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THE CAUCASUS & GLOBALIZATION
Elene CHIKOVANI
Ph.D. (Econ.), Professor, School of Business Administration (SBA)
(Tbilisi, Georgia).
Mariam AVALIANI
MBA, Project Manager, LEPL Educational and Scientific Infrastructure Development Agency (ESIDA), Ministry of Education and Science of Georgia, Marketing and Project Management Instructor, Georgian-American University
(Tbilisi, Georgia).
CUSTOMS MODERNIZATION IN GEORGIA: CHANGES, OUTCOMES, AND FUTURE PERSPECTIVES
Abstract
S
ince 2004, Georgia has been carrying out systemic reform aimed at modernizing the old, corrupted, customs
system. The country intends to bring current legislation into harmony with European legislative regulations, increase reve-
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nue mobilization through improved customs administration, simplify customs procedures, and refine the customer culture. Georgia has been applying numerous innovative approaches throughout this process. The article focuses on the important challenges in the customs system, the crucial transformations and innovations implemented during the reformation process, the
successful outcomes, and the future perspectives. The first results are encouraging and prove that the customs modernization strategy has been properly conceptualized and implemented. However, due to the new challenges of today's world and Georgia's geopolitical role in these processes, further efforts must be made to form a safe, liberal, and open customs regime.
Introduction
Since independence, the overriding objective of Georgia's economic policies has been to create and develop a market economy through privatization of state-owned enterprises, deregulation of prices, and liberalization of its trade and investment regimes. Much of this was achieved when Georgia established a legislative basis for competitive markets by deregulating prices, rescinding exclusive rights granted to certain economic agents, abolishing restrictions on competition in certain activities, and cutting back on subsidized credits to state-owned enterprises. The trade and trade-related policies pursued during the review period have built on these achievements, helping to bring Georgia's legal system into harmony with international regulations by introducing or amending legislation in key trade-related areas such as customs. The revision was aimed at simplifying customs procedures and harmonizing both customs legislation and procedures with the European Community Customs Code and the revised Kyoto Convention on the Simplification and Harmonization of Customs Procedures. Pursuant to the agreements signed with the WTO and European Union, Georgia has pledged to bring customs legislation, procedures, and rates into compliance with WTO and EU regulations, thus creating unified and simplified procedures for importers, exporters, and freight forwarders.
Strategy and Tasks of the Customs Reforms
in Georgia
The foundation of customs reform is defined by a number of strategic documents adopted by the government of Georgia: the Strategy of Development of the Ministry of Finance of Georgia and Directions of International Assistance for 2007-2011,1 the Public Sector Financial Management Strategy for 2009-2013,2 and the Border Management Strategy of Georgia3 approved by Decree No. 59 of 4 February, 2008 of the President of Georgia.
The top priority vectors of the European Neighborhood Policy and Integrated Border Management model created by the EU member states are the main basis for the border management strategy elaborated in Georgia. Meanwhile, specificities proper to Georgia were taken into consideration.
Georgian border management strategy is based on common border management model, consisting of 4 steps.4 The above-mentioned model includes all the necessary measures for effective border
1 See: Strategy of Development of the Ministry of Finance of Georgia and Directions of International Assistance for 2007-2011, Tbilisi, Georgia, March 2007, 19 pp.
2 See: Public Sector Financial Management Strategy for 2009-2013, Ministry of Finance of Georgia, Tbilisi, Georgia, 2009, 19 pp.
