How the customs mafia deals with “medical” tax breaks

Under the guise of medicines and medical equipment, cosmetics, injection implants for “puffing up” lips and other far from essential goods are imported into Ukraine at a preferential VAT rate. The budget is losing, customs officers are doing the opposite.

These are the summary results of a recent audit conducted by the Court of Accounts.

The auditors analyzed the years 2021, 2022 and nine months of 2023, that is, they had the opportunity to look at the dynamics. It is positive, but greatly spoiled by the Covid quarantine, during which tax breaks for medicines were expanded. Accordingly, the declared sharp, almost half, decrease in the number of importers - tax beneficiaries from 2022 - is not an improvement in the work of customs officers, but the consequences of the abolition of “quarantine” benefits.

The very existence of a VAT benefit (from zero to 7% with a base rate of 20%) for importers of medicines and medical products seems completely justified, especially at the present time. However, customs does not always make adequate decisions on the application of these preferential rates, although it has all the regulatory documents, lists and lists. Often the same groups of goods are taxed either at a full rate or at a reduced rate, and the logic in providing benefits is not always traceable, unlike the corruption factor.

The Accounts Chamber of Ukraine conducted a random audit of four customs offices: Volyn, Dnieper, Lviv and Odessa. The results are interesting: in two hundred cases, the unjustified use of VAT benefits was recorded, as a result of which more than 32 million UAH were not received into the state budget. Not very much, at first glance, but we are talking about only four customs houses out of 16, that is, the indicated budget losses may turn out to be only a fourth of the total amount of shortfalls due to imaginary customs benefits.

There are interesting cases. For example, auditors identified six companies that received benefits for importing goods that were not even close to being on the list approved by the government. Four out of six companies were serviced by Lviv customs, what a coincidence. Another suspicious beneficiary was also found there: the company imported medical products at a reduced VAT rate, allegedly because the supply was carried out as part of the “implementation of government programs in the healthcare sector,” but the purchase was not state-owned.

Moreover, an enterprising private owner eventually sold this product to a utility company, which is what auditors caught him doing. After clarifying the circumstances, the “beneficiary” himself agreed to pay additional VAT to the state and not go into the details of this story. It seems like a happy ending, but what about the customs officer who approved his benefit? Obviously, he escaped with a slight fright.

...Or this example: two importers brought gauze to the customs territory of Ukraine for the further production of bandages worth more than UAH 110 million. Both are at a reduced rate of 7 percent. Only one brought finished goods to Ukraine, and the second brought not so much gauze, but practically raw materials. Of course, he had to pay 20% VAT, if only because the imported raw materials can ultimately be used in any way, not for medical purposes either. But customs gave the go-ahead. The budget lost almost 16 million UAH.

And Dnieper customs officers granted a 7% discount to a batch of injectable implants based on hyaluronic acid worth UAH 2.5 million, although they knew for sure that no benefits apply to cosmetic products. And when registering the shipment, they could definitely read in the declaration provided by the manufacturer that its product is “a cosmetic product for removing wrinkles and improving the shape of lips.” Cost of omission? The importer paid 175 thousand UAH to the state budget, although he should have paid half a million.

The situation with the provision of medical benefits to companies whose type of activity is as far removed from medicine as possible looks completely strange. Thus, among the beneficiaries were the Lviv Circus, the National Palace "Ukraine", the hotel complex "Karpaty" and the company "OKKO". According to the law, without a license (and there is none), they, in principle, could not import medications into Ukraine, with or without benefits. But somehow they delivered it, and at a discount.

So why such confusion? Let us quote paragraph 4 of the report: “The audit found that... separate records of persons carrying out operations for the import of medicines and medical devices into the customs territory of Ukraine are not maintained, since this is not provided for by regulations.” Well, if there is no accounting, then there is nothing to complain about.

And in addition to everything, as the Accounts Chamber notes, the samples provided by the State Customs Service are inaccurate, since a significant number of customs codes, by which tax benefits are determined, include goods that may belong to both medical devices and other groups. For example, code 9402 includes medical, surgical, dental, veterinary furniture, and hairdressing chairs. Code 9001 “Fiber optic products, lenses, prisms, mirrors, unframed” includes both medical products and household appliances. And the code 8703 encrypts both ambulances and racing cars.

It seems that such a wide “filling” of codes is an ideal breeding ground for corruption and arbitrariness at customs. Meanwhile, warring Ukraine needs tax revenue like air. And if only for the import of gauze the budget received a shortfall of 16 million, then when extrapolated to other dubious decisions of customs on the application of VAT benefits for importers, a huge figure will emerge.

I wonder if Ferraris or hairdressing chairs were actually imported into Ukraine under the guise of medical equipment and with 7% VAT? They very well could. But this is only one problem raised in a multi-page audit. The problem is with licensing, with inspections, with communications between tax authorities, customs officers and the State Lexicon Service. There is even a problem with reporting: auditors discovered, for example, that Lviv customs regularly (allegedly by mistake) entered the same data into the columns of different indicators, ultimately distorting all its statistics for the nine months of 2023.

Chaos? The authors do not use this word in the report, but it seems like it. Let us remind you that customs reform is one of the eternal priorities in our country.