Background Note – Business Climate in Ukraine

(situation on 1 March 2011)

The following is a non-exhaustive list of cases brought to the attention of the European Commission, where companies have reported significant obstacles to carrying out their operations in Ukraine. Cases are presented in alphabetical order.
The European Commission has no intention of interfering in cases which are sub judice, or in attributing responsibility for the problems described. The purpose of this indicative list is to meet the request made by the Ukrainian authorities for a more concrete illustration of the business climate issues reported in regular EU-Ukraine dialogue and reflected in international reports. In each case a summary of the main issues is given. This summary is in no way intended to be a verified or comprehensive account of facts: further details should be followed up with the companies concerned.

    Agrochemical producers
Members of the Agrochemical Committee of the European Business Associations (EBA) have reported a number of issues affecting the business operations of their industry in Ukraine. Problems are related to violation of intellectual property rights (IPR) and to counterfeited products. IPR Violation – The industry has reported that active ingredients which violate IPR are registered by the Ministry of Environmental Protection of Ukraine (MEP) under existing Ukrainian legislation, and that each year the number of such violations keeps growing. Current legislation provides no protection against the registration of such formulations, since a violation of the IPR does not constitute grounds for cancellation of registration. A formulation in breach of IPR may be used freely in Ukraine even after the violation has been established by an economic court. Companies holding the patents for active agents learn about violations of their patent rights from the published List of Pesticides and Agrochemicals, as well as when the violating formulations are offered for sale and sold in Ukraine. An example of a patent holder reporting continuous violations of IPR is DuPont Ukraine. Despite multiple court decisions establishing patent violation, the same infringing active ingredients are registered under different names. According to industry, the way to solve the problem is to amend the procedure for the registration of pesticides and agrochemicals. The industry has a number of proposals which it has already shared and would gladly discuss with Ukrainian authorities again.

Proving the Intent for Intellectual Property Right Protection – In compliance with the Code of Ukraine on Administrative Infringements and the Criminal Code of Ukraine within court process against the infringer the claimant must prove the deliberate nature of the infringement (when the person who committed infringement was aware of unlawful character of his/her activity or inactivity, foresaw its harmful results and wanted to achieve such results or deliberately allowed such results to occur) or the infringement due to negligence (when the person who committed infringement foresaw the possibility of harmful results of his activity or inactivity and high-mindedly considered to avert such results or did not foresee such possibility).

In practice there are often situations when the Court of First Instance takes into consideration the statement of the infringer (“I was not aware of”) and close the case because of the absence of intent. However, the Court of Higher Instance normally establishes intent based on the fact that “a person purchased and sold products without any documents”, “a person carries out the entrepreneurial activity for a long time and should be aware of famous world brands”, etc. These divergent views represent, in the EBA’s view, a problem in the system which could be solved via a dialogue on the subject with the judiciary authorities, the prosecutor’s office and the police aimed at producing explanations and creating precedents on establishing guilt for this category of cases. Counterfeit – The industry has reported that large amounts of counterfeited products are being discovered in Ukraine. Recently, a large batch of counterfeited insecticides, fungicides, herbicides and protectants was discovered by the State Tax Administration of Ukraine in Talne, Cherkassy Oblast. These products of unknown origin are marked with the brand names of Syngenta, BASF, Bayer, DuPont, Monsanto, Arysta, Dow Agrosciences and others. Some products are marked with the trade marks of Roundup, Lontrel, Galera, Bi-58, Confidor, Zenkor, Zelek, Milagro, Devident, Fastak and Targa, which are intellectual property of the above-listed agrochemical producers.

In another recent case the Special Department for Anti-Corruption and Organised Crime of the National Security Office in Kyiv Oblast discovered 74 tons of fake products in Bila Tserkva, including fake pesticides marked with Syngenta, Bayer and Monsanto trade marks. These products were registered in Ukraine by RANGOLI and sold to DIGVILLAGE, a company with no license for pesticide trading. The European Business Association is asking the Government and law enforcement bodies to assume responsibility for the life and health of the citizens, to prevent the outflow of these fake products into the markets of Ukraine and to undertake all necessary measures to prevent the disappearance of the seized fake products in question and ensure their proper destruction.

ArcelorMittal

OJSC ArcelorMittal Kryvij Rih is the largest foreign investor in Ukraine. Its steelmaking business is to a large extent dependent on exports (80%). The company has reported that the most important issue to sustain their operations in Ukraine in the short, medium and long term is to resolve the issues they face with VAT refund. This issue has two components: Outstanding VAT refund: The Company was assured by Ukrainian authorities that their outstanding VAT refund would have been settled by the end 2010, but this has not happened. They claim that the total outstanding VAT which has to be reimbursed is approximately between USD 250-300 million. In the summer of 2010, ArcelorMittal was able to buy VAT bonds with a 20% discount, but this was a one-off and rather small transaction. Automatic VAT refund: The company has reported that, unlike the case in other sectors, the Ukrainian Government has not been able to adopt an automatic VAT refund system for the future. The automatic VAT refund system should be operational as of 1 March 2011; however for the company it is still unclear how this refund system will work in practice as, amongst other things, it does not set a specific time limit before which the tax authorities have to issue confirmation of the VAT receipts. There is therefore the risk that VAT refunds will be dealt with swiftly in practice. Finally, the company has reported instances of corruption when operating in Ukraine. This remains a key problem, as it undermines economic reform and restrains entrepreneurial spirit and competition. Corruption has been faced when dealing with bureaucratic procedures like requesting permits (e.g. significant delays in issuing environmental permits, companies are threatened with penalties and potential shutdowns), licenses (e.g. production expansion) or standard setting processes (for example in engineering). These procedures, the company feels, could be modernised and made less bureaucratic in order to speed up the implementation of projects and allow the transfer of modern technologies and practices.

