Contracts Between Russian and Kyrgyz Companies: International Trade Legal Guide

 

May 31, 2023

BRACE Law Firm ©

 

Trade between Russia and Kyrgyzstan has grown and developed for many years, and the signing of the Treaty on the Eurasian Economic Union [1] simplified trade relations between EAEU countries and led to Armenia and Kyrgyzstan joining the Union. The Kyrgyz Republic joined the EAEU on May 29, 2014. [2]

Sanctions restrictions imposed on the Russian Federation have increased trade turnover between the countries in various areas, including growth in transit shipments to the Russian Federation through the territory of Kyrgyzstan.

Russia exports goods such as timber, fertilizers, lumber, coal, and other commodities to the Kyrgyz Republic. In turn, fruits, vegetables, cotton, textiles, clothing, processed agricultural products, fabrics, and goods whose direct supply from manufacturing countries is restricted or prohibited by sanctions lists are imported into the Russian Federation from Kyrgyzstan.

The Kyrgyz Republic applies certain provisions of the Treaty on the EAEU and other international treaties in accordance with the conditions and transitional provisions defined by a separate protocol and taking into account agreements on the application of the EAEU Common Customs Tariff for goods listed in that protocol. The Protocol on the Conditions and Transitional Provisions for the Application by the Kyrgyz Republic of the Treaty on the EAEU (the "Protocol on Conditions and Transitional Provisions"), certain international treaties included in the law of the Eurasian Economic Union, and acts of the bodies of the Eurasian Economic Union in connection with the accession of the Kyrgyz Republic to the Treaty on the EAEU was signed in Moscow on May 8, 2015.

After the Kyrgyz Republic implemented the measures necessary to cancel customs control for goods and vehicles and the Supreme Eurasian Economic Council assessed the customs control system, it adopted Decision No. 5 dated May 8, 2015, On the Abolition of Customs Control for Goods and Vehicles Moved Through the Kyrgyz-Kazakh Section of the State Border. This decision abolished customs control at the Kyrgyz-Kazakh section of the state border and at airports for air travel between the Kyrgyz Republic and other Eurasian Economic Union member states.

Furthermore, after the signing of the treaty on Kyrgyzstan's accession to the EAEU, the Supreme Eurasian Economic Council at the level of heads of state approved an action plan for the accession of the Kyrgyz Republic to the single economic space of the Republic of Belarus, the Republic of Kazakhstan, and the Russian Federation, taking into account the formation of the Eurasian Economic Union. [3] This plan specifies measures for each sector of interaction. To increase the country's export potential and the competitiveness of domestic products on the world market, the Government of the Kyrgyz Republic, for its part, adopted a program for the development of exports of the Kyrgyz Republic. [4]

Under subparagraph 5 of paragraph 1 of Article 25 of the Treaty on the EAEU, the movement of Union goods between the Russian Federation and the Kyrgyz Republic since the effective date of the Treaty on the Accession of the Kyrgyz Republic to the Treaty on the EAEU is carried out without customs declaration, except for cases provided for by the Treaty on the Eurasian Economic Union.[5] At the same time, the Union carries out unified customs regulation [6] in accordance with the EAEU Customs Code and international treaties and acts regulating customs legal relations that constitute Union law.

To establish unified customs regulation, the Common Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union is used to describe goods. This system for describing and coding goods is used to classify products for the application of customs tariff regulation measures, export customs duties, prohibitions and restrictions, internal market protection measures, and the maintenance of customs statistics. [7]

The Commodity Nomenclature of Foreign Economic Activity [8] may be used for taxing goods and for other purposes provided for by international treaties and acts constituting Union law and/or the laws of the member states.

The Explanations to the Common Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union serve as one of the auxiliary working materials designed to ensure uniform interpretation and application of the EAEU TN VED. [9]

The declarant and other persons classify goods in accordance with the TN VED during customs declaration and in other cases where, under international treaties and acts in the field of customs regulation, the product code is declared to the customs authority in accordance with the Commodity Nomenclature of Foreign Economic Activity. [10]

A significant issue when goods cross the EAEU customs border is the determination of the origin of goods imported into the Union's customs territory. This involves identifying the country where the product was wholly obtained, produced, or underwent sufficient processing according to the criteria for determining the origin of goods. The origin of a product is determined for the purposes and according to the rules [11] provided for by the Treaty on the Union. The origin of goods must be confirmed in all cases where the application of customs tariff regulation measures, prohibitions and restrictions, or internal market protection measures depends on the origin of the goods.

