EURASIAN ECONOMIC UNION
Bakhyt Kadyrova, Associate
On 29 May 2014, the presidents of Kazakhstan, Russia and Belarus signed an agreement (the «Treaty») in Astana on the Eurasian Economic Union (the «EaEU» or the «Union»). The Treaty will enter force on 1 January 2015. According to the Treaty, the Union is an international organization and its membership is open to other countries. It is expected that from 1 January 2015 Armenia will join the Union as a full member, while work is also being done to prepare Kyrgyzstan and Tajikistan to join the Union.
The Treaty is aimed at ensuring the free movement of goods, services, capital and labor, as well as a coordinated, coherent and uniform policy in a number of industries. As a result, a single market should be formed within the Union and borders should be fully opened to economic activity.
The Treaty has been signed on the basis of other international treaties agreed mainly in 2009-2010, which established the legal framework of the Customs Union of Russia, Kazakhstan and Belarus (the «CU») and the Common Economic Space (the next stage of integration). Some of these international treaties were incorporated into the law of the Union and are applied to the extent they do not contradict the Treaty, while a number of agreements, protocols and international agreements governing various matters of the CU cease to have effect from the effective date of the Treaty. The resolutions of the Supreme Council at the level of Heads of State, the Supreme Council at the level of Heads of Governments and the Commission in effect as of the effective date of the Treaty also remain in force and are applied to the extent not inconsistent with the Treaty.
We examine the most significant changes in the following areas:
- Union’s Bodies
- Regulation of circulation of drugs and medical products
- Customs regulation
- Foreign Trade Policy
- Technical regulation
- Trade in services, establishment, operation and investments
- Regulation of financial markets
- Energy sector
- Taxes and taxation
- State Procurement
- Intellectual property
- Labor migration
- Regulation of access to rail transport
- Local content in subsurface use contracts
- Local content in procurements of Samruk-Kazyna NWF
- Some aspects of the imposition of penalties and dispute resolution
Below is a brief overview of the major changes in the areas we have mentioned.
The Union has the following bodies:
- Supreme Eurasian Economic Council (the «Supreme Council»);
- Eurasian Intergovernmental Council (the «Intergovernmental Council»);
- Eurasian Economic Commission (the «Commission» or «EEC»);
- Court of the Eurasian Economic Union (the «Court of the Union»).
The working language of the Union is Russian. Resolutions of the Union’s bodies should be officially published on the official website of the Union.
Let us have a detailed look at the Court of the Union, a judicial authority acting on a permanent basis which, among other things, is empowered to hear disputes involving investors.
The Court of the Union began functioning as part of the CU from 2010.
Under the Treaty, the powers of the Court of the Union are more clearly defined. The Court of the Union:
1) gives guidance with respect to the provisions of the Treaty, international agreements in the framework of the Union and resolutions of the bodies of the Union upon the application of a member state or a body of the Union, as well as at the request of employees and officials of the Union’s bodies and the Court; and
2) hears disputes arising from the implementation of the Treaty, international agreements within the framework of the Union and/or resolutions of the bodies of the Union at the request of: (a) a member state, or (b) a business entity.
The Treaty provides a clear grading of disputes for consideration by the Court of the Union:
1) the following disputes are considered at the request of a member state:
- consistency of an international agreement within the framework of the Union, or its certain provisions, with the Treaty;
- the observance by another member state (other member states) of the Treaty, international agreements within the framework of the Union and/or resolutions of the Union’s bodies, as well as certain provisions of the above international agreements and/or resolutions;
- the compliance of resolutions of the Commission or its certain provisions with the Treaty, international agreements within the framework of the Union and/or resolutions of the Union’s bodies;
- challenging actions (or inaction) of the Commission.
2) the following disputes are considered at the request of a business entity (which is defined as a legal entity or an individual entrepreneur registered under the laws of a member or third-party state):
- the compliance of a resolution of the Commission or its provisions which directly affect the rights and legitimate interests of the business entity concerning entrepreneurial or other economic activities with the Treaty and/or international treaties within the framework of the Union, if such resolution or its provisions entailed the infringement of rights and legitimate interests of the business entity conferred by the Treaty and/or international treaties within the framework of the Union;
- challenging actions/non-actions of the Commission which directly affect the rights and legitimate interests of a business entity concerning entrepreneurial or other economic activities, if such actions/non-actions resulted in the infringement of rights and legitimate interests of the business entity conferred by the Treaty and/or international treaties within the framework of the Union.
