Ukraine loses over UAH 1 billion annually due to tax evasion on the illegal sale of Apple iPhones. Experts propose legislating to combat this situation. Our journalists decided to investigate the difference between a "white" smartphone and a "black" one and what needs to be done to ensure Ukrainians can purchase iPhones legally.
Apple devices, particularly iPhones, are becoming increasingly fashionable in Ukraine every year. Every self-respecting businessman, politician, or entertainer considers it their duty to own an iPhone, thereby emphasizing their status, which undoubtedly popularizes the brand in the country.
Ordinary Ukrainians aren't lagging behind their idols—they're trying to get an iPhone at any cost, but not everyone is willing to pay more than 20 hryvnias for a phone. That's the average price of the latest iPhone models.
As we know, demand creates supply. Thus, the iPhone, just like the iPhone, has recently appeared on the market, only at a much lower price.
We decided to find out how phones costing 20 hryvnias differ from similar ones several thousand rubles cheaper. After all, the internet is full of ads for "cheap iPhones," "inexpensive iPhones," "new iPhones for sale at a low price," as well as messages about various discounts, promotions, and so on.
As it turns out, the answer is quite simple and predictable: cheap iPhones are contraband. It might seem like there's nothing wrong with buying an illegal phone. In fact, an illegal iPhone isn't intended for use in Ukraine and may not function properly. The main problems are related to the so-called "fine-tuning" of phones for the specific equipment of certain mobile operators. If the phone operates permanently on other networks, certain aspects, such as the stability and quality of connection and data transfer, battery life, and so on, may suffer. This isn't to mention that different countries have different power grid specifications (current levels in the outlet), which can also create difficulties when purchasing illegal devices with chargers that aren't Ukrainian-made. Therefore, when buying an official iPhone, you can be sure you're getting a new, high-quality device.
The main benefit received by the user of a "white" iPhone is warranty support in Ukraine, which is provided in accordance with Apple's recommendations and policies.
It's worth noting that the purchase of "black" iPhones causes colossal losses to the Ukrainian state budget and the country's economy. After all, the price difference between a "white" and a "black" smartphone—several thousand hryvnias on a single device—is precisely the VAT that remains unpaid to the state budget.
According to an insider at a distribution network selling technology, approximately 600 new Apple smartphones were registered daily in 2015 across mobile operator networks operating in Ukraine, and only about 24% (approximately 140 units) of these were legally transported across the border. Considering that the majority of illegal sales are for the most expensive models, the share of illegal goods in revenue is close to 95%.
This is confirmed by data from GFK, which estimates that approximately 53 iPhones were sold in Ukraine in 2015, which is comparable to the official sales share estimated by market experts. We calculated that the state budget loses over UAH 1 billion annually from unpaid taxes on illegal iPhones and iPhones.
It's difficult to calculate the average price of a device, given the current black market share, but if we consider the cheapest model, the 6s, which officially retails for UAH 23999 as of April 5, 2016, we get the following for this model alone:
Turnover 2015: 23999 UAH x 600 tel./day x 365 days x 95% (share of smuggling) = 4,992,991,950 UAH
Unpaid taxes in 2015: UAH 4,992,991,950 - UAH 4,992,991,950 / 1,26 (VAT + import duty) = UAH 1,030,299,926
The State Fiscal Service of Ukraine (SFS) is aware of this problem. However, according to information provided in response to an official journalistic inquiry, there are very few instances of illegally imported phones being seized. Furthermore, the agency doesn't know how many illegal and legal iPhones are in use in Ukraine; such statistics are simply not kept.
"In 2015, the State Fiscal Service customs offices recorded 92 violations of customs regulations involving mobile phones (smartphones) crossing the customs border. 1353 phones with a total value of over UAH 8,9 million were seized. Of these, Apple-related violations accounted for 78% of the total number of smartphones seized in 2015," the State Fiscal Service press service said in an official statement.
In particular, it is noted that last year, 72 cases of violations involving the movement of 703 units of Apple smartphones worth a total of 6,5 million hryvnias across the border were recorded.
"Over the first two months of 2016, the State Fiscal Service customs office recorded 15 violations of customs regulations regarding the movement of mobile phones (smartphones) across the Ukrainian customs border. Sixty-seven phones with a total value of over UAH 0,9 million were seized," the State Fiscal Service added.
The press service clarified that among these violations, 15 violations were recorded for the transportation of 67 iPhones worth a total of 0,9 million UAH.
While researching the issue of illegal iPhones flooding the market, we learned that they enter Ukraine in two ways: through illegal movement across the border by unscrupulous entrepreneurs (the black route), and through import by residents, primarily those living near the border, ostensibly for themselves (the gray route).
It turns out that in order to import a batch of iPhones illegally, you only need to pay about $15 per phone at the border.