Logistics Chains Between Russia and Kyrgyzstan

The delivery of goods from one country to another is a critical stage of any foreign trade contract. Various modes of transport are used to transport goods between Russia and Kyrgyzstan:

• Air freight;
• Rail transport;
• Road transport.

Water transport can only be used as part of multimodal logistics because the Kyrgyz Republic lacks direct access to sea transport routes.

Typically, a multimodal scheme is used to deliver goods between partners from Russia and Kyrgyzstan, which may include several modes of transport for a single logistics chain. Therefore, when concluding a foreign trade contract, it is important to settle transport issues and select the most suitable delivery terms for all parties to the international agreement.

Contracts between Russian and Kyrgyz Companies

Kyrgyzstan is among the Asian countries that produce large quantities of cotton, fabrics, and diverse textiles, which significantly impacts the types of goods exported to other countries. Sewing workshops and factories allow the country to meet consumer demand in this area.

All trade relations begin with agreements between partners on the basic parameters of the export or import of goods for a future transaction. Subsequently, other delivery details from one country to another are worked out; in doing so, parties should not forget about security, as it is essential to perform due diligence on a future partner to verify their reliability.

Significant criteria when choosing a partner include:

• Price;
• Assortment;
• Minimum order quantity;
• Payment terms (the availability of ruble accounts significantly simplifies interaction between partners);
• Logistics capabilities;
• Production capacity;
• Quality control.

When purchasing textile goods or interacting with a sewing factory, additional significant criteria include:

• Production lead times;
• The ability and willingness to produce product samples;
• The ability to provide finished product samples.

When interacting with Kyrgyz partners, it is also important to consider the mentality of Eastern entrepreneurs: deliberate pacing and resolving issues through face-to-face meetings. As a rule, Kyrgyz partners do not resolve important matters over the phone.

After selecting a supplier and agreeing on all delivery terms, the partners must agree on the text of the foreign trade contract. The contract is concluded in simple written form; furthermore, a foreign trade contract with Kyrgyz partners should reflect the essential terms of the international transaction:

• Name, quantity, and price of the goods supplied;
• Delivery terms;
• Payment terms;
• Transport obligations of the parties;
• Cargo insurance;
• Governing law for disputes;
• Terms for the transfer of title from the seller to the buyer, etc.

Often, to define delivery terms, parties use the Incoterms International Rules for the Interpretation of Trade Terms in the version selected by the parties, which significantly facilitates the drafting of the contract.

Customs Value of Goods in Trade with Kyrgyzstan

An essential condition of any foreign trade contract is its value, including the customs value, which determines the taxation of the imported goods. Provisions on the customs value of goods are reflected in Article 38 of the EAEU Customs Code, which stipulates that the customs value of goods and information relating to its determination must be based on reliable, quantifiable, and documented information. Procedures for determining the customs value of goods must be generally applicable — that is, they must not differ depending on the source of supply, including the origin of the goods, type of goods, transaction participants, or other factors.

The customs value of goods is determined in the currency of the member state where the customs duties, taxes, special, antidumping, or countervailing duties are payable.

