Customs Reforms Help Uncover Biggest Import Violation in Iran

EghtesadOnline: Leaked documents belonging to the Islamic Republic of Iran Customs Administration showed that a South Korean company, which later turned out to be LG Electronics, was fined three quarters of a billion dollars for violating import regulations.

News ID: ۷۷۲۷۹۸

01 January 2017

This has grabbed the headlines in Iran in recent days, sparking a debate among officials.

In an interview with the Financial Tribune, a source at IRICA’s public relations, who spoke on condition of anonymity, explained that “this is the first such case considering the scale of the violation” and that there are “similar ongoing investigations for other companies as well”.

The source added that such findings have become possible as a result of reforms implemented by IRICA over the past few years, including the use of electronic equipment that has helped the administration create a “comprehensive database” for the first time.

An inter-office IRICA letter leaked online last week showed a South Korean company, whose name was not initially disclosed, dodged the payment of 18.2 trillion rials (over $450 million) in import tariffs by shipping disassembled products through separate customs bureaus, Financial Tribune reported.

A statement published later by the Ministry of Industries, Mining and Trade indicated that the company was Goldiran–the official representative of LG Electronics in Iran.

Iranian customs regulations subject home appliances to import tariffs of more than 50% if shipped as final products to Iran. However, the government imposes considerably less for parts used in manufacturing in a bid to support domestic industries.

IRICA’s public relations said the move to fine the South Korean party is in accordance with statutes of the World Customs Organization’s Harmonized Commodity Description and Coding System generally referred to as "Harmonized System" or simply "HS".

HS is a multipurpose international product nomenclature, comprising about 5,000 commodity groups, each identified by a six-digit code, arranged in a legal and logical structure supported by well-defined rules to achieve uniform classification.

The system is used by more than 200 countries, including the Islamic Republic of Iran, as a basis for their customs tariffs and for the collection of international trade statistics. It is governed by an international convention.

The six General Rules for Interpretation (GRI 1 to 6) are the main tool for the daily application of HS and form an integral part of the HS Convention.

GRI 2 and GRI 3 pertain to incomplete, unfinished goods; unassembled, disassembled goods; and combinations of goods. It effectively contains two rules. GRI 2(a) applies to incomplete or unfinished and unassembled or disassembled articles, which are classified as the complete or finished article if they have the latter’s essential character.

“IRICA’s ruling complies with the GRI 2(a) regulation,” the IRICA public relations said. “Imports include higher tariffs, if it is proven to IRICA that the shipped parts have not been involved in the manufacturing process.”

Heated Debate

LG Electronics has manufacturing facilities in Iran where parts are assembled to final goods, but it is unclear if they use domestically manufactured parts in those products.

Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh has sided with LG. In a letter to the head of IRICA, Masoud Karbasian, he asked for the hefty penalty to be scrapped.

“The imported parts are used to manufacture final products … and to turn into final goods, they go through various manufacturing processes (welding, gas injection and final tests). Therefore, they are not subject to GRI 2(a) regulation,” the letter reads.

The minister's statement added that Goldiran has recently made “considerable investment” to broaden its manufacturing base in Iran, which in turn has led to “creation of jobs and transfer of technology,” among other benefits.

Nematzadeh’s stance had a backlash in local media. Ahmad Tavakkoli, a former parliamentarian, criticized the minister in a letter to First Vice President Es’haq Jahangiri.

Although regulations regarding the matter are deemed hazy, IRICA says its experts have conducted a series of investigations to prove the violations.

These investigations included a survey of manufacturing activities and assessment of relevant documents a few months after the parts were cleared from Iran's borders, the IRICA source told Financial Tribune.

“A new regulation allows us to audit the companies with regard to the parts they import for up to three years from the date of importation.”

Customs Reforms

IRICA says reforms undertaken in the past few years have led to the recent finding, as the administration is now able to track shipments electronically and register them in a comprehensive database.

“Up to this point, we did not have a database to be able to investigate a violation on such a scale,” the source added.

IRICA’s reforms to improve services and streamline customs procedures to increase revenues have been collectively introduced as an Integrated Customs System. These reforms started four years ago.

The body has also replaced a number of customs documents with electronic ones to create a more efficient and modern environment, and fight violations and smuggling.

The online declaration of exports and imports enables the declarant to electronically report their goods 24/7. It minimizes bureaucracy and streamlines transactions while saving importers and exporters a great deal of time.

A customs system called Import General Manifest registers details about the shipper, consignee, number of packages, kind of packages, description of goods, airway bill or bill of lading number and date, flight or vessel specification. Now carrier companies can submit IGMs electronically.

One of the major challenges facing customs management concerns warehouses and getting the warehouse receipts. Warehouse supervision is among the legal responsibilities of customs. With the implementation of the Integrated Customs System, the customs receipt data are now sent to customs bureaus electronically.

Iran last year joined the Electronic TIR Convention—the Convention on International Transport of Goods Under Cover of TIR Carnets—a multilateral treaty concluded at Geneva in 1975 to simplify and harmonize the administrative formalities of international road transport.

IRICA says the latest violation on the part of LG Electronics is the first of its kind, considering the amount of tariffs evaded, “but it certainly will not be the last.” Investigators are currently working on other similar cases.

The customs administration says the case is in its initial stage.

“This is a preliminary ruling. It will be discussed in two arbitrator commissions and the second commission will comprise representatives of the Ministry of Industries, Mining and Trade, Judiciary and Iran Chamber of Commerce, Industries, Mines and Agriculture,” the source said.

“If unsettled, the case will be referred to the Court of Administrative Justice.” The court is an arm of Iran’s judiciary.

South Korean electronics giants, Samsung and LG Electronics, lead Iran’s home appliance market. While foreign products account for 65% of the domestic market, the two South Korean companies hold a 55% share.

Home appliances also account for 13% of all the goods smuggled into Iran.