3 See: Border Management Strategy of Georgia, approved by the Presidential Decree No. 59, 4 February, 2008, 43 pp.
4 See: Ibid., p. 7.
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management. At each stage of the model, cooperation and collaboration at the inter-agency, intra-agency, and international levels are of crucial importance.5
The main aspects of intra-agency reform are as follows: in 2007, tax, customs, and financial police departments were merged into one unified structure—the Revenue Service of Georgia. The Revenue Service of Georgia (RS) exercises authority throughout the entire territory of Georgia. Principles of integrated border management are defined by primary legislative acts, such as: the Law of Georgia on the State Border of Georgia, the Customs Code of Georgia, the Law on Food Safety, and other laws. Procedures are described by secondary legislative acts, such as: the joint decree of the Minister of Finance and Minister of Agriculture of Georgia and the joint decree of the Minister of Finance and the Minister of Internal Affairs of Georgia.6
Inter-agency cooperation on SPS includes: implementing integrated management procedures between the Ministry of Finance and the Ministry of Agriculture of Georgia, the latter being a policy decision-maker. The ministry defines SPS procedures through its subordinated authority—the National Service of Food Safety, Veterinary and Plant Protection (NS); the Revenue Service carries out customs and passport control. Integrated management procedures between the Ministry of Finance and the Ministry of Internal Affairs of Georgia are defined as follows: the Ministry of Internal Affairs of Georgia is a policy decision-maker; RS carries out customs and passport control of passengers and vehicles at main border checkpoints (Sarpi, Sadakhlo, Red Bridge, and Lagodekhi); the Ministry of Internal Affairs of Georgia carries out border control at the border checkpoints.
Georgia has launched a number of international agreements aimed at promoting international trade and deepening cooperation. The government of Georgia is rapidly expanding the coverage area of Double Tax Avoidance Treaties. Today Georgia has active Double Tax Avoidance Treaties with 31 states around the world. During the current year, 14 more treaties were added to the list: five of them have already been ratified and nine more are awaiting signing/ratification in the nearest future.7 In order to set up effective mechanisms against transborder crime, bilateral agreements have been elaborated (especially with neighboring countries), and Georgia is adhering to international agreements.
Given the complicated economic relations with Russia, especially the embargo imposed on Georgian production, the Georgian government has sensibly decided to sign a Free Trade Agreement with the Republic of Turkey. An Agreement on Preferential Trade, signed on 19 December, 2006, intended granting specific privileges to certain goods and facilitating the import of Georgian goods into the Turkish market.8 In the framework of the above-mentioned agreement, an import quota system was defined for Georgian goods imported into Turkey. On 21 November, 2007, Georgia and the Republic of Turkey signed a bilateral Agreement on Free Trade.9 In October 2010, the Agreement on Integrated Border Management of the Customs Border CheckPoints was signed.10 The practical side of this agreement implies developing economic ties and a transport corridor. Namely, the agreement decreases the number of procedures at customs checkpoints. None of the procedures will be duplicated.11 This simplification is made possible through the immediate transmission of information between checkpoints, thus increasing the efficiency of customs control, simplifying the time-consuming procedures, and curtailing related expenses. According to the agreement, customs duty was abolished between the two countries. Hence, lowering expenses for importers would result in reduced prices.
5 See: M. Khurtsidze, Degree of Integration of Customs and Border Services in Georgia, Tbilisi, 2010, p. 5.
6 See: Trade Policies and Practices by Measure, Georgia, WT/TPR/S/ xxx, 25 June, 2009, p. 5.
7 See: New Tax Code, Amcham Roundtable, Courtyard Marriott, Tbilisi, 22 September, 2010, p. 5.
8 See: Agreement between Republic of Turkey and Georgia on Preferential Trade, 19 December, 2006, 12 pp.
9 See: Agreement between the Republic of Turkey and Georgia on Free Trade, 21 November, 2007. Ratified by the Parliament of Georgia by Resolution No. 5653-RS, 28 December, 2007, Tbilisi, Georgia, 18 pp.
10 See: Agreement between the Republic of Turkey and the Government of Georgia on Integrated Management of Customs Border Check Points, 8 October, 2010.
11 See: "Integrated Management of Customs Check Points. News and Events," 8 October, 2010, available at [www.mof.ge].
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Besides, all usual taxes (VAT, excise) will be maintained (except on products exempted from taxes: medicines, baby food, etc.). However, quality control of imported products is still problematic for both countries.
Basic Changes in Current Customs Legislation. Tariff System Regulation. Unification of Tax and Customs Codes
Since 2004, significant changes have been implemented on the basis of legislative reform aimed at improving the financial system and bringing it into harmony with international standards. The main objective of the legislative reform was to ensure long-term and sustainable economic development, reduce the value of raw materials and production costs, attract foreign investments, contribute to the free movement of capital, and eradicate corruption through simplification of the customs procedures and creation of a new taxation system.