"Smuggling into Ukraine must be stopped. It traditionally occurs in three ways: air smuggling, transport smuggling, and smuggling disguised as legal imports, where a private entrepreneur living on the border might bring in 50 kg of some cargo, making 20, 30, or 50 trips a day and then bringing it in. The challenge here is to combat smuggling. It's impossible to combat smuggling 100%, but it can be stopped as soon as it becomes unprofitable for those who control it. And it's controlled by law enforcement agencies, the SBU, the prosecutor's office, local potentates—everyone, that's no secret. As soon as the 'sword of punishment' appears, one that truly punishes and refuses to accept financial, material, or any other form of gratitude, anything less than punishment, everything will change," emphasized Boryslav Bereza, a member of the Verkhovna Rada Committee on Preventing and Combating Corruption.
According to the MP, smugglers must be held criminally liable.
"This is a common criminal offense. It needs to be stopped, because the fight against smuggling is enshrined in our Criminal Code. But you see, no one is fighting it yet. On the contrary, every 'Lancelot' who sets out to fight corruption somehow turns into a Dragon and becomes part of the system," he noted, answering the question of whether it's possible to combat illegal import schemes legislatively.
Moreover, according to the lawyer, the smuggling of smartphones into Ukraine is possible due to a number of legal loopholes. "One of the problems is the delivery of phones, so to speak, 'in hand' (in bags), illegally crossing the border. Since there is no procedure for checking phones that connect to the network, this is possible," said Dmitry Kolesnik, a lawyer and partner at the law firm Lexman.
It's worth noting that illegal sellers of iPhones, like any other technology, rely primarily on so-called price comparison sites or price aggregators. The latter are only concerned with making a quick buck and therefore don't verify the legality of the products they list on their websites. Unfortunately, law enforcement agencies are reluctant to investigate such sites, even though they are the easiest way to track down contraband sold through online stores.
In turn, Mykhailo Golovko, a member of the Verkhovna Rada Committee on Customs and Tax Policy and MP, emphasized that iPhones should be confiscated from entrepreneurs who cannot prove their origin, and that such sellers should be fined and prosecuted. "There are sufficient legislative powers for this," he said, adding that this requires regular inspections of entrepreneurs for illegal goods.
He added that at the moment 50-60% of the Ukrainian economy is in the shadows.
It's worth noting that Asbis and EPC are officially authorized to import Apple devices into Ukraine, and they, in turn, can grant this right to other businesses. These companies hold official documents for the Apple brand at Ukrainian customs. The website of one of the official importers lists stores that sell legal, "white" iPhones intended for use in our country.
The only real liability that retail chains can bear is when, through cooperation with regulatory authorities (tax, customs, the Security Service of Ukraine, and the Ministry of Internal Affairs), it is proven that the "black" iPhones were imported into the country illegally and in violation of customs and tax regulations.
"Due to the establishment of these facts (the sale of illegal goods – ed.), retail chains face the confiscation of illegally imported property, the imposition and collection of fines, and possible administrative and criminal liability (for tax evasion)," said Dmitry Kolesnik, a lawyer and partner at the Lexman law firm.
At the same time, according to his data, retail chains exploit all sorts of flaws and loopholes in legislation to avoid such consequences, and sometimes use the protection services of regulatory authorities.
"Therefore, our country still needs to improve the rules governing the import of goods into Ukraine, including phones. Companies that own the brand have every right to defend their rights in court for violations of their rights by sellers of 'gray iPhones' and to demand full compensation for damages and moral harm from the violators," Mr. Kolesnik noted.
The "gray route" for transporting electronics across the border is even simpler. Every day, a Ukrainian living near the border smuggles several phones through checkpoints, ostensibly for their own use, without paying any taxes. They then easily sell the "gray" phones through social media or online stores, which is illegal.
According to the lawyer, if law enforcement can prove that the iPhones were imported by private individuals for commercial purposes rather than personal use, they should be held accountable, including criminally. "Such individuals face confiscation of property imported in violation of customs rules and regulations, and they may also face administrative or criminal liability," Mr. Kolesnik said.
According to some members of parliament, the problem of "gray" smartphones can be solved by prohibiting individuals from importing large quantities of technology "for themselves."
"We need to amend the legislation so that you can import an iPhone or other electronics, for example, once a year, so it's clear that someone brought it for themselves, and not just the next day they're traveling abroad and carrying a whole bunch of phones," said Mikhail Golovko, a member of the Committee on Customs and Tax Policy.
Our journalists decided to conduct an experiment, and a mystery shopper purchased two illegal phones from different Moscow stores. She succeeded without difficulty. At first, the salespeople at one of the stores told her that the iPhone was only available for pre-order through the website or by phone, and that it would be delivered to the store where she was a few hours later that same day. However, after they saw the money, the phone immediately appeared "from under the counter." As the sales assistant explained, the iPhone she wanted was from someone else's order.
It's worth noting that we were given a "warranty" with the phone, without any information about the organization providing warranty service. The store calls it a "manufacturer's warranty," which is pure deception. However, according to the seller, if a problem occurs, the phone will be sent to the manufacturer via shipment to Europe (!!!) and will take at least 20 days to fix or replace the device. The issued warranty contains absolutely no details other than the website and phone number of the online store. In fact, it's difficult to file a claim under this document, and the seller thus absolves itself of any obligation to fulfill its warranty obligations under Section 4, Article 8 of the Law of Ukraine "On the Protection of Consumer Rights."
