Recently, more and more problems have been exposed in connection with customs policy and customs services. The Lithuanian government is being reproached for not protecting local producers and for not being able to curb contraband. On the other hand, people are becoming irritated with increases in customs duties that lead to price hikes and a shrinking choice of goods. The Lithuanian customs policy has assumed an international dimension: Lithuania’s attempts to join the WTO have been postponed several times. Further, the customs policy has triggered numerous conflicts with neighbouring Latvia.
Duties Cause Problems
The problems related to customs policy fall into three groups. The first group of problems concerns the application of customs duties, tariffs, and quotas, or direct restrictions of trade. The second group refers to the policies and methodology of customs duties and customs procedures. Finally, problems are also caused by organisational weaknesses at customs offices.
Customs duties and restrictions on trade are the biggest causes for concern. These problems spark off procedural hurdles. Even if policies related to the application of customs duties, customs procedures and organisational arrangements were ideal, such restrictions would impede a rational allocation of resources, effective business activity, and the growth of people’s welfare.
First, these problems injure many businesses and employees, because market and production processes have a global nature. There are no purely national products in any country, and Lithuania is no exception. If foreign materials and tools cannot be used in creating a “Lithuanian” product, both the competitiveness of that product and the effectiveness of Lithuanian manufacturers will suffer. That is why breeders of pigs who insist that all their problems would be solved if imports were prohibited know better than to claim the same thing about fuel, food additives, and other materials that are vital to their activities.
Second, unsound customs policies strike hardest at consumers, who lose the opportunity to buy cheaper and better goods. Contrary to the popular beliefs and arguments of the champions of protectionism, if custom duties are charged, Lithuanian prices do not remain the same nor do the prices of foreign goods increase. The prices of Lithuanian goods do not lag behind. They end up just a fraction lower than those of imported products; however, it is not consumers but Lithuanian manufacturers who receive the main portion of the difference in costs caused by customs duties. No wonder that such gifts – opportunities to make easy money without bothering too much about work (unless mincing of ministerial thresholds is regarded as work) – are not available to everyone. The lucky ones are usually politically connected monopolists. Not accidentally, increases in import duties on sugar were initiated by state-owned sugar refineries; on fuel, by the state-owned Mažeikių Nafta; and on oil, by the Obelių Aliejus that was set up from state loans.
Third, increases in import duties create a pretext for retaliatory protectionist measures from other countries, but this effect is frequently overlooked. The trade wars that have occurred between Lithuania and Latvia regarding eggs and pork are a good example of this.
It is often said that although protectionist measures do lead to price hikes and limit choices, they protect local entrepreneurs and employees and therefore contribute to the country’s welfare. Even so, the benefits are reaped by the few, while the burden falls on everyone. Sadly, the beneficiaries are concrete, obvious groups, while those who carry the burden are not. Therefore the losses they sustain are not associated with protectionism.
If that is not bad enough, then why not erect fences around the Šalcininkai, Kretinga or Pakruojis regions and stimulate their development by establishing customs offices and imposing duties on the products that are brought in?
The only effective way to solve customs problems is to do away with direct restrictions on trade (duties, quotas, prohibitions, etc). This can be accomplished in many ways: by reducing tariffs, scrapping the most defective duties on certain kinds of goods, and by lifting quality requirements for imported goods. ( etc.)?
Rules of Customs Duties are at Fault
The existence of a custom duty in itself hinders business activity, trade, and effective allocation of resources. But the extent of negative consequences of customs duties depends on their application procedures and customs regulations. Therefore, if the willingness to remove customs duties is lacking, it is at least worth exploring problems related to customs activities and regulations, their implications, and possible solutions.
One of the main problems is that customs offices do not recognise the real, purchase value of imported goods. If customs duties are applied, they should be charged on the prices of goods. This is dictated by the logic of customs duties as well as international practices and treaties. However, when a customs duty is calculated for a given commodity, the price that has been paid for that commodity is frequently ignored in favour of directive values. Rather than defining how to apply transaction values, the customs code and secondary legislation show how to avoid it. Oddly enough, it has happened that customs valuation has included the amount of value added tax that was charged abroad but never paid. Even goods obtained for free (advertisement stalls and booklets) get taxed. This causes an unjustified increase in the effective customs duty.
Much confusion in calculating customs value of goods is caused by price discounts that are applied to goods. In Lithuania, discounts are not regulated by any legal acts, and universally acknowledged business practices are ignored. The treatment of discounts is based mainly on a document issued by the Customs Department. This document instructs territorial customs offices to apply discounts (in both quantitative and qualitative terms) that are “usually” used in commerce. It also leaves it to the discretion of territorial offices to acknowledge, in exceptional cases, bigger discounts or other types of discounts than those “usually” used. The legitimacy of this note is dubious, while its enforcement conditions show that the customs code is inconsistent and incomplete. The content of the note expands the norms of the customs code to the disadvantage of economic agents and creates an atmosphere of instability. It precludes the application of transaction value in calculating customs duties. It makes importers ask their business partners to only indicate the final price, and omit any discounts in the documents.
If goods have been purchased at a discount, the customs office requires that a separate contract verifying the discount be provided. Although it is common in international practice to indicate both the price and the discount in the same document, Lithuanian companies must either ask for separate contracts or for documents indicating the price after discount.
Bureaucracy and futile attempts to control everything is another painful problem. Unnecessary checking of goods and special documentation requirements are just two examples.
Lithuanian customs do not recognise the presumption of innocence. Collisions are usually solved to the disadvantage of private agents.
Both the customs code and government decrees regulating customs work are chock-full of directive norms. The rights of economic agents and individuals are not properly defined. Customs enjoys an unjustified degree of discretion in applying and enforcing regulations. Laws governing customs activities are very complicated, vague, and riddled with repetitive exemptions. Orders and notes from the Customs Department under the Ministry of Finance play no small part in defining customs procedures.
In order to refine customs regulations, LFMI proposes not only solutions to specific problems, but also ways to perfect the system itself. The customs code should spell out the rights of individuals, importers, exporters, and passengers. It should define the principles that will secure the rights of individuals (first of all, that a person cannot be regarded as an offender until proven otherwise according to procedures established by law). Provisions of the customs code that allow “other legal acts” to set additional obligations and requirements should be eliminated. Likewise, it is necessary to do away with internal instructions of the Customs Department which not only define the internal order at customs but also affect the application of tax and other rules. Customs should not be treated as an exceptional institution in property relationships. It is essential to outlaw any provisions that make it impossible to use a transaction value in customs valuation when appropriate written documents are provided.
It is frequently maintained that problems are caused and solved irrespective of legal acts, and that these have a minor influence on the work of customs offices. This impotence of legislation is due to vague rules, repetitive exemptions, and poorly defined rights of customs “clients.” The situation is further worsened by the pursuit of the ultimate goal of raising budget revenues, a goal which makes customs officials fearful of taking action – however just and rightful – in the best interest of people.
All customs-related problems would be solved if custom duties – the most defective of all taxes – were outlawed. Although we do admit that the work of customs offices should be rationalised and have proposed ways to achieve this, it should be kept in mind that these solutions will be important, but far from effectul.