Until 2006, customs duties were differentiated by types of product according to the Law on Customs Tariffs, and 16 rates of the customs duties were active. As a result of the changes in legislation in 2006, only 3 rates out of 16 customs duties (12%, 5%, and 0%) remain.12 Equal rates of customs duties were defined for imported goods from the CIS and other countries beginning on 1 January, 2008. Different tax regimes for imported goods that originated in WTO member and non-member countries were abolished. Customs fees were completely abolished as of 1 January, 2011.
Since 1 January, 2007, changes have been made in the secondary legislation on the basis of the new customs code in order to harmonize Georgian and European customs legislations. The regulatory acts on customs phyto-sanitary and veterinary control, intellectual property rights, and monitoring of money laundering at the customs border entered into force. It should be mentioned that for the purpose of simplifying customs procedures13 and bringing them into harmony with international standards, the following changes have been made to the customs code during the last two years14:
—delegation of authority by the head of the Revenue Service to staff members to sign various documents on specific issues on behalf of the customs authorities;
—specification of the list of Georgian goods;
—cancellation of the obligation to notarize documents proving the authority of the representative body;
— solving the problem of exchanging the confidential information by authorizing the Ministry of Finance of Georgia to sign an agreement with customs authorities of foreign countries on further information exchange; setting up a system for exchanging confidential information with the Border Protection Department;
—granting foreign citizens (including non-residents) the right to resell goods at the warehouse;
—releasing goods if customs liabilities arise that originated on the basis of a declaration after payment in full of all duties or, in cases envisaged by the code, after submitting a warranty on ensuring full customs liability, as well as after part payment of customs duties and submission of a warranty on the residual;
12 See: Tax Code of Georgia, No. 692-RS, 22 December, 2004, Tbilisi, Georgia, Art 2703.
13 See: Ibidem, 242 pp.
14 See: Changes in the Customs Code of Georgia, Ministry of Finance of Georgia, 25 November, 2010, pp. 4-41, available at [www.mof.ge].
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—granting licenses for duty-free shopping activities to Georgia-based enterprises and entrepreneurs (physical persons), as well as to foreign enterprises and entrepreneurs, etc.
The recent legislative changes, which entered into force on 1 January, 2011, represent a new stage of customs system reform. Unification of the Tax and Customs Codes is the main priority of legislative reform at the new stage of institutional changes. The incorporated tax and customs code aims at increasing public trust in the tax system, forming a stable and sustainable tax environment, encouraging business legalization, removing ambiguities through simplified legal provisions, simplifying tax administration by reducing the tax compliance burden, evenly distributing the tax burden, and using the best international tax practices and EU directives. The New Tax Code envisages unification of tax and customs assets/liabilities of the taxpayers; it exercises (has) significant impact on small enterprises through introducing a new tax regime. The New Tax Code is more systemic and more customer-oriented; it provides simplified reporting procedures, an electronic system of declaration, a less bureaucratic system of navigation, fairer and more objective regulations. It also enables quicker and easier resolution of administrative issues and overpayments and more flexibility in managing liabilities and cash flows; it reduces the administrative burden of compliance and taxable income.15
Unification of the tax and customs codes has enabled consolidation of provisions with analogous content and principles.16 It resulted in the creation of a single document enabling the actors involved in export-import activities to obtain all the relevant documentation and general regulations from the one source. The provisions regulating tax control and the post release customs code regulations have been incorporated into one chapter. In addition, bearing in mind the specificities of the customs domain, the provisions regulating preliminary decisions, confidential information, terms, and exchange rates have been combined with the relevant analogous regulations of the tax code. The general provisions regulating tax and customs offences and sanctions have been incorporated into one chapter. Definition of the customs regime and treatment defined by the customs code have been eliminated and the term for each commodity operation introduced. Customs treatment operations regarding passing the goods into state ownership and destruction of goods under customs supervision have been united into the article relating to disposal of goods by the customs authorities. Provisions analogous to the inward and outward processing of goods in the customs territory have been combined into one article. Following unification of the tax and customs codes, tax and customs cards have been combined enabling taxpayers to set off tax claims and liabilities. Refund of excess amounts will be performed automatically by the tax authorities and this regime will concern all the companies using electronic declaration. At the same time, companies are free to leave this regime and return to the old one. The main goal of the unification is to simplify tax management. The autonomous status of the customs service will be abolished and it will be incorporated into the tax service. Customs terminology will be changed within the framework of tax and customs service unification. The juridical status of the Revenue Service has been changed; it is now a Legal Entity of Public Law.17
Organizational Specifics of the Customs System
in Georgia. Administrative Reform
The administrative reform was aimed at defining the obligations and partnerships necessary for cooperating, reorganizing the existing structure, or creating a new one at intra-agency, inter-agency, and
