Customs against Tolling

In August-September, the discussion started around the problem of jewelry tolling was a major intrigue in the life of the Russian jewelry industry highlighted by key mass media.
The Central Excise Customs lodged a claim with the biggest jewelry companies in Russia for hundreds of millions of roubles – the customs agency already filed more than 30 lawsuits to the Arbitration Court of Moscow, the Kommersant daily reports. The customs authorities demand that duties be paid not only from the cost of manufacturing jewelry abroad, but also from the cost of rough materials belonging to Russian ordering customers. Payment of such duties will trigger jewelry price growth and sanctions to jewelers for violating the customs regulations.

As it was explained to the RBC daily by Valery Radashevich, General Director of the Guild of Russian Jewelers, the tolling scheme was gainful for jewelers, since the 20-percent customs duty was charged only from the cost of work performed on a foreign floor and not from the cost of imported products. In addition to this duty, companies paid an 18-percent VAT. Under the tolling scheme it was allowed to import items without stones, for instance, gold chains. Companies were issued special permissions for exporting precious metals from Russia followed by consequent import of finished jewelry pieces back into the country.

“We were not very much in favour of this order of things fearing that jewelers were more tempted to take precious metals out of the country rather than develop jewelry production in Russia,” Valery Radashevich says. “So we addressed the government suggesting to introduce quantitative limitations for a certain range of jewelry items.” Eventually, the Federal Customs Service (FCS) decided to check the previously issued permissions for export and processing of precious metals. From the 1st of April 2008 these permissions were withdrawn and held invalid. The customs service also resolved that for the goods exported under the tolling schemes companies must additionally pay duties and taxes as for imported goods, i.e. 20 percent of the goods’ cost and a VAT of 18 percent.

The Guild of Jewelers did not expect such an outcome. “We are resolutely against the practice of additional tax charges for earlier imported goods,” Mr. Radashevich says indignantly. “Our association addressed the government asking to make the FCS cancel its decision on additional tax charges. The government ordered the FCS and Ministry of Finance to study this appeal.”

However, the matter was already taken to the court floor. In August, the Arbitration Court of Moscow received several claims from the Central Excise Customs to jewelers: Adamas (RUR 250.8 million), Kameya Co (RUR 134.5 million), Top Gold (RUR 25.7 million), Yashma Zoloto (RUR 18.7 million), Myuz Elit (RUR 16.3 million), Inter-Chas (RUR 8.3 million) and PK Yuvest (RUR 14.5 and 3.7 million). According to Valery Radashevich, 44 Russian companies may happen in this situation.

The industry ran into a dead-lock, says Yulia Nalivkina, Strategic Projecting Director of Adamas. “After the permission was cancelled the customs blocked a parcel of jewelry goods made of our metal and we cannot take them. According to the law, we are obliged to import these items under the same scheme, which was used for export. However, this is impossible, since the tolling scheme was cancelled. But if we take the goods in as if they are imported, we’ll have to pay a fine and overpay for our own jewelry items several times.” According to Ms. Nalivkina,  Adamas, which has its own production facilities, used to bring from Italy only an insignificant share of its products. “But many companies, which manufactured virtually all their products abroad, particularly in China and Turkey, are now in very troubled waters,” Yulia Nalivkina says. “The situation is fraught with most severe disamenities for retail, where scarcity of goods is already looming.”

The cancellation of tolling schemes is a colossal problem not only for the market, but also for consumers, Denis Adamsky, General Manager of the Moscow Jewelry Plant agrees.
“Russian jewelry companies cannot produce jewelry items on the same level with Western companies,” Mr. Adamsky grieves. “Meanwhile, demand for jewelry is very high and the market grows about 50 percent a year. The tolling scheme was first of all designated for consumers – it was cheaper than importing gold jewelry from Poland, Turkey or China.” According to Denis Adamsky, the companies, which before paid preferential duties, are now shuffling off their tax burden on buyers and jewelry prices have already risen 30-40 percent.