The EAEU Customs Code also reflects the methods for determining the customs value of goods:

• Transaction value method for imported goods [12];
• Transaction value method for identical goods [13];
• Transaction value method for similar goods [14];
• Deductive method [15];
• Computed method [16];
• Reserve (fallback) method.[17]

Future interaction with customs authorities, taxation, and potential litigation depend on the correct choice of method for determining customs value and the provision of all necessary documents. For example, if documents are improperly executed and the product value is incorrectly calculated, customs authorities may find that the determination of customs value is based on arbitrary or fictitious values, which violates paragraph 8 of Article 38 of the EAEU Customs Code. [18]

Taxation in Export and Import Between Russian and Kyrgyz Partners

Given that Russia and Kyrgyzstan are members of the Eurasian Economic Union, the Treaty on the EAEU provides that goods imported from the territory of one member state to the territory of another member state are subject to indirect taxes.[19]

The collection of indirect taxes in mutual trade is carried out according to the country of destination principle, which provides for the application of a zero percent Value Added Tax (VAT) rate and/or exemption from excise duties upon export, as well as their taxation with indirect taxes upon import. The collection of indirect taxes and the mechanism for monitoring their payment during export and import are carried out in the corresponding manner, [20] under which indirect taxes represent Value Added Tax and excises (excise tax or excise duty).

When exporting goods from the territory of one member state to the territory of another member state, the taxpayer of the member state from which the goods were exported applies a 0% VAT rate and/or an exemption from excise duties upon submitting the relevant documents to the tax authority.

To confirm the justification for applying the 0% VAT rate and/or exemption from excise duties, the taxpayer of the member state from which the goods were exported must submit the following documents (or copies thereof) to the tax authority simultaneously with the tax declaration:

• Agreements (contracts) concluded with a taxpayer of another member state or with a taxpayer of a non-Union state, on the basis of which the export of goods is carried out; in the case of leasing goods or a commodity credit (commodity loan, loan in the form of things) — leasing agreements (contracts), commodity credit agreements (contracts) (commodity loans, loans in the form of things); agreements (contracts) for the manufacture of goods; agreements (contracts) for the processing of customer-supplied raw materials;
• A bank statement confirming the actual receipt of revenue from the sale of exported goods to the account of the taxpayer-exporter, unless otherwise provided by the laws of the member state;
• An application for the import of goods and the payment of indirect taxes, drawn up in the form provided for by a separate international interagency agreement, with a mark from the tax authority of the member state into whose territory the goods were imported regarding the payment of indirect taxes (exemption or other procedure for fulfilling tax obligations) (in original paper form or a copy at the discretion of the tax authorities of the member states) or a list of applications (on paper or in electronic form with an enhanced qualified electronic signature of the taxpayer); [21]

The form of the list of applications, the procedure for filling it out, and the format are determined by the regulatory legal acts of the tax authorities of the member states or other regulatory legal acts of the member states.[22]

• Transport (shipping) and/or other documents provided for by the laws of the member state confirming the movement of goods from the territory of one member state to the territory of another member state;

These documents are not submitted if, for certain types of movement of goods, including the movement of goods without the use of vehicles, the execution of these documents is not provided for by the laws of the member state.

• Other documents confirming the justification for applying the 0% VAT rate and/or exemption from excise duties provided for by the laws of the member state from which the goods were exported.

Documents must be submitted to the tax authority within 180 calendar days from the date of shipment (transfer) of the goods. If these documents are not submitted within the established period, the indirect taxes are payable to the budget for the tax (reporting) period in which the date of shipment of the goods falls, or another tax (reporting) period established by the laws of the member state, with the right to deduct (offset) the corresponding VAT amounts according to the laws of the member state from which the goods were exported.

For the purpose of calculating VAT on the sale of goods, the date of shipment is the date of the first primary accounting document drawn up for the buyer of the goods (the first carrier), or the date of issuance of another mandatory document provided for by the laws of the member state for the VAT taxpayer.

For the purpose of calculating excises on excisable goods produced from one's own raw materials, the date of shipment of goods is the date of the first primary accounting document drawn up for the buyer (recipient) of the goods; for excisable goods produced from customer-supplied raw materials, the date of shipment is the date of signing the certificate of acceptance and transfer of excisable goods, unless otherwise provided by the laws of the member state in whose territory the excisable goods were produced.

In the event of non-payment, incomplete payment of indirect taxes, or payment of such taxes in violation of the deadline established by this paragraph, the tax authority shall collect indirect taxes and penalties in the manner and amount established by the laws of the member state from which the goods were exported, and shall also apply methods to ensure the fulfillment of obligations to pay indirect taxes and penalties and the liability measures established by the laws of that member state.

