Russia-Ukraine Wrangle over Car Scrappage Levy

Ukraine is introducing the scrappage levy on Russian cars. It seems that this is the Kiev’s answer to a similar tax imposed by Russia earlier this year. (We wrote about it here.)

Russian utilisation tax closes its market for Ukrainian cars, buses, and, especially, trucks. Life becomes hard for quite a few Ukrainian car manufacturers, including UkrAVTO, Bogdan, AutoKrAZ, LAZ, Cherkasky Bus and Etalon. On the other hand, the Ukrainian tax creates problems for Russian AutoVAZ.

The Ukrainian government seems to be willing to reach an agreement with Moscow on mutual non-application of the levies. Ukrainian Minister of Economic Development and Trade Petro Poroshenko has said that he hopes that a positive solution will be found during the CIS meeting in Yalta on September 28. Viktor Khristenko, the Chairman of the Eurasian Economic Commission, has stated that Ukraine and Russia are keen to find a compromise.

Dmitry Chernyy, Ludmila Baleevskikh and Andrey Kalimanov from law firm Muranov, Chernyakov & Partners share their views on the matter.

As is well known, the Ukrainian authorities are actively discussing the introduction of the utilization levy on cars imported from Russia.

Last week, the Ukrainian Ministry of Ecology and Natural Resources issued a draft resolution imposing a scrappage levy on imported cars, trucks, buses and special vehicles.

The document is of a declarative nature: it does not specify the size or timing for the introduction of the utilization levy. At the same time, the draft resolution states that the Ministry of Ecology and Natural Resources and the Ministry of Economic Development must submit proposals on the minimum amount of the levy in two weeks time.

Ukrainian Prime Minister Mykola Azarov has said that the levy can be as high as US$1,000 per car. But so far there are no official propositions on the size of the levy.

It is not a secret that the imposition of the utilization levy by Ukraine is the country’s response to the introduction of a similar levy by Russia, which fact is made clear in the draft resolution. According to the explanatory memorandum to the Russian draft law, the levy will make Ukrainian cars more expensive by 10-12%.

Currently, Ukraine is keen on negotiating with Russia so that the levy would no apply to Ukrainian products.

The draft resolution may be an instrument of pressure in these negotiations.

However, it should be understood that the introduction of the utilization levy in respect of cars produced in Russia by Ukraine can be considered a premature measure contrary to the commitments assumed by Ukraine when joining WTO.

If the Ukrainian government believes that the introduction of the utilization levy by Russia (which applies not only to cars produced in Ukraine but to all wheeled vehicles produced in Russia and abroad) violates the Ukrainian interests as a WTO member, it must follow the WTO dispute resolution procedure.

In accordance with this procedure, Ukraine must send to the Russian government a notice that there is a dispute and begin bilateral consultations through diplomatic channels. And only if such consultations do not get results, Ukraine is able to request the establishing of a dispute settlement body.

If in the course of these proceedings the dispute resolution body finds the fact of the violation of the WTO rules by Russia, it can issue an order demanding the abolishment of the levy. The penalty for failure to comply with this order can be permission to Ukraine not to follow its WTO concessions and obligations in respect of Russia.

If the procedure for resolving disputes between WTO members is not followed, and Ukraine introduces the utilisation fee unilaterally, Russian carmakers, who will be the first to suffer from this measure, will be able to apply to the Government of the Russian Federation with the request to initiate the procedure under the WTO rules and to serve the notice of the dispute to the Ukrainian government.

Muranov, Chernyakov & Partners