Baby Food exporters

According to the Article 197.1.1 of the new Tax Code № 2755-VI dated 2 December 2010, supply operations of baby food products are exempt from VAT taxation. The respective list of products shall be determined by the Cabinet of Ministers of
Ukraine. Moreover, Article 197.4 of the Tax Code implies that VAT exemption for products foreseen by Article 197.1 is also applied for import operations. Since companies were not informed of the criteria and evaluation methods for the selection by the Cabinet of Ministers of Ukraine (CMU) of the respective baby food products for VAT exemption, the European Business Association (EBA) has appealedofficially to the CMU, the Ministry of Industrial Policy, the Ministry of Agrarian Policy and the Ministry of Health Protection with the request to make the selection transparent and to involve concerned businesses in the process. Recently, the EBA learned that a Draft Resolution with the respective products was finalised by the Ministry on Industrial Policy and submitted to CMU for approval and voting. EBA members are aware of the draft version sent for approval to the CMU approval, which includes solely Ukrainian products. Moreover, it does not foresee any opportunity for the inclusion of imported baby food products, what goes against Article 197.4 of the Tax Code. The EBA believes that this Draft Resolution discriminates against international producers of baby food. EBA members therefore advocate for the inclusion of imported baby food products into existing Draft Resolution.

Bel Shostka

“Bel Shostka Ukraine” (Group Bel) reports that it found itself under unnecessarily high pressure from the tax authorities, a fact that is obstructing its business operation in the country. Despite the fact that the VAT arrears of UAH 23 million have not been reimbursed since 2008, the company suffers from strong unjustified administrative pressure, which grows from day to day. Currently, the company is involved in 10 different legal suits that, it claims, it was obliged to initiate against Tax Inspections due to unreasonable and unfounded accusations. One of these cases serves as an example of the situation the company faces. In the first quarter 2010, the tax audit related to the July ’08-September ’09 period led to a penalty against the company. The reason evoked by the state authorities is that Bel Shostka Ukraine relies on a fake supplier through document falsifications in order to avoid tax payment. The company claims that this accusation is totally unjustified and that all the documents are valid (contract, deliveries notes, invoices and payment through bank transfer). Convinced that the accusation is unjustified and unacceptable, the representatives of the company decided to defend themselves at the Sumy Administrative Court. As a result, Bel Shostka Ukraine won the first court hearing. At the same time, in March 2010 Sumy Regional Tax Police initiated a criminal case against Bel Shostka’s representatives, based on the same unjustified accusation. The tax police conducted the investigation in, according to the company, an outrageous manner, but did not find any evidence of crime. As a result, the criminal case was closed in July 2010. A few months later, in November 2010 the criminal case was reopened with the same accusations. In February 2011, Sumy Regional Tax Police issued another criminal case against Bel Shostka Ukraine top managers, evoking tax evasion linked to the initial opened case. Tax police issued this second criminal case despite of the fact that, the company claims, they do not legally have the right to do so according to the Tax code article 56.22. At the end of February 2011, Bel Shostka’s Director was called for an interview by Tax Police office in Sumy. According to his report, during the interview he was blackmailed by the Tax Police officer who told him that if the company does not pay the amount they ask for, the operations of Bel Shostka Ukraine will be completely blocked. After the interview, the Tax Police came to Shostka Plant for stock-taking check. The company believes that it is being harassed in an unjustifiable way and based on fakecriteria, and therefore asks for the involvement of the authorities to solve this case.

Cement Ltd

Cement Ltd, a company owned by Portuguese capitals, is located in Odessa and employs about 200 people. The company, as well as the whole cement sector, is confronted with a large problem of counterfeiting. According to the data provided by cement producers, more than 1 million tons of substandard cement are sold in Ukraine annually (more than 10% of market). This affects the prices, damages the reputation of legal brands, and creates risks both for the objects built and for the people living in them, and damages the national budget. In addition, the company has also reported increasing problems with the tax authorities, and has recently suffered from an unusual number of inspections. One of the most problematic examples was a recent tax inspection that continued for 10 weeks. Tax authorities have accused the company of tax violations of more than 20 million UAH due to disagreement with costs calculations (around 18% of annual turnover). Moreover, there is a tendency for law enforcement authorities to open criminal cases as soon as the company disagrees with the authorities on tax issues. The company reports that these inspections are not co-ordinated and sometimes overlap in their content.

CEPS / CEEV

The European Spirits Organisation (CEPS) is the representative body of European producers of spirits. The Comité Européen des Entreprises Vins (CEEV) is the representative body of the EU industry and trade in wines. These organisations have reported that their members’ goods have been held by Ukrainian Customs without objective reasons for several weeks, starting from mid- November 2011. Regrettably, problems with customs authorities have hit this sector in a period of the year which corresponds to the major part of their profits and had therefore seriously affected importers. A slight improvement in the situation was reported by importers in January 2011. Shipments went through and were customs cleared, although sometimes with a delay of several days for some importers.Categories affected are wine and spirits from many different EU Member States (UK, IRL, CZ, FI, SE, FR, IT, and PL among others). CEPS/CEEV reports that excise taxes, import duties and VAT of goods being held had already been paid to Customs, in accordance with Ukrainian local rules. The problem lies in the fact that Ukrainian Customs reject the import values provided by importers without any explanations as to why such declared values are unsatisfactory. This happens on a regular basis, as more than 95% of the goods were re-evaluated so far. According to the industry, customs reassess import values arbitrarily by automatically using the fall-back Method (method 6) for all goods. Re-evaluation in January differs from one product to another and ranges, as far as CEPS is aware, from -39% to 221% increase. The average increase is between approx. 35% and 80%, depending on the company. According to the industry, there is a complete absence of logic and large discretionary in Customs authorities, which is further demonstrated by the following:

•  Customs seems to apply specific reasoning by truck and not by product

•  The increased percentage is different from one category of wine or spirits to

another

•  Customs do not take into account the ageing difference between several SKUs of a same brand (for example, whisky of a brand aged 12 years old will be reassessed the same way than whisky of the same brand aged 18 years old–which is more expensive in practice).