15 I
16 See: "Unification of the Tax and Customs Codes," available at [www.mof.ge].
1 See: New Tax Code, p. 5. ' See: "Unification of the T ' See: New Tax Code, p. 7.
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international levels, and forming a structure that excludes the overlapping of functions and activities of other organizations. Customs functions were revised based on the requirements of fiscal stability and integrated border management: customs authorities control and protection of the state border within their competence in order to defend the domestic market, economy, and population.18 For the purpose of forming successful inter-agency cooperation, convenient legislation is being elaborated in order to allocate functions among the border management agencies. Regulatory acts set forth the common regulations of cooperation, information exchange, joint use of infrastructure and equipment, and staff training.
The New Staff Development Strategy and HR Requirements— A New Staff Training System
Taking into consideration the main requirements of the Arusha Declaration, significant steps were taken to introduce a new system of Human Resource Management and Code of Conduct, improve ethics and the organizational culture, develop leadership and communications, increase transparency, and strengthen measures against corruption.19 In 2005-2006, at the initial stage of the reform, full staff rotation was carried out and all corrupted employees were dismissed, which resulted in the eradication of corruption in the customs system. Moreover, the remuneration and customs officer incentive systems were significantly improved step by step. A new staff development strategy was launched in the Ministry and a staff training and retraining system was introduced.20 The system includes basic training, vocational training, and on-the-job training. The new model of training and career development aims at creating adequate structures for research, training, and development and at establishing an integrated plan of cooperation between the agencies directly involved in training and career development activities. The customs system is staffed with highly qualified professionals. Higher education is mandatory and the interns selected receive the necessary theoretical and practical training. Meanwhile, with the academy's internal resources and the assistance of international organizations, regular training sessions are organized for officials. Joint training sessions are conducted in cooperation with agencies directly involved in border management activities. Periodic skill development training sessions and TOT (Training of Trainers) courses are held for experienced staff. The Human Resource Management policy includes all stages of career-building from incentives to encouraging promotion. The HRM policy is based on transparency, accountability, motivation, and equity.21 Anticorruption measures that foresee social guarantees, financial encouragement, internal audit, and frequent rotation are systematically carried out.
Modernization of the Customs Infrastructure
Over the past few years, important steps have been taken to improve Georgia's customs infrastructure. With financial assistance from the U.S. government, new checkpoints at Red Bridge, La-godekhi, Sadakhlo, Kazbegi, Vale, and Guguti have been activated. Furthermore, the government
18 See: Border Management Strategy of Georgia, p. 16.
19 See: The Revised Arusha Declaration, The Customs Cooperation Council, June 2003 (101st / 102nd Council Sessions), Arts 1-9.
20 See: Decree of President of Georgia on Establishment of LEPL-Financial Academy of the Ministry of Finance of Georgia, No. 254, Tbilisi, Georgia, 26 April, 2010.
21 See: Professional Standards, PICARD, WCO, Rue du Marché 30 B-1210 Brussels, Belgium, 46 pp., Tel.: +32 (0)2 209 92 11 Fax: +32 (0)2 209 92 92 E-mail:[email protected] Website [http://www.wcoomd.org], pp. 21-24.
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allocated subsidies for new terminals in Batumi and Poti, which are currently under construction, and reconstruction of the customs checkpoint in Sarpi. Meanwhile, technological schemes for the functioning of customs checkpoints and customs posts have been refined. The whole system has been fitted out with modern equipment that allows effective customs procedure performance in less time.
