Existence of Legal Grounds for Conducting a Customs Audit

The fact of compliance by the customs authorities with the requirements of Article 66 of the EAEU Customs Code and the existence of legal grounds for conducting a customs audit are subject to detailed examination.

By the decision of the Specialized Interdistrict Administrative Court of Shymkent dated July 28, 2022, the claim of LLP “S” against the Republican State Institution “Main Dispatching Directorate of the State Revenue Committee of the Ministry of Finance of the Republic of Kazakhstan” and the Republican State Institution “Department of State Revenue of Shymkent” seeking recognition as unlawful and annulment of decisions on amendments (additions) to the information declared in the goods declarations was dismissed (No. 5294-22-00-4/774).

The circumstances of the case established that on July 7, 2021, JSC “I” and X CO LTD entered into a sale and purchase agreement for flaked caustic soda in the quantity of 3,042 tonnes (hereinafter referred to as the “Goods”) at a price of 1,530 yuan per tonne, for a total amount of 4,654,260 yuan (hereinafter referred to as Contract 1).

On August 20, 2021, LLP “S”, JSC “I” and LLP “A” entered into Contract No. 16/P-08-21 for the supply of the Goods at a price of USD 280 per tonne, for a total amount of USD 851,760 (hereinafter referred to as Contract 2).

Upon importation into the territory of the EAEU from China, the claimant carried out customs declaration of the Goods under goods declarations (hereinafter referred to as GDs) No. 57201/130122/0000318, 57201/120122/0000234 and 57201/120122/0000241.

In respect of the claimant, the Electronic Declaration Centre issued a decision on amendments (additions) to the information declared in GD No. 57201/130122/0000318 dated April 11, 2022 (hereinafter referred to as Decision 1).

The Department issued a decision on amendments (additions) to the information declared in GDs No. 57201/120122/0000234 and 57201/120122/0000241 dated April 24, 2022 (hereinafter referred to as Decision 2).

The respondents justified their decisions by stating that, in automated mode, a risk profile was triggered in relation to the price declared by the declarant in the claimant’s GDs. LLP “S” was granted 60 calendar days to submit all documents necessary to confirm the price of the imported Goods. However, the Partnership did not submit all the documentation, since, pursuant to paragraph 10 of Article 38 of the EAEU Customs Code, the customs value of goods and the information relating to its determination must be based on reliable, quantitatively determinable and documentarily confirmed information.

In dismissing the claim, the court of first instance concluded that the contested decisions had been issued by the respondents in accordance with the provisions of the customs legislation of the Republic of Kazakhstan and the EAEU.

By the ruling of the Judicial Chamber for Administrative Cases of the Shymkent City Court dated December 1, 2022, the decision of the court of first instance was upheld without amendment.

However, the cassation panel considered that the conclusions of the courts of first instance and appeal were premature and were not based on the factual circumstances established in the case.

Paragraph 15 of Article 38 of the EAEU Customs Code provides that the basis for determining the customs value of imported goods must, to the maximum extent possible, be the transaction value of those goods within the meaning defined in Article 66 of this Code.

Thus, the respondent is obliged to verify whether the claimant has fulfilled the conditions set out in Article 66 of the EAEU Customs Code for determining the customs value based on the transaction value. Only if the claimant fails to fulfil such conditions is the respondent entitled to refuse the application of Method 1 in accordance with paragraph 2 of Article 66 of the EAEU Customs Code.

This provision stipulates that if at least one of the conditions specified in paragraph 1 of this Article is not fulfilled, the price actually paid or payable is not acceptable for determining the customs value of imported goods, and the transaction value method for imported goods (Method 1) shall not be applied.

Before conducting an audit, the respondents must verify whether at least one of the grounds listed in Article 66 of the EAEU Customs Code exists. In the absence of at least one of the specified grounds, the customs authority had no legal grounds for conducting an audit in respect of LLP “S”.

Paragraph 7 of the Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan dated November 29, 2019, No. 7, “On Certain Issues of the Application of Customs Legislation by Courts”, states that, in accordance with the rule on the sequential application of methods for determining customs value set out in paragraph 15 of Article 38 of the EAEU Customs Code, where it is impossible to use the first method (based on the transaction value of imported goods), each subsequent method shall be applied only if the customs value cannot be determined by using the preceding method.