Member states may also refer other disputed matters to the competence of the Court if resolution is directly provided for by the Treaty, other international agreements among member states and international treaties of the Union with third parties.
Before applying to the Court of the Union, an applicant must apply to a member state or the Commission for the pre-trial resolution of a dispute. A business entity may file an application with the Court of the Union upon payment of a fee.
The consideration period for disputes before the Court of the Union has not undergone major changes and remains up to 90 days from the date an application is filed (previously it was no more than 3 months from the date an application is filed). The Court issues its decision based on the results of dispute resolution and, in the event of a request for clarification, an advisory opinion. As before, an advisory opinion is advisory in nature, while the court's decision on the dispute is binding.
A common market of drugs and medical products (healthcare products and medical equipment) meeting the standards of the appropriate pharmaceutical practices will be created as part of the Union. It is expected that the common market for drugs and medical products will begin functioning within the Union from 1 January 2016. For this purpose, member states shall enter into an international agreement by 1 January 2015 at the latest, which will determine the common principles and rules for the circulation of drugs and medical products.
Customs regulation in the Union will be carried out in accordance with the new (revised) Customs Code of the Union, international treaties and acts, and the provisions of the Treaty. It is expected that the new Customs Code of the Union will come into force from the beginning of 2016. Currently, active work is being undertaken on the draft code.
Pending the entry into force of the new Customs Code of the Union, customs regulations in the Union will be carried out in accordance with the Agreement on the CU Customs Code of 27 November 2009 and other international agreements of the member states governing the customs relations entered into as part of the formation of the contractual legal framework of the CU and the Common Economic Space and incorporated, under the Agreement, into the law of the Union, subject to the provisions of the Treaty.
In general, the Treaty contemplates the preservation of all existing customs privileges under the customs legislation of the CU. However, due to the signing of the Treaty, many agreements and protocols of the CU will lose their effect. It is expected that the main provisions of such agreements will be included in the Customs Code of the Union.
According to the comments of the working group which is drafting the Customs Code of the Union, among other things the new Customs Code will give priority to electronic customs declarations, carrying out customs operations via the information systems of the relevant bodies, mutual recognition of authorized economic operators, use of a «one window» mechanism, focusing on the post-customs control. In prospect the requirement on submission of documents evidencing compliance with technical regulations of the Customs Union from the customs declaration could be excluded.
The common Foreign Economic Activity Commodity Classifier and the Common Customs Tariff that are approved by the Commission and serve as instruments of the trade policy of the Union should apply as part of the customs and tariff regulations in the customs territory of the Union. The main types of import duties remain unchanged. Customs exemptions and tariff quotas may apply within the tariff regulation.
The following common measures of non-tariff regulation are applied as part of the non-tariff regulation in third-party trading operations: (i) the prohibition of import and/or export of goods; (ii) quantitative restrictions on the import and/or export of goods; (iii) the exclusive right to export and/or import goods; (iv) automatic licensing (monitoring) of export and/or import of goods; and (v) authorization procedure for import and/or export of goods.
Notwithstanding the provisions of the Treaty, member states may unilaterally grant trade preferences to a third party on the basis of international agreements entered into before 1 January 2015.
Member states should unify the agreements under which the preferences are being granted.
Special protective antidumping and countervailing measures taken in respect of goods imported into the customs territory of the Union by way of revising special protective, antidumping and countervailing measures that were in effect in accordance with the laws of the member states will apply until the date of expiry of the above measures established by the relevant decision of the Commission, and may be subject to revision in accordance with the provisions of the Treaty.
For purposes of implementing the provisions concerning tariff preferences in respect of goods originating from developing countries and/or least developed countries, the Protocol on the Common System of Tariff Preferences of the CU of 12 December 2008 should be applied until a decision of the Commission on that issue enters into force.
Pending the entry into force of a decision of the Commission, which establishes the rules for determining the origin of goods, the Agreement on Common Rules for Determining a Country of Origin of Goods of 25 January 2008 and the Agreement on Rules for Determining the Origin of Goods from Developing and Least Developed Countries of 12 December 2008 should apply.
The issue of technical regulation within the Union is of no less importance. The principles of integration of technical regulation within the CU became the basis for integration within the Union.