This situation means in practice that importers of EU wine and spirits have to accept an arbitrary re-evaluation and pay an extra amount in terms of VAT to clear their goods. Given that import tariffs and excise taxes of wine and spirits are specific, re-evaluation of the products only affects the amount of VAT due to be paid. However, such amount can be increased quite significantly (reaching most of the time over 10.000 US$ per brand). Multiplied by the number of reassessments of products and the number of operators, this could lead to several millions of Euros of VAT for European importers if the problem persists for a year. Importers fear that it will be extremely difficult to obtain the reimbursement of such amount of VAT.

Moreover, under the new Tax Code of Ukraine, effective from 1 January 2011, importers should not sell their products below the customs value (including the reassessed customs value). In the case that importers do not comply with this rule, they have anyway to accrue the additional relevant VAT amount in their declaration, thus artificially decreasing their VAT credit. According to industry, the problem occurs at Customs clearance border post number 13 at Oblast of Kyiv and in the Customs office of Oblast of Kyiv, but they are not sure yet whether other border posts are also concerned. Ukrainian Customs authorities have claimed that the Customs value of goods is underevaluated. However, they have not yet justified on what grounds they demand extra documentation neither have they clarified precisely which documentation they need. Moreover, it seems that the State Customs Service tends to use the refusal or incapacity to provide the additional requested documents as a justification to automatically use alternative valuation methods instead of the transaction value method, in full breach of the Customs Code of Ukraine and Article VII of the GATT and the Agreement on Customs valuation. Most worryingly, it has been reported that customs authorities sometimes merely request a certain amount of money to continue with the clearance of goods. Industry reports that they were informed of one case in which goods have been cleared apparently after putting some money on the table. For the reason mentioned above, producers of wine and spirits exporting to Ukraine request the immediate clearance of the goods by Customs on the basis of their transaction value, in full compliance with Ukrainian legislation and GATT, without asking additional documents, and providing detailed and in writing grounds for refusing to accept the transaction value.

COCERAL

COCERAL groups the European cereals, rice, feedstuffs, oilseeds, olive oil, oils and fats and agro supply trade, representing collectors, distributors, exporters, importers and agribulk storers of the above mentioned commodities. Its members are mainly private traders.
COCERAL is concerned about a number of recent developments affecting the markets of grain, oilseed and edible oil in Ukraine. According to COCERAL, the interference in these markets in the 2010/11 marketing year was extraordinary and included the following measures:

• Detention of vessels in Ukrainian ports following instructions by the Ukrainian Customs Authorities on July 29th, 2010.

•  Introduction and extension of grain export quotas (Resolution #938 of Cabinet of Ministers of Ukraine (CMU), published on October 19th, 2010), managed in an untransparent and unfair way.

•  Creation of the state trading company Khlib Investbud, which received by far the largest quota share in the two rounds of grain quota allocation. The company is, according the available information, only 39 % state owned, whereas the majority of shares are held by various offshore companies.

•  The mandatory registration of export contracts for agricultural and food products at the Agrarian Exchange effective from February 1st, 2011 (Resolution # 1254 adopted by the Cabinet of Ministers of Ukraine on December 13th, 2010) which has the potential to be used to interfere in the markets.

•  Following the issuing of bonds by the Ukrainian government to settle the VAT arrears accumulated until 30 April 2010 no or very little VAT reimbursements were paid to grain trading companies. According to a survey done by the American Chamber of Commerce VAT arrears amounted to UAH 1.5 bln as per 31 December 31 2010. In addition, the new Tax Code of Ukraine stipulates that only agricultural producers are eligible for VAT reimbursements during export operations.

• Draft law #8053 of the Ukrainian Parliament of 2 February 2011 would give the Cabinet of Ministers the right to regulate prices for many agricultural products including grains, oilseeds and many processed products. The Law stipulates that only farmers or grain trading agents with a state share appointed by the Cabinet of Ministers are entitled to export. There is diverging information whether this draft was cancelled. Another Draft law, # 8163, which was published by the Parliament of Ukraine on 25 February 2011 seems to substitute # 8053 and would entitle the following entities to export grain: 1) farmers, who would be allowed to export the grain they have produced on their farm; 2) companies with a state share of minimum 25 %; 3) grain traders, but only for the grain that was contracted already before the start of the vegetation and for which the trader pre-finance the farmer a minimum of 50 % of the contract price. This draft law seems to be perfectly designed to favour state agents like Khlib Investbud as this company, with a state share of 39 %, would be allowed to export without this pre-financing clause.

According to COCERAL, the measures mentioned above are:

• Extremely ill-targeted in achieving food price stability and, in the long run, food security. Export regulations of grain have only a minor effect on inflation. Even in Ukraine, grain makes only 30 to 40 % of the final consumer bread price, the rest being labour, energy, logistics etc. Prices of other food products are not influenced.
• The market regulations are highly counterproductive, as they are a burden for agriculture and agricultural development. The grain export quotas will cost agricultural producers a loss in revenue of US$ 1.9 billion to US$ 2.6 billion in the 2010/11 marketing year.
• Most international grain traders did not receive any quota in the two rounds of quota allocation as basic documents were not provided by the Ministry of Agriculture in time. The quota allocation was therefore, in both rounds, highly untransparent and unfair. The newly established company Khlib Investbud received more than 750,000 t of quotas in the second round of quota allocation or about 50 % of the total.
• The major threat appears to be draft law # 8053 or draft law # 8163. COCERAL claims that these laws are aimed at depriving international grain trading companies from their business and therefore their investments in the country are at risk. Companies with a state share of a minimum of 25% will be able to export without any precondition. Trading companies, on the other hand, would be only allowed to export grain that was contracted in a forward contract and for which the production is prefinanced by 50%. Such a measure would give international trading companies a major disadvantage on the market and would reduce their market access to a minimum. Draft law # 8163 is not only a threat to traders but to the agricultural sector as well. Farmers also need to sell at least 50 % their grain and oilseed production during harvest from June to September in order to finance the harvest and field works for the autumn harvest campaign. Depending on the year and the market prices, farmers receive an estimated US$ 5.5 to 9 billion in cash during this period. This represents 3.5% to 7 % of the Ukrainian GDP and cannot be provided via direct farmer exports, domestic purchases or via the purchases of semi-state-agents like Khlib Invest Bud. Thus, by eliminating traders, farmers will be confronted with lack of financing and with sharply reduced market prices, as all potential purchasers are pushed out of the market.
• The mounting VAT arrears of UAH 1.5 bln as per December 31st, 2010 are a very big burden for the companies involved. Furthermore, Ukrainian tax authorities exert a lot of pressure on companies by not recognizing their claims. In addition, the new Ukrainian Tax Code enacted on 1 January 2011 entails objectionable VAT provisions. The Code provides that when farmers do the export operations themselves they are eligible for getting their input VAT reimbursed (first supplier rule).However, when traders export products they are not entitled to VAT refunds, which provides for a major competitive disadvantage.

