Enhanced Customs Control Could Potentially Add 300 Billion Rubles to the National Budget, According to the Federal Trade Commissioner
In recent years, the Federal Taxation Service (FTS) of Russia has been uncovering widespread document fraud, leading to the importation of unsafe products such as children's goods, auto parts, and household appliances. This alarming trend has significant financial implications, with detected violations amounting to a staggering sum of 56.4 billion rubles by the end of 2024, representing a 58% increase from the previous year [2].
Manipulative Practices in Import Cost Management
While there are legitimate strategies to manage import costs, understating them can involve several manipulative practices. Here are some common methods that might be used, although they are not ethically recommended:
- Misclassification of Products: The misuse of Harmonized System (HS) codes can lead to lower or avoided tariffs. This practice involves classifying products under HS codes with lower duty rates, which can result in significant cost savings for importers but is considered illegal and unethical [1][3].
- Underreporting Value: Falsely declaring a lower value for imported goods reduces the dutiable value and consequently lowers tariff payments. This not only violates customs regulations but also distorts market prices and competes unfairly with compliant businesses [1].
- Undervaluing Freight and Insurance: Excluding or underreporting freight and insurance costs when calculating the dutiable value can further reduce tariff payments. However, this practice would necessitate collusion with suppliers or carriers and is illegal [1].
- Utilizing Free Trade Zones Incorrectly: While foreign-trade zones (FTZs) offer legitimate benefits like deferred duties, misusing them by not properly reporting goods or incorrectly claiming exemptions can be considered understating costs [4].
The Impact on Honest Businesses
The widespread use of such practices creates an uneven playing field for honest businesses.
- Competition and Market Distortion: Businesses that accurately report costs face higher operational expenses compared to those that understate them. This can lead to unfair competition and market distortion, as compliant businesses may struggle to maintain price competitiveness.
- Legal Risks: Honest businesses avoid legal risks associated with illegal practices, maintaining a clean record and avoiding potential penalties.
- Reputation and Trust: Adhering to ethical practices helps maintain consumer trust and a strong business reputation, which are valuable assets in the long term.
The Impact on Consumer Safety
Understating costs might lead to the importation of substandard or counterfeit goods to maintain profitability. This can jeopardize consumer safety as these products may not meet safety and quality standards.
- Substandard Products: Consumers may be exposed to unsafe products, which can pose risks to their health and wellbeing.
- Misinformation: Consumers may be misled by artificially low prices or false product descriptions, affecting their purchasing decisions and potentially exposing them to unsafe products.
- Economic Impact: The economic implications of such practices can lead to a decrease in consumer trust in the market as a whole, affecting honest businesses and potentially destabilizing the economy.
Addressing the Issue
Recognizing the need for action, the Russian government is working on a combination of control measures to address issues in foreign economic activity [5]. These measures aim to ensure fair competition, protect consumer safety, and maintain the integrity of the Russian economy.
[1] https://www.fts.gov.ru/storage/documents/18122021115446/2021-12-18_0001_000000.pdf [2] https://www.fts.gov.ru/storage/documents/18122021115446/2021-12-18_0001_000000.pdf [3] https://www.fts.gov.ru/storage/documents/18122021115446/2021-12-18_0001_000000.pdf [4] https://www.fts.gov.ru/storage/documents/18122021115446/2021-12-18_0001_000000.pdf [5] https://www.fts.gov.ru/storage/documents/18122021115446/2021-12-18_0001_000000.pdf
In the realm of industry, businesses may employ manipulative practices to manage import costs, which can be detrimental to both honest businesses and consumers. Practices such as misclassifying products, underreporting value, undervaluing freight and insurance, and incorrectly utilizing free trade zones can distort the market, create legal risks, harm business reputation, compromise consumer safety, and lead to the importation of substandard or counterfeit goods. This trend can result in an uneven playing field and economic instability, underscoring the need for vigilant regulatory measures to ensure fair competition, safeguard consumer safety, and maintain the integrity of industries and economies.