Let us briefly focus on the platform for technical regulation within the common territory of the Union:
- member states approve a unified list of products for which mandatory requirements are established within the Union (the «Unified List»). For such products technical regulations are developed that have a direct effect in the territory of the Union. No additional requirements for the products included in the Unified List may be brought by national legislations;
- for products which are not included in the Unified List, technical regulation is developed by member states on their own;
- member states mutually recognize documents evidencing compliance of products that are not included in the Unified List;
- member states harmonize the rules for assessing compliance and mutually recognize the accreditation of certification bodies and testing laboratories that perform work on compliance confirmation;
- member states harmonize the measurement system;
- common documents are approved with respect to compliance of products and a single mark of compliance of products with technical regulation;
- member states harmonize their national legislation on the establishment of liability for violation of the requirements of technical regulations.
The Treaty regulates the issues of trade in services, establishment of entities (including the acquisition of an interest or control in the existing legal entities), entrepreneurial activities and investment. The provisions of the Treaty on these issues have replaced the Agreement on Trade in Services and Investments in the Member States of the Common Economic Space of 9 December 2010, which was previously entered into within the CU.
The purpose of the Treaty concerning trading in services, establishing entities, entrepreneurial activities and investment is to ensure freedom of relations in these areas by providing no less favorable treatment, liberalization and harmonization of legislation and progressive simplification of excessive regulation. At the same time, as before, the Treaty sets lists of limitations and exceptions, which should be reduced gradually. In Kazakhstan for example, restrictions and exceptions have been set against property and permanent land use, advantage on the basis of local content, and transactions with strategic resources.
New provisions of the Treaty concerning trade in services, establishment of entities, entrepreneurial activities and investment compared to the old Agreement of 9 December 2010 proscribe changes in the requirements to the approval procedure for draft normative legal acts as well as the introduction of rules on the resolution procedure for investment disputes (for more details on the procedure for resolution of investment disputes please see «Some aspects of the imposition of penalties and dispute resolution» below).
Thus, in accordance with the transparency principle, draft normative legal acts dealing with matters of trade in services, establishment of institutions, entrepreneurial activities and investment should, as a general rule, be published on the Internet thirty (30) calendar days prior to their adoption with the possibility for all interested parties to submit comments and proposals thereon.
As part of the Treaty, member states agree to carry out coordinated regulation of the financial market. The financial market, under the Treaty, covers activities in the banking and insurance sectors, as well as in the services sector for the securities market. The member states provide for the basic principles of financial market regulation in the Treaty. The development of the following principles is new compared to the previous arrangements reached among the member states.
In particular, the regulation of financial markets must meet the following principles and objectives:
- deepening of integration and non-discrimination in terms of access to the financial markets of the member states;
- guarantees of the rights of consumers of financial services;
- creation of conditions for the mutual recognition of licenses in financial market sectors in the Union;
- determination of an approach to the management of financial risks in accordance with international standards;
- determination of requirements for the implementation of financial activities (in particular, prudential requirements);
- a unified approach to supervision of financial market participants; and
- ensuring transparency of activities of financial market participants.
It is noteworthy that certain arrangements have already been reached among the member states with respect to the provision of financial services in their territories under Annex V of the Agreement on Trade in Services and Investment in the Member States of the Common Economic Space of 9 December 2010 (the «Agreement»). The Treaty will in turn replace the said Agreement. The Treaty describes more specifically and fully the direction in which the integration of member states’ legislations will be developing. At the same time, it has retained many of the provisions and principles of the Agreement. We emphasize that member states will have to develop harmonized requirements for financial market regulation.
In the banking sector, member states will be guided by the best international practice and fundamental principles of effective banking supervision of the Basel Committee on Banking Supervision.
The Treaty defines a provisional list of areas in which harmonization should take place. In particular, the changes will directly affect:
- the developing of a common definition of a «credit institution»;
- the procedure, mechanisms, peculiarities and conditions for the establishment, reorganization and liquidation of credit institutions;
- grounds for revocation of licenses;
- ensuring the financial soundness of credit institutions - types of activity will be determined in addition to banking activities, which will be permitted for credit institutions;
- requirements for prudential standards, mandatory reserves and special provisions;
- the procedure for supervision of credit institutions, bank holding companies and banking groups;
- an approach to financial recovery and bankruptcy of credit institutions (including the regulation of the rights of creditors and priority of claims); and
- a list of operations to be recognized as bank operations.
In the insurance sector, harmonization will, among other things, affect:
- the creation of a single definition of a «professional participant of the insurance market»;
- the procedure and conditions for the establishment and licensing of insurance activity;
- grounds for revocation of licenses;
- the procedure, mechanisms and conditions for liquidation of a professional participant of the insurance market;
- ensuring the financial sustainability of a professional participant of the securities market, in particular, with regard to the adequacy of insurance reserves, the composition and structure of assets, and the minimum level and procedure for the formation of the charter capital and owner’s equity;
- the procedure for supervision of professional participants of the insurance market will be established;
- the requirements for the composition of insurance groups and insurance holdings will be established.