Given the environment described above, COCERAL asks the Ukrainian authorities to correct these policies by:

1. Granting international grain trading companies the right to export the stocks they have accumulated already during the harvest 2010 – and which were not considered in the two rounds of quota allocation- and develop a plan to help remove the quota system.
2. Providing a clear commitment on the grain market regulation for the 2011/12 marketing year. The less predictable the government actions are, the less grain traders will be engaged in any sort of forward contracting and pre-financing. In this respect, COCERAL believes it is essential to dismiss draft Law # 8053 and not to substitute it with any other provision.
3. Paying VAT arrears to agricultural traders and provide a level playing field for all market participants involved in export and processing operations.
4. Eliminating any future official or unofficial export bans, restrictions

and preconditions for exporters.

Dairy and food products producers

Members of the European Business Association’s Dairy Committee including Danone, Milkiland, Wimm Bill Dann, Unimilk, Lactalis and Bel/Shostka are facing state price regulation, which affects their operations in the country. In January 2011 Kiev City State Administration issued the Order “On prices regulation for the main food products”, which orders all economic operators to establish a limited trade/sales mark-ups of 10% on the wholesale price (customs value) of, among others,milk, cheese, sour cream and butter in amount with the aim to avoid ungrounded price increase for the main food products. Following such limitation, retailers are refusing to purchase the products at the producers. If there is no improvement, the current situation risks to make companies’ activities completely unprofitable, eventually push them out of the Ukrainian market. These companies demand that this non-market practice of price regulation of dairy products is stopped.

DANONE
The EU-Ukraine Business Council reported that the company Danone faces serious problems with Ukrainian tax authorities, leading to a criminal case against the management of Danone Ukraine. Because of lack of clear rules for inclusion of royalties into customs value Danone Ukraine, based on the existing legal and regulatory acts, calculated, declared and duly paid the VAT on royalties as from 2008. This approach was approved by the Tax Authorities of Ukraine, thus the interests of the state were not violated. The Customs Authorities, after conducting in October 2010 a regular post-clearance audit of import operations (2007-2010) for Danone Ukraine, claimed understated customs
value of goods insisting that the company did not include royalties and some services into customs value, and therefore had underpaid VAT. This ignored the fact that Danone Ukraine declared and paid VAT on royalties in full to tax authorities.
Danone disagreed with this decision and appealed to the court. This step caused the pressure from the Customs authorities to the company aimed to solve the issue in an ‘amicable’ way, namely the customs authorities have addressed the Ministry of Economic Development and Trade of Ukraine with a request to impose an individual regime of mport/export, and the Tax police office to initiate the criminal investigation. Legal grounds – The customs value (tax base for VAT) is determined in accordance with Customs Code of Ukraine. The Customs Code of Ukraine includes general principles for calculation of customs value. Specifically, the Customs Code (Art. 267) requires that royalties shall be included into customs value if royalties are related to the imported goods and paid as a condition for the sale of the imported goods. However, in Ukraine there is no separate law or binding subordinate legislation to explain in detail how the principles of the Customs Code shall be applied in specific circumstances. The position of the customs in the dispute with Danone Ukraine is generally based on the document issued by the State Customs Service of Ukraine in 2009 (SCSU Regulation “On Methodological Recommendations on application of the provisions of Customs Code regarding customs value” No. 74 of 31.01.07, as amended on 28.09.09). This Regulation has not been registered by the Ministry of Justice of Ukraine, thus the regulation is not legally binding.
According to the Resolution of the Cabinet of Ministers N 339, upon completion of the audit Customs must produce special formal document “decision on determining customs value” and present it to the importer. In case of Danone Ukraine the customs authorities failed to issue around 3300 decisions on determining customs value. Current situation – Customs requires from Danone Ukraine to pay 6,2 M UAH, plus 3,1 M UAH of penalties as for underpaid VAT on royalties and some services while Danone Ukraine has already paid to the State Budget of Ukraine the amount of 7,5 M UAH of VAT on royalties and some services which is declared in VAT declarations. Tax police of Shevchenkovsky district of the city of Kiev has opened a criminal case against the management of Danone Ukraine under the article 212 of the Criminal Code of Ukraine “Tax evading”. Currently the company faces a criminal investigation where the employees of the company, including directors, are being questioned by police officers.

East-West Alliance
East-West Alliance is an Irish company with joint stock and Ukrainian subsidiaries experiencing difficulties in its operations in Ukraine. The company reported that the State Tax Administration (Tax Police Department) confiscated from it 8 L-410 and 8 Antonov 28 aircraft, as well as documents confirming ownership. The company claims that in these cases the State has not taken necessary measures to redress violated property rights. Regarding the L-410 aircraft, on 15 November 2004 the General Prosecutor’s Office instructed the State Tax Police to return the aircraft, but this was not done. KyivEconomic Court issued a decision on 24 May 2006 confirming this. That decision was overturned on appeal, but confirmed again on 1 April 2008 by the Supreme Court of Ukraine. This decision has still not been executed, so the company is applying to the European Court of Human Rights. Regarding the Antonov aircraft, the situation was similar. On 7 February 2005, Pecherskiy District Court ordered the aircraft to be returned to their owner. Kyiv District Economic Court also made a judgment in favour of the company on 25 September 2006, and these decisions seem to have been upheld by higher courts, but again the aircraft have not been returned, and again the company has registered a case at the European Court of Human Rights.