When exporting goods from the territory of one member state to the territory of another member state, the taxpayer has the right to tax deductions (offsets) in a manner similar to that provided for by the laws of the member state applied to goods exported from the territory of that member state outside the Union.

Furthermore, the place of sale of goods is determined in accordance with the laws of the member states, unless otherwise established by regulatory documents.

If a taxpayer of one member state sells goods to a taxpayer of another member state, and the transportation of the goods began outside the Union and was completed in another member state, the territory of the member state where the goods are placed under the customs procedure of release for domestic consumption is recognized as the place of sale.

The customs procedure of release for domestic consumption is a customs procedure applied to foreign goods under which the goods are located and used in the Union's customs territory without restrictions on ownership, use, and/or disposal provided for by international treaties and acts in the field of customs regulation regarding foreign goods, unless otherwise established by the Customs Code. [23]

It is important to note that the VAT tax base for the export of goods, if it changes toward an increase (decrease) due to an increase (decrease) in the price of the sold goods or a decrease in the quantity (volume) of sold goods due to their return for reasons of poor quality and/or incomplete set, is adjusted in the tax (reporting) period in which the parties to the contract changed the price (agreed on the return) of the exported goods, unless otherwise provided by the laws of the member state.

The collection of indirect taxes on goods imported into the territory of one member state from the territory of another member state is carried out by the tax authority of the member state into whose territory the goods were imported, at the place of registration of the taxpayers who are the owners of the goods, including taxpayers applying special tax regimes.

If goods are purchased based on a contract between a taxpayer of one member state and a taxpayer of another member state, the payment of indirect taxes is carried out by the taxpayer of the member state into whose territory the goods were imported—the owner of the goods, or, if provided for by the laws of the member state, by a commission agent, attorney, or agent.

If goods are purchased based on a contract between a taxpayer of one member state and a taxpayer of another member state and the goods are imported from the territory of a third member state, indirect taxes are paid by the taxpayer of the member state into whose territory the goods were imported — the owner of the goods.

If goods are purchased based on a contract between a taxpayer of one member state and a taxpayer of a state that is not a member of the Union, and the goods are imported from the territory of another member state, indirect taxes are paid by the taxpayer of the member state into whose territory the goods were imported, the owner of the goods or, if provided for by the laws of the member state, a commission agent, attorney, or agent.

For VAT purposes, the tax base is determined on the date the imported goods are recorded by the taxpayer (but no later than the deadline established by the laws of the member state into whose territory the goods are imported) based on the value of the purchased goods (including goods resulting from work performed under a contract for their manufacture), as well as goods received under a commodity credit contract (commodity loan, loan in the form of things), goods that are the product of processing customer-supplied raw materials, and excises payable on excisable goods.

The value of purchased goods (including goods resulting from work performed under a contract for their manufacture) is the transaction price payable to the supplier for the goods (works, services) according to the terms of the contract.

For the purposes of determining the tax base, the value of goods (including goods resulting from work performed under a contract for their manufacture) expressed in foreign currency is converted into the national currency at the exchange rate of the national (central) bank of the member state on the date the goods are accepted for accounting.

Prohibitions and Restrictions in Interaction Between Russian and Kyrgyz Companies

In interaction between Russian and Kyrgyz partners, it is important to consider prohibitions and restrictions. According to the EAEU Customs Code, these represent non-tariff regulation measures applied to goods moved across the Union's customs border, including those introduced unilaterally in accordance with the Treaty on the EAEU, technical regulation measures, sanitary, veterinary-sanitary, and quarantine phytosanitary measures, export control measures (including measures regarding military products), and radiation requirements established in accordance with the Treaty on the Union and/or the laws of the member states.

Notably, until December 31, 2023, a ban was introduced on the export from the Russian Federation of goods defined by a Russian Government Resolution. [24] As a general rule, the introduced ban does not apply to goods exported to EAEU member states; however, for some goods, a permit-based procedure for export from Russia to the territories of EAEU member states was established until December 31, 2023: [25]

• Certain types of agricultural machinery and parts thereof;
• Certain types of vehicles, their parts, and components;
• Certain types of industrial products according to a list;
• Certain types of telecommunications equipment, parts, and materials;
• Certain types of laboratory, mining, geological exploration, and geophysical equipment and parts thereof;
• Certain types of medical goods.