In the services sector for securities, the member states will harmonize the legislative requirements concerning:
- broker-dealer activities in the securities market;
- activities concerning the management of securities, financial instruments, assets and investment portfolios of pension funds and collective investments;
- clearing activities;
- depository activities;
- activity for keeping the register of securities holders;
- activity for the organization of trade in the securities market.
The main new features in comparison with the provisions of the Agreement will be:
- for financial market players established in accordance with the laws of one of the member states in respect of their activities in the territory of another member state, subject to certain restrictions -national treatment and most favored nation treatment in respect of establishment and/or activities that will be provided by member states under the Treaty. In particular, this will be expressed in the possibility to provide financial services without establishing a legal entity on the territory of another member state, provide services through branches, as well as provide financial services on a cross-boundary basis; and
- in the securities market, in addition to the harmonization of legislation concerning the establishment and regulation of its members, requirements will be harmonized with respect to the issuance of securities by issuers in the territories of member states, as well as requirements for the placement and circulation of securities in the territory of member states, provided that they are issued on the territory of only one member state. Also, harmonized requirements will be developed in the area of unlawful use of insider information and manipulations of the securities market.
Eventually, after reaching a certain level of integration of legislation, member states will also have the option of creating a single financial regulator in the territory of the Union.
However, the member states have currently agreed and upheld, within the Treaty, a number of existing limitations to the implementation of activities in their financial markets. In particular, the limitations in relation to the financial market of Kazakhstan will remain effective for an indefinite period, including inter alia: (i) prohibition on banking activities in the territory of Kazakhstan through branches of foreign banks, (ii) insurance of property interests of Kazakhstan residents on the territory of Kazakhstan only by Kazakhstan insurance companies, and (iii) the requirement for the legal form of finance companies.
For as long as the restrictions on the financial markets of member states continue to exist, it will be not possible to realize the Treaty’s full potential, and the liberalization of national legislations set out in the Treaty looks relative. We hope that the specific terms of liberalization and removal of restrictions on the activities of financial institutions will be agreed upon soon, and the tremendous potential laid in the field of financial services will be fully achieved.
Under the Treaty, gradual formation of common markets of electric power, gas, oil and oil products is planned. The development of concepts and programs for the formation of such common markets is planned for 2015-2018. Preliminarily, the Treaty has established the following dates for the entry into force of common markets: electric power market by 1 July 2019; gas, oil and oil products markets by 1 July 2025.
In the area of taxation the Treaty regulates the procedure for collection of indirect taxes: VAT and excise duties on export and import of goods and provision of services.
For these purposes, the Protocol on the Procedure for Collection of Indirect Taxes and the Mechanism of Control over their Payment in Export and Import of Goods, Performance of Work, and Provision of Services was adopted as an annex to the Treaty. This Protocol included, with minor changes, the current protocols of the CU: (i) the Protocol on the Procedure for Collection of Indirect Taxes and the Mechanism of Control over their Payment in Export and Import of Goods in the CU, and (ii) the Protocol on the Procedure for Collection of Indirect Taxes in Performing Work or Provision of Services in the CU.
The new protocol contains details among other things regarding:
- determining the place of the sale of goods;
- the procedure for submitting documents for export and import of goods;
- the procedure for payment of indirect taxes on goods imported by the agent or attorney;
- determining the tax base in some cases;
- the procedure for payment of indirect taxes when returning imported goods.
The Treaty provides for the cases when indirect taxes on import are not charged. An important specification is made in respect of exemption from taxation for import of goods transferred within the same legal entity. The current legislation does not have such a specification, which creates problems for the transfer of goods between branches of the same legal entity located in different states.
The Treaty provides for the possibility of exchange of information between the tax authorities of member states on the basis of a separate interagency agreement.
With regard to the taxation of individuals the Treaty provides for withholding taxes from residents of one member state employed in another member state at the rates established by the legislation of the state in which such work is carried out.
For an economic union, issues concerning free movement of goods and services, including those for public use, are crucial. The Treaty aims to provide free access, for example, to Kazakhstan suppliers for a government procurement carried out in Russia and Belarus, and vice versa.