European and international fuel producers
European and international fuel producers operating in Ukraine or supplying Ukraine and fuel traders operating in Ukraine, have reported a number of issues which are negatively affecting their business operations in Ukraine. According to information submitted by the EU-Ukraine Business Council, these companies are affected by what they see as non-market priced imports from Belarus and Kazakhstan. These countries, which have bilateral agreements with Russia and have formed a customs union with that country, receive Russian crude oil at a preferential price, which is significantly lower than the one set for Ukraine and the European Union. They use this non-market advantage ($121/ton for Belarus and $180/ton for Kazakhstan) mostly for exporting their oil products, principally motor fuel, to Ukraine, adversely affecting EU and international fuel producers in Ukraine. Fuel producers believe that Ukraine, as a member of WTO, should carry out an antidumping investigation against Belarus and Kazakhstan with the aim of eliminating these countries’ unfair non-market advantage in fuel pricing.
Secondly, European fuel producers and exporters are concerned about the recent safeguard investigation initiated by Ukraine into imports of refined petroleum products (diesel, gasoline) which could lead to measures affecting EU exports. Safeguard measures are imposed against imports from all origin, thus also hitting the products exported from the EU. EU exports to Ukraine consist only of high quality petroleum products (so-called EURO 5 standard), which is not produced in Ukraine and cannot be considered as directly competitive with the domestic products manufactured in Ukraine.
Consequently, EU exports cannot cause any problems to the domestic industry and should therefore be excluded from the scope of the investigation.

Ferrero

The company Soremartec, part of the Ferrero Group, has been involved in legal procedures to protect its intellectual property rights since April 2008. The subject of the initial law suit was the prohibition to the confectionary manufacturer ZAO Landrin (St. Petersburg, Russia) to use the international trademark №798984 owned by Ferrero and protecting the outside appearance of Raffaello pralines. Landrin immediately filed a counter-claim challenging the Raffaello trademark on the grounds of alleged lack of distinctiveness. In accordance with Ukrainian procedural law, the initial claim and the counter-claim were joined into one proceeding. In February 2009 the Court of First Instance ruled out in favour of Soremartec, prohibiting sales of Landrin Waferatto Classic praline in Ukraine and rejecting Landrin’s counter-claim. Landrin challenged the decision, and in June 2009 Kiev’s Commercial Court of Appeals reversed the decision. Consequently, the claim by Soremartec was left with no consideration while the counter-claim by Landrin was satisfied, meaning that the Raffaello trademark was cancelled. Subsequently, Soremartec challenged the decision of the Court of Appeals but lost when its cassation claim was rejected by the High Commercial Court of Ukraine in October 2009. Soremartec then applied to the Supreme Court of Ukraine, the highest judicial instance of Ukraine. In January 2010 the Supreme Court cancelled all decisions that were previously taken in this case and sent the case back to Kiev’s Commercial Court for reconsideration. The validity of the disputed Raffaello trademark was, therefore, reinstated. In 15 September 2010, Kyiv’s Commercial Court partially satisfied the law suit from Soremartec, stating that no infringement was made by Landrin himself but by his importer and seller. Landrin and his importer challenged again the decision and on 1 November 2010 Kiev’s Commercial Court of Appeals rejected Soremartec’s lawsuit, satisfied the counter-claims made by Landrin and his importer, invalidated the trademark and asked Ukrpatent to withdraw the trademark from the register.
On 19 January 2011, after two years of inconsistent court decisions, the High Commercial Court of Ukraine finally confirmed the cancellation of Ferrero’s international device trademark which protects the original appearance of the Raffaello praline.
According to the company, this ruling constituted a judicial endorsement of IPR violation and has set a very bad precedent for the future protection of trademarks in Ukraine. The recent announcement by ZAO Landrin that it is planning to open a factory in Ukraine to benefit from this negative decision causes further concern. Therefore, the company asks
the Ukrainian authorities not to allow the further violation by ZAO Landrin of their IPR.

Financial services
Banks, international payment systems providers and industry associations have raised repeatedly their concerns about some legislative developments in the financial services sector in Ukraine that they claim is negatively affecting the business environment in which they operate.
These service providers have indicated that the proposed amendments to the Law of Ukraine “On Payment Systems and Transfer of Funds in Ukraine” (Draft Law 6465/6466) as well as the National Bank of Ukraine (NBU) Resolutions 223 and 280, would discriminate against foreign services suppliers. Their main concern is that these modifications, which would considerably change the current regulatory framework for card payments in Ukraine, would establish a monopoly for processing and clearing card payment services for domestic transactions (Draft Laws 6465/6466) as well as restrict the ability to supply payment services into the Ukrainian market (Draft Laws 6465/6466 and NBU Resolutions 223 and 280). The provision contained within the draft laws that requires processing of domestic payments by a domestic provider seems to be the most problematic as it directly discriminates against foreign providers and limits competition within the market. Critically, some of the changes proposed seem to be incompatible with Ukraine’s international obligations to the World Trade Organization (WTO). Specifically, Ukraine made a commitment to grant unrestricted access to its market to all providers of payment and money transmission services under Article VII(2) of the Schedule of Specific Commitments to GATS adopted on 15 April 1994 and ratified by Ukraine on 10 April 2008. Also, according to Article XVI (1) of GATS, Ukraine may not provide access to this market to other members of WTO, which is less favourable than that provided for in mentioned above commitments.
Draft Law 6465/6466 remains on the plenary agenda of the Parliament and can be brought up for voting at any moment, which creates uncertainty among different market players. It would therefore be advisable that the government authorities facilitate the withdrawal of the draft legislation from the Parliament. Regarding Resolution 223, which changes the regulation of operations with special payment instruments (cards), refers in particular to provision 9.11 which mandates global payment systems’ tariffs to be in local currency (hryvnia) and to provision 9.12 which requires international players to place one of their critical risk management requirements – collateral from local banks – in Ukraine without proper access and title to the deposit funds. Both provisions are effective as of 1 January 2011 but international payment systems have informed the National Bank of Ukraine that they currently cannot comply with them due to technical, operational, and legal reasons. International payments systems have asked the NBU to review these two provisions due to the fact that implementation of them would increase operational costs for Ukrainian banks. International payment systems have also asked the NBU for a 24-month extension to allow them to comply with section 9.12 and a 12-month extension to come into compliance with section 9.11, giving them time to restructure their contracts with Ukrainian clients and their internal procedures and processes. The NBU responded to this request with the letter saying that “NBU has not made any changes to the timeline of the Resolution #223 implementation” and “resolutions of NBU are obligatory for implementation”. Therefore as of 1 January 2011 international payment systems are not compliant with the NBU Resolution #223 due to technical, legal, and operational reasons.
Industry representatives have repeatedly asked the NBU to freeze implementation of articles 9.11 and 9.12 of the Resolution #223 and organise a transparent discussion with cashless payment industry participants on goals and methods to be achieved with this regulation, but no progress has been made yet.