As follows from the requirements submitted by the respondents to the claimant in respect of GDs No. 57201/130122/0000318, 57201/120122/0000234 and 57201/120122/0000241, the grounds for refusing to apply Method 1 were stated as the unreliability of the information concerning the customs value of the Goods and the failure to duly confirm the declared information.

In resolving the dispute, the courts failed to take into account that, where the first method cannot be applied, consultations may be held between the state revenue authority and the declarant for the purpose of making a reasoned choice of the value basis for customs valuation, namely the transaction value of identical or similar goods.

When considering disputes related to the correctness of the choice of the method for determining customs value, the state revenue authority is entitled to refer to the absence of price information necessary to apply the relevant method only if it confirms the impossibility of obtaining such information or if the declarant refuses to provide the necessary information within the framework of consultations conducted with the declarant.

However, the courts also failed to verify and examine these circumstances, referring only to the unsubstantiated responses of the Electronic Declaration Centre and the respondent stating that there was no information available for applying the second and third methods of determining the customs value of the Goods. Therefore, the claimant’s arguments concerning the questionable absence of such information in the EAEU information system deserve consideration.

By the ruling of the Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan dated August 4, 2023, the decision of the court of first instance and the ruling of the appellate court were set aside. The case was remitted for a new hearing to the Judicial Chamber for Administrative Cases of the Shymkent City Court (6001-23-00-6ап/169).

Based on judicial practice, it may be concluded that shortcomings in the activities of customs authorities consist in the adoption by state bodies authorized in this field of administrative acts involving gross violations of procedural requirements. In particular, administrative acts fail to comply with the requirements of special legislation; violate the principles of the priority of rights, protection of the right to legitimate expectations and prohibition of abuse of formal requirements (Articles 7, 8, 12, 13 and 14 of the Administrative Procedural and Process-Related Code); and also fail to comply with the requirements of Articles 79 and 80 of the Administrative Procedural and Process-Related Code.

Furthermore, customs authorities engage in formalistic examination of documents and information submitted with customs declarations for the purpose of confirming customs value, and audits are also conducted in the absence of the legal grounds listed in Article 66 of the EAEU Customs Code.

Regulatory Framework

1. Constitution of the Republic of Kazakhstan dated August 30, 1995;
2. Administrative Procedural and Process-Related Code of the Republic of Kazakhstan (hereinafter referred to as the APPC);
3. Code of the Republic of Kazakhstan “On Customs Regulation in the Republic of Kazakhstan” (hereinafter referred to as the Customs Code);
4. Customs Code of the Eurasian Economic Union, ratified by the Law of the Republic of Kazakhstan dated December 13, 2017, No. 115-VI (hereinafter referred to as the EAEU Customs Code);
5. Regulatory Resolution of the Supreme Court of the Republic of Kazakhstan dated November 29, 2019, No. 7, “On Certain Issues of the Application of Customs Legislation by Courts”;
6. Code of the Republic of Kazakhstan “On Taxes and Other Mandatory Payments to the Budget” (Tax Code);
7. Entrepreneurial Code of the Republic of Kazakhstan (hereinafter referred to as the Entrepreneurial Code);
8. Code of the Republic of Kazakhstan on Administrative Offences (hereinafter referred to as the Administrative Offences Code);
9. Civil Procedure Code of the Republic of Kazakhstan (hereinafter referred to as the CPC);
10. Treaty on the Eurasian Economic Union dated May 29, 2014 (hereinafter referred to as the EAEU Treaty);
11. Acts constituting the law of the EAEU (hereinafter referred to as international treaties and acts in the field of customs regulation);
12. Decision No. 42 of the Board of the Eurasian Economic Commission dated March 27, 2018, “On the Specifics of Conducting Customs Control of the Customs Value of Goods Imported into the Customs Territory of the Eurasian Economic Union”.

Abbreviations Used

JCA SC – Judicial Chamber for Administrative Cases of the Supreme Court of the Republic of Kazakhstan;

JCA – Judicial Chambers for Administrative Cases of regional courts and courts equated thereto;

SIAC – Specialized Interdistrict Administrative Courts of the regions of the country;

SI – State Institution;

RSI – Republican State Institution;

SRC – State Revenue Committee;

DSR – Department of State Revenue;

USR – Administration of State Revenue;

LLP – Limited Liability Partnership;

IE – Individual Entrepreneur.

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