This objective will be achieved by member states through the following means:
- granting national treatment to suppliers from member states, there must be no preference to domestic suppliers;
- harmonization of legislation (establishing uniform requirements to procurement participants and procurement, the criteria for admission to trading platforms, the requirements for determining winners, as well as government procurement methods, etc.);
- organization of a single resource on the Internet that will give access to all information on government procurement of each member state;
- mutual recognition of electronic signatures made in accordance with the laws of one of the member states, which will provide free access to electronic procurement in each state;
- establishing uniform requirements for conducting procurement in electronic format, including a three country-wide list of products to be procured by an electronic auction;
- maintaining a single register of disreputable suppliers.
We note that exclusion from national treatment for companies from member states of the Treaty is possible only for a term not exceeding two years. However, the Commission may revoke the act of a member state establishing exclusion from national treatment.
The Treaty does not apply to procurement where information is a state secret and procurement carried out by the national banks of member states.
The Treaty contains obligations of the parties with respect to intellectual property («IP»). Most rules in this area are declarative provisions that the parties will cooperate in the area of protection and enforcement of IP through their state authorities. The Treaty and annexes to it also list the principles of protection of various IP items.
We note, however, that the Treaty provides for a number of initiatives that can be considered a significant development of regional protection and security of IP items. However, they cannot be considered new provisions for the Union. Those initiatives have already been implemented by Russia, Belarus and Kazakhstan within the CU. They include:
- a single system of registration for trademarks and appellations of origin which will operate in the territory of all member states of the Union;
- a single customs register of IP (a technical measure restricting the entry of goods into the market before the issue of violation of IP rights is clarified).
It is worth noting that the Treaty provides for national treatment of protection and security of IP for entities of member states in the territory of the Union.
We believe that in furtherance of the Treaty relevant rules will be adopted that will describe in detail how the single system of registration for trademarks and appellations of origin will operate and how the single customs registry will work.
The Parties will also have to solve a number of issues related to existing national systems of protection, for example, for trademarks. Will the existing registration of a trademark in at least one of the member states of the Union be the basis for denial of the registration of a single trademark of the Union? The Treaty does not address this issue.
Within the framework of the Treaty, member states will independently develop and implement their own national industrial policies and determine the ways, forms and directions of provision of industrial subsidies. Industrial subsidies mean financial assistance or any other form of maintenance of income or price for producers of industrial goods. Member states are to ensure the entry into force of an international treaty from 1 January 2017, which will determine the procedure for coordination with the Commission of subsidies and adoption by the Commission of the relevant decisions, including the procedure for conducting proceedings and the criteria for determining the permissibility of specific subsidies. No approval by the Commission of industrial subsidies will be required until 1 January 2017.
From the effective date of the Treaty (1 January 2015), the existing Agreement on the Legal Status of Migrant Workers and Members of Their Families of 19 November 2010 will cease to have effect, and in this regard the procedure for migrant workers' employment and related issues will be governed by the provisions of the Treaty which contains the relevant provisions.
The Treaty introduces the option of employing of labor of member states («Workers») not only on the basis of an employment contract but also on the basis of a civil contract for the performance of work (a service contract). Accordingly, all of the provisions (privileges, rights and obligations) regarding Workers will apply not only to persons working under an employment contract, but also to persons working under service agreements.
The concept of «the customer of work/services» has appeared, and means a legal entity or an individual who provides a Worker with work on the basis of a service contract executed with him/her, and upon the execution of such an agreement, such legal entity or individual will have the rights and obligations of an employer.
To enable Workers to work, documents confirming their education issued by educational organizations (educational establishments, organizations in the education sector) of member states will be recognized in the country of their employment without the need to carry out procedures for recognizing documents confirming education established by the country of employment. However, Workers of one member state applying for engagement in educational, legal, medical or pharmaceutical activity in another member state will have to undergo a recognition procedure for documents confirming their education established by the legislation of the state of employment and may be admitted, respectively, to educational, legal, medical or pharmaceutical activities in accordance with the laws of the state where they are employed.
The main provisions relating to labor activity by Workers remain unchanged, including: (i) exemption of Workers from the need to obtain work permits in the state of employment; (ii) the period of temporary stay (residence) of Workers and members of their families in the state where they are employed will be determined by the term of the employment contract (and, from the effective date of the Treaty, also by the term of the service contract); (iii) exemption of Workers and members of their families from the obligation of registration (recording) within 30 days from the date of entry; (iv) in the event of early termination of an employment contract or civil contract, after the expiry of 90 days from the date of entry to the state of employment, Workers have the right to enter into a new employment contract or service contract within 15 days after such termination without leaving the state where they were employed.