Flowers exporters
Dutch exporters of flowers, bulbs, plants and seeds have repeatedly reported that during customs clearance the value of these goods is increased 5 to 6 times without any explanations. The State Customs Service of Ukraine (SCSU) reportedly disregards evidence provided by importers, including e.g. invoices stamped by the Chamber of Commerce in the Netherlands. A number of Dutch exporters have lost many orders from Ukraine due to the drastically higher values imposed by the SCSU. The example is given of certain varieties of flowers, which are auctioned in the Netherlands for € 0,30 and valued by the SCSU at € 2,20. Similar problems have been also reported by Italian and Polish exporters of flowers, whose embassies, like the Netherlands’, have approached the SCSU in writing. This problem, which started in August 2010, continues to the present day. Although the situation with the customs clearance of flowers being imported to Ukraine has seen some improvement, broadly speaking exporters are still experiencing problems and losing business.

Lithuanian furniture exporters
JSC “Abu Partneriai“ and “Narbuto baldai” are Lithuanian furniture exporters affected by the negative impact on their operations produced by the use of reference prices by Ukrainian customs authorities for calculation of customs duties.
The situation has particularly deteriorated after the entrance into force of the State’s Customs Service of Ukraine Order No.10 and the Decrees No. 11/4-10.27/293 „On strengthening control of customs formalities on imports of furniture” on 10th of January 2011.
The Ukrainian customs authority where the goods are presented for the customs procedure is Podilska Regional Customs House (in Ukrainian – Відділ митного оформлення Подільський “Митний пост правобережний”). The CN codes of the
goods exported to Ukraine are (9401.30.00, 9401.61.00, 9401.69.00, 9401.71.00, 9403.10.58, 9403.10.93, 9403.10.98, 9403.30.19, 9403.30.91, 9403.30.99, 9403.90.10, 9403.90.30, 9403.90.90).
The customs duties for furniture commodities are being calculated using the reference price of 25 USD/kg while the companies claim that the real customs value of mentioned goods does not exceed 5-6 USD/kg. The Ukrainian customs authorities do not present any documents or justifications concerning this increase in customs value, which is almost fivefold if compared to the real value estimated by the Lithuanian exporters.
JSC „SBA Baldu kompanija” is another exporter of Lithuanian furniture affected by this practice. In this case, the Ukrainian customs authorities where the goods are presented for the customs procedure is the Kiev Regional Customs House. The CN codes of the furniture exported to Ukraine are (94035000, 94036010, 94016100, 70099200). The company argues that the real customs value of this shipment is 36 135,10 USD, while the value calculated by the Ukrainian Custom authorities amounts to 77 500,00 USD. Any official information or documents to justify this increase are not presented by Ukrainian customs authorities and the shipment is delayed at the Kiev Regional Customs House. Therefore, the partner companies of Lithuanian exporter are sustaining losses and eventually the final customer in Ukrainian market refuses to purchase the goods because of overdue delivery.

Metso
Metso is the leading global provider of equipment and services to the mining and construction industries, and has been working in Ukraine for over 15 years supplying equipment for mining companies.
Lately, the company claims that it has been facing some abnormal issues with Ukrainian Customs Service represented by Krivoy Customs Office. As a rule, this office increases the declared value of Metro’s imported products, without proper justifications. This has not only meant additional and unjustified payments but also delays in customs clearance of up to two weeks, which lead to untimely supply of parts for Metso equipments and jeopardizes stable operations of many mining and constructions companies in the country.
The company reports that the transaction prices of their imported goods are always confirmed by the contract and shipping documents as well as the copies of export declarations. However, instead of using the transaction value method, authorities make use of indicative prices of other goods. The company stresses that reference prices, indicative prices or variants thereof have no legitimate role in the determination of customs value.

Nestle
Nestle Ukraine imports vegetable-based substitute for creams (Coffee-Mate) from Thailand. In 2008, Odessa Customs issued a decision on the product code, which confirmed the code by which the company has cleared this product. In September 2010, Customs laboratory selected samples and conducted an analysis of the product, which resulted in changing of the product code and a duty increase from 0% to 8%.The company questions the results of the analysis, as the manufacturer of this product is Nestle itself and they have proper indications of the level of sugar it contains, which is different to the one determined by Odessa Customs laboratory. Since then, all deliveries of the product are blocked in the port. As a consequence, the company is bearing losses on idle product in the port and products for sale are out of stock in sufficient quantity.
In another incident, Svitoch, a Lviv-based confectionery manufacturer owned by Nestle, has been waiting since April 2010 that the State Committee of Ukraine for technical regulation and consumer policy (DSSU) confirms the customs value of cocoa products that are imported from Europe. The company claims that the whole set of required supporting documents was provided, but the DSSU has been rechecking the reliability of the given documents for more than six months.
Finally, the company reports the case of Ukrainian food processor Volyn Holding, which is owned by Nestle and imports tomato paste from China for its own production needs. Despite providing the full required documentation, including export declaration, direct contract with a fixed price therein, bank confirmation of invoice payment to the supplier and the confirmation of goods insurance with an indication of its value, authorities refused to apply the transaction value method to determine the customs value. The value was raised by customs authorities by almost 20%.

