Experimental system launched to trace imported products

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide.
 

Introduction

On 29 May 2019 an interstate agreement was concluded within the framework of the Eurasian Economic Union, under which it was agreed to introduce a system to enable certain categories of imported goods to be traced.

On 1 July 2019 Russia launched an experimental traceability system, which will remain in place until 31 December 2019.

In this context, 'traceability' means the control of operations relating to the circulation of goods, comprising a set of measures aimed at ensuring that the background, use or location of certain goods can be traced using an identification system. The system is expected to enable:

• consumers to obtain necessary information about purchased goods;
• businesses to reduce their operating costs; and
• Eurasian Economic Union member states (including Russia) to reduce the level of record falsification in the market and better control the payment of taxes.

At the beginning of 2020, the Russian government will summarise the results of the experiment and decide the format in which to formally introduce the system.

Traceability system

The proposed traceability system is purely documentary and does not involve the application of any special marks, chips or other material carriers on goods. All products covered by the system will receive unique numbers to be included in the owner's records. The importer must assign a registration number to each batch of imported goods and a serial number to each product. Valued added tax payers must include these numbers in the invoice and shipping document (ie, the waybill or universal transfer document). These numbers will then be entered into the automated tax control system, which should – in theory – monitor the movement of each item of goods until it is sold for retail or disposed of. However, the system will track goods using more than just registration numbers; sellers must also report to the tax authorities on the movement of traceable goods and the arrival of such goods at a warehouse, among other things. Thus, this is a system of total control over the movement of all goods imported into Russia – from the moment that they cross the border until they are sold to the final consumer.

Participation

Participation in this experiment is voluntary for importing organisations. So far, the following goods have been selected:

• refrigerators;
• washing machines;
• forklifts;
• bulldozers;
• monitors and video projectors;
• prams; and
• storage devices.

System operator

The operator of the information system on which the experiment is based is the Federal Tax Service (FTS). This is because the FTS already has real-time tracking information systems for tax payments and alcohol sales, among other things. In addition, it is well known that the system's main goal is to increase the collection of import turnover taxes in Russia.

Recommendations for participation

On 4 July 2019 the FTS sent an information letter (ED-4-15/13072 @) containing recommendations for organisations willing to participate in the experiment. In particular, the letter sets out:

• the conditions for participating in the experiment;
• the rules for applying to participate in the experiment and the standard application form, including a list of documents to be attached;
• the procedure for registering an application;
• the rules for submitting to the FTS documents containing the details of goods subject to the system; and
• the structure of the batch registration number and the rules for including this in the application documents.

Thus, any importer of the abovementioned goods can participate in the experiment using the recommendations set out in the FTS's letter.

Comment

This experiment should help to identify and solve any problems that would likely arise when introducing the traceability system on an ongoing basis. Many of these problems are obvious and result from the system's design. For example, it is unclear whether the system will be able to cover goods which have no serial number and are defined only by generic characteristics (ie, when it is difficult to correlate the serial number of the goods from the corresponding batch with the specific item). In addition, it is difficult to predict how this mechanism will work in relation to goods that are sold to other businesses (rather than individuals) not for resale, but for their own needs (eg, when a large company buys computer monitors in bulk for its employees).

For importers, the implications of this system are controversial. Such a system of total control over the movement of goods may help right holders to identify counterfeit goods. At the same time, this system essentially imposes additional record-keeping (in addition to accounting, tax and statistical records) and reporting requirements on importers and traders. Serious penalties are envisaged for violations of such requirements: the draft normative acts impose a penalty of 5% to 10% of the costs of the goods in case of a failure to submit reports or errors in such reports. Further, such draft acts do not determine the value of which a percentage will be charged as a fine, since such value can mean either the purchase value of the goods or their sale value (which differ significantly).

It is hoped that the experiment will help to solve the above issues and result in a system that meets the interests of responsible businesses.