Simplification of Border Control Procedures. New Information System— ASYCUDA WORLD
Trade-related policies and the legislative changes in the customs system have contributed to bringing Georgian border control procedures22 into harmony with international regulations.23 The most important changes are24:
1. Reduction in the number of customs procedures from 15 to 7.
2. Simplification of export and import documentation and a reduction in the number of documents from 19 to 9.25
3. Risk-based customs control. The Revenue Service of the Ministry of Finance of Georgia (RS) began developing risk-based customs control and tax audit systems which have been functioning at customs checkpoints since March 2008. Risk assessment is performed on the basis of the ASYCUDA WORLD information system and its supplementary software using price discrepancy and importers/exporters risk analysis.
4. Post-clearance audit has been in force since January 2009.
5. The Gold List Program has been implemented.
6. The data bases of the Ministry of Internal Affairs and Revenue Service have been unified on the border. The one-stop principle has entered into the force, thus simplifying procedures and improving the quality of service.
7. Selective checking is performed on the basis of the risk analysis information system. Simplified customs procedures are performed by customs officers that imply the possibility of declaring and exporting goods while postponing duty payment for 30 days.26
8. The list of goods subject to licenses and permits has been significantly reduced: the permit for transit of veterinary goods has been abolished; the procedure for issuing a certificate of origin has been simplified and it can be obtained directly from the customs authority.
9. Passport control. When crossing the border in different means of transportation, passport control and other border procedures were conducted by different agencies at different places. Following the reform, passport control in such cases at main customs checkpoints (Sarpi, Sadakhlo, Red Bridge, and Lagodekhi) is performed by the customs authority. Consequently, when crossing the border, integrated procedures are conducted.
22 See: General Agreement on Tariffs and Trade (GATT) 1994.
23 See: International Convention on the Simplification and Harmonization of Customs Procedures (Kyoto Convention), Entered into force on 25 September, 1974, Customs Cooperation Council (World Customs Organization), Rue du Marché 30 B-1210, Brussels.
24 See: Trade Policies and Practices by Measure, p. 3.
25 See: Customs Legislation Reform, Ministry of Finance of Georgia, 2010, p. 7.
26 See: Georgian Customs, Presentation on Current Customs Reforms, Tbilisi, Georgia, 2010, p. 7.
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10. The obligation to present phyto-sanitary and veterinary permits has been abolished for the transit of controlled commodities.
11. Selective weighting has been introduced. Previously, all means of transportation entering from foreign countries were weighed at the customs checkpoints in order to reveal overload above the norm. Following the reform, the number of weighed means of transportation has been significantly reduced and selective weighing introduced.
New Approaches and Improved Business Environment. License and Permit System Reform and Administration
The business environment in Georgia has gone through significant changes in recent years. Since 2005, regulations and barriers to business entry have been streamlined and the number of business activities subject to licenses and permits reduced by 84%. Licensing procedures have been simplified, and the one-stop approach to business regulation has been adopted. Further, entry barriers in the form of minimum capital requirements have been reduced. As regards the regulation of ongoing business, operational licensing, permits, and other compliance systems, including taxes and customs, have become more business-friendly. Contract enforcement has been strengthened by reforming court procedures for commercial disputes.27
As a result of the changes in the Law on Entrepreneurs (1994), in 2005, 2006, and 2007, business registration has become easier and more efficient, taking only three days for legal entities and one day for individuals; there are no restrictions on the foreign ownership of companies in Georgia.28 The Law on Licenses and Permits (2005) sets forth the list of activities subject to licensing.29 The law considers approximately 50 other types of activities subject to special permission, including the following: import and export of weapons, impact on the environment, construction, customs warehouse, etc. The administrative license-issuing body is required to issue an administrative act on granting a license within 30 days after an application has been filed and an administrative act on granting a permit within 20 days after an application has been filed. A license or permit is automatically granted in the event that the administrative body does not respond to the application within the deadline. In some areas of business activity, the mandatory time for issuing licenses and permits is even shorter.