PKN Orlen Lietuva
PKN Orlen Lietuva is a Lithuanian oil product exporter affected by the negative impact on their operations produced by the use of reference prices by Ukrainian customs authorities for calculation of customs duties.
The situation has particularly deteriorated after the entrance into force of Decree No.
11/4-10.27180 „On strengthening control of customs formalities on imports of oil products” on 6 January 2011.
The Ukrainian customs authorities where PKN goods are presented for the customs clearance is Odessa (South) Regional Customs House. The CN Code of the oil product exported to Ukraine is 2710194110.
The company reports that customs duties for oil products are being calculated using the reference price of 50 USD/t while the real value of mentioned goods is at the level of 20 USD/t. For the last 10 years’, it has been common practice to determine the oil products’ customs value using the Platts’s „European Marketscan” indicator “Cargoes CIF NEW/Basis ARA“. This practice is applied in the EU market. As a WTO member, Ukraine should use the same method in determining customs value. However, Ukrainian customs authorities do not follow the internationally recognized rules and practices. Since the beginning of January 2011, the delay in customs formalities procedure has prolonged from 1 to 3 days (sometimes for 2 weeks) resulting into the additional costs and in some cases into the refusal by the importer to purchase in advance agreed quantities. Because of this situation, the selling volumes of Lithuanian exporter Orlen Lietuva in Ukrainian market decreased by 30% in January 2011. Ukrainian customs authorities do not present any official information or documents justifying the mentioned actions.

Products of animal origin – Import permits
EU exporters, Ukrainian importers and EU companies established in Ukraine have raised this issue with the EU Delegation repeatedly since July 2010. Also the European Business Association has expressed serious concerns.
Import permits, required for animal products, are pending and procedures for application and issuance are not clear. Permits may cover only a very limited period, and it is not clear for which products and in which circumstances these import permits are required. Furthermore, it is not clear when products are considered to be “new” products, thus requiring a permit. As of 1 January 2009, regionally issued import permits for products of animal origin have been withdrawn, and new permits are issued only at the central office of the State Committee of Veterinary Medicine of Ukraine. This was informed by the Chief State Inspector of Veterinary Medicine of Ukraine in a letter dated 15 June 2010, #15-3-1-3/5107. According to exporters, this organisational arrangement has created barriers to trade. The barrier is not only costly and burdensome; it also seriously affects ongoing trade.
The European Commission has on several occasions asked the Ukrainian authorities for more clarity on the procedures, on the documentation needed by Ukraine, and on the products covered by these requirements. Two joint letters by the European Commission together with Canada, the USA and Norway have been sent to Ukrainian authorities. The first letter from 22 October 2010 was answered, although in a general way and several specific questions remained unaddressed. A second letter including specific questions, sent on 16 November 2010, remains unanswered.

Regal Petroleum

Regal (UK Company), a company active in exploration and production, has invested over $240 million in Ukraine in the last three years.
In mid-December 2009 the company experienced what they identified as a qualitatively different type of inspection of its field operations. Unlike previous inspections, this one was considered to be spurious, and well established protocols were not followed. In particular, the findings of the inspectors were not produced and left behind in a report. Given the irregular processes, and the company’s disagreement with the basis and content of the reports, Regal did not accept the findings it received in subsequent reports. These findings were essentially administrative environmental issues. The company, which claims to implement internationally approved environmental and safety standards, approached the Ministry of Environmental Protection (MEP) to discuss the issue.
On 21 May 2010 Regal was served with a ‘Stop Order’ (suspension of production licences) dated 30 March 2010. With the support of the British Embassy, and in the presence of the British ambassador to Ukraine, the company met the deputy Minister of Environmental Protection, and it was told verbally to continue production while the issues were resolved. On 2 July 2010 the Kiev Court imposed an injunction on the Order at the request of the company’s gas purchaser.
During June and July the majority of issues raised by the Order were fully resolved with the MEP. Having received full sign-off on the inspections from the MEP, the company continued to produce on the assumption that the MEP would remove the Order very shortly (closing a producing gas field is a very major exercise and could potentially permanently impair the reservoir’s future performance).
On 11 October 2010, for no apparent reason, the Kiev Court removed the injunction, thereby effectively re-instating the Order. Regal ceased production on 17 November 2010, and de-commissioned and released both drill rigs back to its contractor. An appeal to the Kiev courts submitted on 18 October was heard on 1 December 2010. According to the company, the appeal to have the injunction reinstated was dismissed without seriously taking into consideration any legal arguments.
An article published on 22 November by the journal Ukrainian Energy seems to confirm the involvement of the Ukrainian Security Services (SBU). The article quotes an official of the MEP saying that “At the moment, Regal’s case cannot be reviewed at the interdepartmental committee meeting as the original inspection papers for the period 2009 – 2010 and the original documents related to Regal’s licences have been retrieved by the Security Service of Ukraine in Poltava region to conduct an investigation on Regal Petroleum.”
The company considers that the suspension of Regal’s licences without warning, or allowing for a period for remedy, represents a disproportionate act in relation to alleged administrative environmental issues. Regal continues to manage its business as best as it can, though all the company’s operations and production in Ukraine are suspended. The company welcomed the chance to meet on 17 January with a staff member from the Ukrainian Embassy in London, and have supplied supporting documentation outlining the history of their case.