Goods are moved across the Union's customs border and/or placed under customs procedures in compliance with prohibitions and restrictions. Compliance with non-tariff regulation measures (including those introduced unilaterally) and technical regulation measures is confirmed in the cases and manner determined by the Commission or the laws of the member states in accordance with the Treaty on the Union. Compliance with export control measures (including measures regarding military products) is confirmed in the cases and manner established in accordance with the laws of the member states by submitting documents and/or information confirming compliance with such measures.

Compliance with sanitary, veterinary-sanitary, and quarantine phytosanitary measures and radiation requirements is confirmed based on the results of sanitary-epidemiological, veterinary, quarantine phytosanitary, and radiation control (oversight) in the manner established by the Treaty on the Union and the acts of the Commission adopted in accordance with it, and/or in the manner established by the laws of the member states.

Compliance with prohibitions and restrictions is confirmed by submitting documents and/or information to customs authorities; furthermore, the release of goods is carried out by customs authorities provided that the person has met the conditions for placing the goods under the declared customs procedure.

If, during the release of a product placed under the customs procedure of release for domestic consumption, the permits cannot be presented to the customs authority, such documents may be presented after the release of the goods within the period necessary to obtain them, but not more than 45 calendar days. Goods for which customs operations have not been completed after 45 calendar days are detained by customs authorities in accordance with Chapter 51 of the EAEU Customs Code.[26]

Court Practice in Trade with Kyrgyz Companies

Most issues in court practice regarding trade operations with Kyrgyz partners relate to customs clearance and taxation. Specifically, the actions of customs authorities are often challenged; as examples of court practice, we present several cases:

• Resolution of the Arbitration Court of the Volga-Vyatka District dated October 6, 2022, No. F01-5195/2022 in case No. A11-5824/2021, On Recognizing Decisions and Notifications of the Customs Authority as Unlawful. The declarant determined the customs value of the goods (toilet and kitchen linen made of terry toweling fabrics) using the transaction value method for imported goods. The customs authority adjusted the customs value of the goods, determining it using the reserve method, and assessed additional customs payments, duties, and penalties. The claim was denied because the customs authority correctly determined the value of the imported goods, as the declarant did not confirm compliance with the requirement for documented confirmation of the quantitative determinacy and reliability of the information on the declared customs value of the goods.
• Resolution of the Arbitration Court of the Moscow District dated January 19, 2022, No. F05-27351/2021 in case No. A41-17674/2021, On the Annulment of the Customs Authority's Decision in Part Recognizing the Company as a Person Bearing Joint and Several Liability with Unidentified Persons. The customs authority issued a decision whereby goods arriving under a cargo air waybill were recognized as illegally moved across the EAEU customs border, and the company was recognized as a person bearing a joint and several obligation to pay customs duties, taxes, special, antidumping, and countervailing duties together with unidentified persons. The claim was granted because the company was neither the person who purchased the goods nor the owner of the goods, and it did not know and should not have known about the facts of the illegal movement of goods.
• Decision of the Arbitration Court of the Vladimir Region dated April 11, 2023, in case No. A11-9329/2021, On Recognizing the Decision to Adjust the Customs Value of Goods as Invalid. The transaction value under the foreign trade contract was formed taking into account conditions that were not reflected in the provisions of the contract, were not quantitatively determined, and were not documented by the declarant. The claim was denied.
• Decision of the Arbitration Court of the Smolensk Region dated April 18, 2023, in case No. A62-1054/2023, On the Annulment of Acts Imposing Administrative Liability under Article 16.3 of the Code of Administrative Offenses of the Russian Federation (non-compliance with prohibitions and restrictions on the import of goods into the customs territory of the Customs Union or Russia and their export). The company carried out the import and transit movement of goods falling under the action of Decree No. 560 [27] in a vehicle without a navigation seal. The claim was denied.

