masse and cleared customs quickly. Cars don't last long at the frontline, which leads to a constant need for new cars.

The availability of benefits also revived related industries, such as service stations and petrol stations. Cars have somehow become a multiplier and allowed a layer of people who lost their jobs to work.

Now, in our opinion, the development of related industries and vehicle imports will be slowed down. It is unlikely that the same number of cars will be imported in the same period without the benefits.

Citizens will need to include significant taxes in the cost of a car. Commenting on similar initiatives, Danylo Getmantsev said that the army will not have any problems as they will use the humanitarian aid mechanism.

We hope that this will be the case. However, this will add to the bureaucratic procedures at the yet-to-be-reformed customs.

Were there any alternatives?

MPs submitted as many as 4 alternative draft laws (Nos. 7418-1, 7418-2, 7418-3, 7418-4). Here are the key features:

- It was proposed to retain benefits for combatants. The idea is interesting, but there was a risk of a new scheme for importing cars. Therefore, it needs to be finalised with safeguards.

- MPs tried to link the privilege to the cost of the car (the figures of 5 and 10 thousand euros were mentioned). With proper control, this was possible to implement and allowed for a step-by-step approach to solving the overall problem of affordable customs clearance for cars.

- It was proposed to halve the import duty (to 5%) and triple the VAT (to 7%) for cars. As in the previous point, we believe that this would allow for a smoother transition to solving the problem as a whole, and, on the other hand, would help to fill the budget.

More details about all the draft laws are available on our website. However, none of these initiatives was supported, and the tax benefits will cease to exist from 1 July 2022.

Prospects for affordable car customs clearance

Prior to the vote on draft law No. 7418, the Cabinet of Ministers of Ukraine submitted three draft laws to the Parliament that proposed to regulate the customs clearance of cars.

Even before the draft laws were registered in Parliament, Minister of Digital Transformation Mykhailo Fedorov explained that from now on, it would be possible to clear cars through Diia. But there are many more changes. Let's talk about them.

New excise tax formula

The key change, in our opinion, is the amendment to the Tax Code of Ukraine, which establishes the excise tax for passenger cars. It is calculated using the following formula:

Rate = Base rate * K

The basic rate is determined depending on the number of full calendar years from the year following the year of manufacture of the vehicle to the year of determination of the tax rate in euros per vehicle and ranges from 1.54 if the vehicle is 0 years old to 0.7 if it is 15+ years old. For example, if a car is 5 years old, the rate is 0.95.

K is a coefficient determined by the following formula:

K = Co x Kt x Kek, where Co is the engine volume coefficient equal to the volume of the cylinders of the internal combustion engine of the respective vehicle, cubic centimetres; Kt is the coefficient of the engine type (diesel 1.2, electric motor 0.5).

Kek is the exclusivity coefficient, which is applied exclusively to vehicles costing more than 375 minimum wages (about UAH 2.5 million) and is 2. For all other vehicles, the value of the Kek indicator is 1.

It is worth noting that the formula is almost not tied to the cost of the car (only when the exclusivity coefficient is applied), but is tied to the volume, engine type and number of years since the year of manufacture of the vehicle.

Value added tax is calculated using the following formula: Rate x 3.5 x 20%.

Excise tax is calculated by the formula: Rate / 2.

A gradual reduction in the base rate is also set to take place until 2027. For cars over 10 years old, the rate is immediately set at 0.7. However, for cars less than 5 years old, a gradual reduction is provided (for example, if a year has passed since the vehicle was manufactured, the rate will be 1.9 until 31 December 2022, the next year - 1.79, until 31 December 2024 - 1.67, and so on).

In view of this, importing used cars will be more profitable than importing new cars (also taking into account the doubling of the rate due to the exclusivity factor). Nevertheless, we note a general move towards reducing customs duties.

Cancellation of import duties and pension duty

Another feature of these draft laws is the abolition of the state pension insurance fee for the first registration of passenger cars. This will reduce the cost of registration, which is a positive development.

Another novelty was the abolition of import duties. This step is necessary and will reduce the cost of customs clearance by 10%, which is also positive.

Amendments to the Customs Code of Ukraine create the preconditions for customs clearance of vehicles through the Unified State Web Portal of Electronic Services. This should reduce the time for customs clearance and become a convenient tool for citizens, which is also a positive development.

Benefits for electric vehicles

The draft laws have not forgotten about the electric vehicle industry. The import of electric vehicles has been exempted from value added tax. They are also exempt from import duties.

Overall, given the path chosen by the government to support the industry, these changes are logical and justified.

What could be the problems?

- The fate of other types of cars (other than passenger cars) is not defined. The law establishes an excise tax formula for passenger cars, but it does not specify the procedure for taxing the import of vehicles for the transport of people and goods. These are different categories of vehicles.

- Certification of vehicles is voluntary, and state registration is carried out without inspection of the vehicle by the MIA. At the request of the person, all these procedures can be carried out.

In general, the idea can be supported, but it should be noted that the proper certification and inspection may affect the further safe operation of the vehicle, as well as the safety of its presence on the road.

Both of these procedures could have a corruption component, but it is better to try to find a way to eliminate it rather than to abolish the procedures as such.

We recommend that this provision be reviewed with the views of all stakeholders (motorists, government agencies and industry associations).

In addition, we note that the Federation of Automobile Employers does not support the draft law, noting that it will once again stimulate the import of used cars into Ukraine that are ten years or more old.

Conclusion.

The problem of affordable car customs clearance requires a comprehensive solution. The sooner the state finds an optimal mechanism, the sooner citizens will be able to renew their car fleet and effectively provide the Armed Forces with the necessary vehicles.

The draft laws need to take into account the positions of all stakeholders when making decisions. They need to be finalised and the problem with car customs clearance in Ukraine needs to be resolved.

Source: Ekonomichna Pravda