However, not all experts share the downbeat forecasts about a possible jewelry price hike. These threats are hardly to happen, the Rossiskaya Gazeta writes. Sellers may lose more than gain if demand will shrink due to a price increase. Then many may again start buying jewelry during a casual trip to Turkey.
The range of jewelry products will narrow, argues Robert Martirosyan, Vice-President of the Yashma Holding: “The consumer will be deprived of certain goods which are not manufactured here, as for instance gold chain locks and gold chains made by complex wickerwork.”

Trade and production company Yashma appealed against the claims lodged by the customs service on August 26. Jewelers pin their hopes for success on the test case produced by a small jewelry company, ZAO Inter-Chas. As early as January it appealed the FCS’ decision as of November 27, 2007 canceling the tolling permission at the Arbitration Court of Moscow.  The customs tax and duty claims for RUR 2 million were also appealed within the frames of this case. On May 29, the court sustained the claim to its full extent and acknowledged that the inspection performed by the customs service confirmed the presence of gold in all imported products.

Yuli Tay, Managing Partner of Bartolius Attorneys at Law, believes that the reasons behind the jewelers’ problems should be sought in the peculiarities of this industry: “Tolling is used in the lumber industry and metallurgy and so far there are no problems serious enough to be attributed to the way this wheelwork ticks.” Robert Martirosyan links the FCS’ moves to new proposals being prepared by the government as far as tolling is concerned.

As the RBC daily found out, the cancellation of tolling schemes on the jewelry market was not a trouble for all its participants. So far as federal-scale players are grappling with multi-million lawsuits on the part of the Central Excise Customs, gold jewelry manufacturers in provinces are adding up profits due to new orders which increased many times. Still, experts warn that domestic jewelers will hardly be able to fill in the import gap completely either by amount or by assortment.

“After the tolling cancellation the number of orders placed with some factories increased dramatically,” Flun Gumerov, President of Almaz-Holding says. “Some factories boosted their rate of production by 50-70 percent.” Gennady Soloveichik, Corporative Development Director of Adamas, explains that Russian manufacturers are indeed on the winning side in the absence of tolling products, since they have a chance to release more home-made jewelry and sell it at higher prices. According to the Rosyuvelirexpert Agency, the size of orders placed with jewelry makers in Kostroma in the first six months of this year went up by more than 20 percent spurred by contacts with companies from Moscow, Saint Petersburg, Novosibirsk and other cities. Mind, that these were the companies which used to operate by tolling schemes before, Rosyuvelirexpert says.

“The tolling scheme placed the Russian jewelry industry in jeopardy,” Flun Gumerov believes. “It made meaningless any technological retooling of Russian factories, any development of the infrastructure and design school in this country.”
In his opinion, using the tolling scheme the country imported goods under the guise of home-made products; at the same time tolling-dependent companies enjoyed significant preferences unlike those engaged in pure import transactions.

The current situation is moneymaking for those enterprises, which have idle production facilities, their own know-how and tried-and-true production methods, Gennady Soloveichik speculates. “However, Russian enterprises will not be able to countervail completely the absence of foreign goods either by amount or by assortment,” Mr. Soloveichik laments. “Not a single Russian company is able to produce jewelry novelties in the same amount as the world-scale manufacturers.” In his opinion, the market supply will decrease and prices will rise affecting buyers. It is impossible to eke out the ensuing scarcity with imported goods, Mr. Soloveichik adds. “Direct import is not economically remunerative, since the 20-percent customs duty will be levied in this case from the full value of goods and they will become noncompetitive.”

Valery Radashevich, General Director of the Guild of Russian Jewelers, believes that Russian companies are again put on unequal footing due to the actions of the Federal Customs Service: “The enterprises, which earlier were engaged in manufacturing jewelry items using their own goods outside the customs territory, after the tolling cancellation decree could invest into purchasing equipment and organizing production of marketable goods. But instead they will now have to spend their money to pay additionally for the goods shipped before tolling was cancelled.”