SCANIA
Of the whole VAT receivable amount 19,3 M UAH (approximately equal to EUR million 1, 7) the Company reported 5,06 M UAH (approx. equal to EUR thousand 477.000) of VAT refund by state bonds. The said amount was fully confirmed within respective tax inspection (Tax Inspection Act dated September 21, 2009 No. 200/23-40/30107866).
Accordingly, on June 23, 2010 the Company filed a claim for obtaining VAT refund via conversion into domestic government bonds. However, due to unknown reasons VAT bonds amount was not actually issued in favour of the Company. Later the tax authorities unofficially confirmed the possibility of the collection of approx. UAH 4,5 million in cash, while the rest of the reported VAT refund (approx. UAH 500 000) is still being treated as pending due to the audit of “your chain of suppliers and their sub-suppliers and their sub-sub-suppliers” and it seems that it will not be confirmed by tax authorities. However, even the fully confirmed amount has not actually refunded in cash as of today. Based on the above, the company is currently looking for effective legal ways for the collection of VAT refund. Scania is of the view that today it is practically impossible to obtain VAT refunds on current bank accounts in a way other than obtaining the funds under obligation to use them immediately for settlements with the state budget. Straightforward VAT reimbursement from the state budget with no further obligations of the taxpayer is available only for government-related companies, or companies carrying our business in the fields of strategic interest of the state.

TeleRadioSvit
TeleRadioSvit is a company (with UK investment), broadcasting television through cable, satellite, and terrestrial antennas (free to air). For this purpose corresponding licences have been obtained from the relevant government agencies in Ukraine. According to Ukrainian legislation, licences for cable and satellite broadcast can be obtained without special competitive procedures (in order to obtain licences for broadcast over radio frequencies, it is necessary to win them in a competition). In 2009 a decision was made that TeleRadioSvit, which at that time was broadcasting only via cable and satellite, should take part in a competition to obtain licences for terrestrial broadcasting. To win in this competition, additional investment was required for the acquisition of television studios, broadcasting equipment, journalists, etc.
In October 2009 TeleRadioSvit won the right to obtain licences in four Ukrainian cities. TeleRadioSvit then took part also in another tender for broadcast licences. As a result, TeleRadioSvit received an addendum to its broadcast licence in which 33 new licences were added to those already obtained. After TeleRadioSvit received these new broadcast frequencies, additional investment was made to purchase new broadcast equipment – antennae, transmitters, and so on. This was also used to pay fees associated with the licences to various government agencies, and for various services performed during the process of obtaining other government permits. TeleRadioSvit began broadcasting on some of the frequencies it won in the first set of tenders, and was waiting to begin broadcasting on the remaining frequencies once the formal process for the permission to broadcast was completed. However, as a result of allegedly unlawful interference by senior Ukrainian officials, all of the broadcast licences previously awarded to TeleRadioSvit were cancelled. Teleradiosvit’s investors noted in particular that the owner of the largest media holding in Ukraine is the current Chairman of the Ukrainian Security Services and formerly also a member of the Supreme Council of Justice. In the spring of 2010 TeleRadioSvit were informed that companies in this media holding had filed a claim in court asking to cancel the licences of TeleRadioSvit and to prevent the company from terrestrial broadcasting in Ukrainian cities. Court proceedings were felt to be one-sided and the court took into account only the arguments from Teleradiosvit’s opponents. At the same time, arguments from TeleRadioSvit and other companies that also claimed to have been harmed were refused, apparently without sufficient justification. In the view of the company, courts have not taken into account the fact that according to Ukrainian law, a television company can be stripped of broadcast licences only if it acted against the law. TeleRadioSvit was not accused of breaking law by any of the courts examining this matter.

Unilever
Unilever is one of the world’s leading suppliers of fast moving consumer goods with operations in more than 100 countries across the globe. On any given day, two billion people use a Unilever product. The first representative office of Unilever in Ukraine was opened in 1993, and in 1998 “Unilever Ukraine” LLC was registered.
Unilever’s brand portfolio in Ukraine includes such well known brands as Calve ketchup, mayonnaise and sauces, Hellman’s mayonnaise, Rama spreads, Crème Bonjour vegetable-oil cheese creme, Knorr soups and seasonings, Beseda, Brook Bond and Lipton tea in the food category; Dove shampoo and skin care products, Clear vita ABE, Sunsilk and Timotei shampoo and hair care products, Rexona and Axe deodorants in the personal care category, as well as Domestos and Cif household cleaning products.
Unilever Ukraine LLC, an official importer of Unilever’s brands in Ukraine, is included in the so-called “white list” of participants of foreign economic activity prepared by the State Customs Service of Ukraine. Inclusion in this list should, in principle, imply simplified customs procedures for the company. However, Unilever Ukraine LLC reports that they constantly face adjustments of their declared value by Ukrainian customs during the process of customs clearance. It seems to be the case that customs authorities do not apply the transaction value method, using reference prices for value determination instead.

URSA
URSA is a large company active in the insulation market, which operates and has investments in Ukraine. Currently, due to multiple problems in terms of taxation and customs, the company is considering putting its investment projects in Ukraine on hold. When importing products, the company experiences a significant increase of customs value due to implications of comparable prices by customs authorities who do not accept the declared customs value by the representatives of the company. As a result, the customs value is 40-60% higher than real value of imported products. In case the company appeals such decisions of customs authorities, the products are kept at the customs premises for the whole period of the dispute. Such delays cause financial losses imposed by importer and eventually it is “less expensive” to agree to the increased customs value than to appeal.
The above-mentioned customs issue also creates problems in taxation. According to the norms of the new Tax Code, the company has no chance to receive VAT refund after products are finally sold in Ukraine because tax authorities consider only the price of the contract but not the increased customs value as the basis for calculation of the VAT refund. In case VAT refund is confirmed by tax audits, the state does not refund the VAT due to unknown reasons.
URSA has also problems related to the change of foreign currency exchange rates resulted from delayed shipments due to postponed customs clearance procedures. Tax authorities object to adding costs associated with change of foreign currency exchange rates to gross costs. URSA claims the contrary, because in fact the company has incurred these costs, which should therefore be added to gross costs.
European Commission