When interacting with Kyrgyz partners, it is necessary to consider the fact of a single customs space between Russia and Kyrgyzstan, and the regulatory framework governing relations in the sphere of trade, taxation, and customs regulation. At the same time, it is also important to take into account the specifics and mentality of Kyrgyz partners, who carefully weigh the decisions they make and value personal communication.

________________________________

References

[1] Treaty on the Eurasian Economic Union. Signed in Astana on May 29, 2014.

[2] Treaty on the Accession of the Kyrgyz Republic to the Treaty on the Eurasian Economic Union dated May 29, 2014. Signed in Moscow on December 23, 2014.

[3] Decision of the Supreme Eurasian Economic Council No. 75 dated October 10, 2014, On the Action Plan (Roadmap) for the Accession of the Kyrgyz Republic to the Single Economic Space of the Republic of Belarus, the Republic of Kazakhstan, and the Russian Federation, Taking into Account the Formation of the Eurasian Economic Union.

[4] Resolution of the Government of the Kyrgyz Republic No. 596 dated December 20, 2018, On Approving the Program of the Government of the Kyrgyz Republic for the Development of Exports of the Kyrgyz Republic for 2019-2022.

[5] Letter of the Bank of Russia No. 014-12-1/8198 dated September 21, 2015, On the Entry into Force of the Treaty on the Accession of the Kyrgyz Republic to the Treaty on the Eurasian Economic Union.

[6] Article 32 of the Treaty on the EAEU.

[7] Article 19 of the EAEU Customs Code.

[8] Decision of the Council of the Eurasian Economic Commission No. 80 dated September 14, 2021, On Approving the Common Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union and the Common Customs Tariff of the Eurasian Economic Union, and on Amending and Recognizing as Void Certain Decisions of the Council of the Eurasian Economic Commission.

[9] Recommendation of the Board of the Eurasian Economic Commission No. 21 dated November 7, 2017, On the Explanations to the Common Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union.

[10] Paragraph 1 of Article 20 of the EAEU Customs Code.

[11] Decision of the Council of the Eurasian Economic Commission No. 49 dated July 13, 2018, On Approving the Rules for Determining the Origin of Goods Imported into the Customs Territory of the Eurasian Economic Union (Non-preferential Rules for Determining the Origin of Goods).

[12] Article 39, Ibid.

[13] Article 41, Ibid.

[14] Article 42, Ibid.

[15] Article 43, Ibid.

[16] Article 44, Ibid.

[17] Article 45, Ibid.

[18] Resolution of the Arbitration Court of the Moscow District No. F05-16860/2022 dated July 27, 2022, in case No. A40-211175/2021, On the Annulment of a Customs Authority Decision. [19] Paragraph 1 of Article 71 of the Treaty on the EAEU.

[20] Appendix No. 18 to the Treaty on the EAEU.

[21] Decision of the Arbitration Court of the Sverdlovsk Region dated July 23, 2018, in case No. A60-22540/2018, On Recognizing as Invalid a Tax Authority Decision to Refuse a VAT Refund.

[22] Order of the Federal Tax Service of Russia No. MMV-7-15/139@ dated April 6, 2015, On Approving the Form of the List of Applications for the Import of Goods and the Payment of Indirect Taxes, the Procedure for Filling It Out, and the Format for Submission in Electronic Form.

[23] Paragraph 1 of Article 134 of the EAEU Customs Code.

[24] Resolution of the Government of the Russian Federation No. 311 dated March 9, 2022, On Measures to Implement the Decree of the President of the Russian Federation No. 100 dated March 8, 2022.

[25] Resolution of the Government of the Russian Federation No. 312 dated March 9, 2022, On Introducing a Temporary Permit-based Procedure for the Export of Certain Types of Goods Outside the Territory of the Russian Federation.

[26] Letter of the Federal Customs Service of Russia No. 01-11/43502 dated July 19, 2019, On Compliance with Prohibitions and Restrictions Regarding Conditionally Released Goods.

[27] Decree of the President of the Russian Federation No. 560 dated August 6, 2014, On the Application of Certain Special Economic Measures to Ensure the Security of the Russian Federation.