In 2005, Georgia adopted a new law on Food Safety and Control which, unlike the former Soviet GOST food safety system, emphasizes controlling the production process itself rather than the final product. The cornerstone of the new law is the OECD approach based on Hazard Analysis and Critical Control Points (HACCP) of the food safety system, which implies constant control at all stages of food production and the packaging process.30 The National Service of Food Safety, Veterinary and Plant Protection established in 2006 is responsible for inspection and control. The Food Safety, Veterinary and Plant Protection Service became fully functional (including market surveillance) in January 2010. Hence, it now bears the sole responsibility for food safety, excluding border control, which was transferred to the Customs Department of the Ministry of Finance.
27 See: Trade Policies and Practices by Measure, p. 15.
28 See: Ibid., pp. 15-16.
29 i
30 See: Trade Policies and Practices by Measure, pp. 20-22.
1 See: Law of Georgia on Licensing and Permits, No. 1775-RS, Tbilisi, Georgia, 24 June, 2005, pp. 5-11.
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New Mechanisms of Border Cooperation
The new mechanism of border cooperation was set up within the framework of the South Caucasus Integrated Border Management (SCIBM) program. SCIBM is a regional program aimed at supporting the governments of Armenia, Azerbaijan, and Georgia in introducing and implementing the Integrated Border Management Strategy. Along with the SCIBM program, UNDP is providing assistance to the ongoing reforms in the area of border management and complements the efforts of the local governments.
Georgia has made notable progress since 2005 in reforming its border management agencies. It has endorsed the Border Management Strategy and its Implementation Plan. Important steps have been taken in terms of documentary control, customs inspection, and the improvement of the legal basis, infrastructure, and working conditions for personnel.
Improving Customer Service
In order to simplify the system, a new form of service has been introduced for taxpayers—the electronic declaration system. In 2009, significant steps were taken toward implementing this service. In March 2009, the service already enabled the electronic submission of all the types of declarations. Electronic submission is possible on the basis of a declaration submitted by a representative of the importer when making a statement on the declaration of goods. When declaring goods electronically, excess money can be automatically refunded; physical persons presenting a declaration electronically have been released from the obligation of submitting a VAT invoice. In 2009, the Ministry of Finance of Georgia held a number of training courses aimed at popularizing the system and familiarizing the taxpayers with it. Open Doors days were held at the service centers of the Revenue Service of Georgia, where relevant practical examples were considered and leaflets describing the electronic declaration procedures were distributed. Taxpayers can use the service of the call center—077 toll-free and benefit from the service's free consultation.
Main Perspectives of the Reform in the Future
The main directions of the future reforms are simplification of the service for taxpayers31; simplifying the declaration procedures and declarations on goods imported by physical persons; simplifying the export procedures for physical persons (to release goods with a customs value of up to 10 000 GEL from the obligation to present a declaration); transferring the right to issue a certificate of origin to the customs authorities32; simplifying customs procedures in the event of the temporary admission of goods (accession to the Istanbul convention on temporary admission); establishing the institution of advance customs declaration and advance customs decision; setting up a personal tax agent system for large taxpayers33; developing an electronic declaration system; setting up an information exchange system between the Revenue Service and Public Registry; creating a unified data base on issuing a certificate of origin; electronic processing of customs inventories of means of medication; setting up an ASYCUDA WORLD electronic system at places of customs operations; reflecting phyto-sanitary and veterinary border quarantine and sanitary quarantine control procedures in the
31 See: Public Sector Financial Management Strategy for 2009-2013 Years.
32 See: Action Plan of the Public Sector Reform Strategy for the 2009 Year, Tbilisi, 2009, p. 3.
33 See: Ibid., pp. 11-12.
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electronic data system; installing special Tracker Systems software for licenses and permits, etc. Planned activities also include building a new training complex for the Finance Academy.
Conclusions
During the past few years, Georgia has embarked on a dynamic and comprehensive customs reform program. Its main components include simplifying and reducing tariff levels; introducing a risk management system based on streamlined customs procedures; highly automated and completely paperless administration; and improved human resource management with a drastic change in personnel and high motivation. Georgia has also introduced a unified Customs and Tax Administration and legal system which resulted in a business-friendly and effective customer culture, improved administration procedures, and revenue mobilization.
Most of these reforms meet international regulations and standards and feature daring and creative innovations that may be successfully implemented by other countries pursuing customs modernization.