To inspect the purchased device, our mystery shopper contacted an authorized service center, where she was told that the iPhone was not intended for use in Ukraine, and that the company where it was purchased was not the seller of this product and had not imported it into Ukraine. Therefore, the authorized service center is not liable for warranty coverage due to the introduction of this product into circulation. Furthermore, the authorized service center noted that they do not have a warranty service agreement with the store where the iPhone was purchased for Apple smartphones, nor do they know the identity of the importer of the iPhone provided to them for inspection. This indicates that the iPhones at the store where our mystery shopper purchased her smartphone are being sold in violation of the law.
The second iPhone, purchased at a different Kyiv store, was only given a three-month warranty, which violates not only Apple's service policy but also Ukrainian law. The official warranty for smartphones cannot be less than six months, and for official Apple devices, it's 12 months.
We also decided to have this phone checked at an authorized service center. They confirmed that this device, too, was illegal. Specifically, the service center's official conclusion stated: "Based on the verification of product information, it was determined that the Company is not the seller of the specified product and did not import the specified unit into Ukraine. Therefore, it bears no warranty obligations in connection with the introduction of the specified product into circulation... the product provided for diagnostics is not intended for sale in Ukraine."
There are several criteria that indicate an iPhone is not intended for use in Ukraine. Specifically, all official iPhone part numbers are registered at customs and end with one of the following combinations: UA/A, RM/A, RK/A, Z/A, SU/A, or FS/A. These can be found on the box or in the memory of each device.
All "white" smartphones also come with an Asbis warranty card, which should look like this:
Another indicator of the legality of an Apple phone is the charging cord plug. It must be European-style.
If you purchased an iPhone and its package contents do not meet these requirements, you should consider whether it was legally imported into Ukraine.
"Current consumer protection legislation clearly regulates the seller's obligations to provide information about the products they sell. Article 15 of the Law of Ukraine "On the Protection of Consumer Rights" stipulates that the seller is obligated to provide the buyer with accurate, objective, and complete information about the product prior to purchase, enabling them to make an informed choice," commented lawyer Dmytro Kolesnik.
According to him, when providing information, sellers must assume that the buyer has no specialized knowledge about the product. This article of the law also regulates the rights and obligations of the consumer and seller in the event of a violation of information rights. Specifically, if, due to failure to provide or provision of inaccurate information, the consumer purchases a product that they would not have purchased had they had complete and accurate information about the product, they have the right to demand a refund from the seller and also to demand compensation for damages.
"Furthermore, failure to provide information carries a penalty of up to 30% of the value of a batch of goods received for sale that does not contain complete, reliable, and objective information. Accordingly, we recommend filing complaints directly with the seller. If legitimate consumer demands are ignored, there is every reason to file a complaint with consumer protection authorities, requesting an unscheduled inspection to verify compliance with Article 15 of the Law of Ukraine "On the Protection of Consumer Rights," the lawyer advised.
It's worth noting that the Association of Information Technology Enterprises in Ukraine stated that they were aware of the problem of illegal iPhone imports and even attempted to address it. However, the issue has stalled, pending the adoption of a relevant bill by the Ukrainian parliament.
"The problem of illegal iPhones certainly exists, and there are solutions—mandatory IMEI code registration, whereby official importers register phones in state databases maintained by the Ukrainian State Center of Radio Frequencies (USCR). Then, if the law requires operators to disconnect phones not registered in the database, there will be no incentive for individuals, or smugglers, to buy illegal phones," says Yuriy Perohanich, Director of the Association of Information Technology Enterprises in Ukraine.
According to him, the IMEI code registration mechanism does not preclude the possibility that a person who has imported one device will be able to conveniently register their phone online for free.
"This all requires political will from legislators—primarily from those factions currently forming the coalition. Such bills were drafted, but they didn't pass (they weren't adopted by the Verkhovna Rada—ed.). It's likely that someone at the highest level in the state benefits from this situation and the continued smuggling trade," he said. He noted that the proposals in the bills called for the gradual introduction of legislative changes.
According to the Association, not only Apple smartphones but also accessories are smuggled into Ukraine. "For example, I can say with certainty that all iWatches in Ukraine are illegal, with the exception of a few purchased in the US by someone who bought them for themselves," the Association's director stated.
It's worth noting that we contacted the press service of the Ukrainian State Center of Radio Frequencies (USCR), who informed us that they do not keep track of the number of iPhones registered in Ukraine.
Ukraine's budget lost over 1 billion hryvnias in 2015. The sale of Apple devices, and iPhones in particular, has been an industry for several years in which illegal activity far outweighs legal activity. Is such a situation possible in a country striving to join Europe? In major cities, contraband goods not intended for sale in Ukraine are sold on central streets. Price platforms are expanding their sales throughout the country. It's difficult to say how long this will continue. After all, to stop this lawlessness, only one thing is needed: the will of those responsible for overseeing customs, taxes, and consumer protection. The situation can change dramatically in 1-2 months. All that's left is the will.
Yuriy Kalyukh, Antikor
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