Localization

On December 16, 2021, the Verkhovna Rada of Ukraine adopted the Law of Ukraine "On Amendments to the Law of Ukraine "On Public Procurement" regarding the creation of prerequisites for the sustainable development and modernization of domestic industry" (read). According to the final provisions, this Law enters into force six months after its publication, which took place on January 14, 2022. Thus, the regulations on the level of localization of production started working on July 14, 2022.

This article explains what the level of localization of goods production is, what the purchasing community can expect in the near future, and how goods manufacturers should act.

What Is the Level of Localization of Goods Production?

According to Clause 29-1 of Part 1 of Art. 1 of the Law of Ukraine "On Public Procurement" as amended on 14.07.2022 (hereinafter referred to as the Law), the level of localization of production is an indicator of the local component in the specific weight of the cost of raw materials, materials, units, aggregates, parts, and components of products, works, services and other components of domestic production in the cost price of the goods that are the subject of purchase.

According to Clause 6-1 of the Final and Transitional Provisions of the Law, customers purchase goods for an amount equal to or exceeding UAH 200,000, taking into account the fact that in 2022 the level of localization of goods production must be equal to or exceed 10%.

At the same time, it should be noted that every year the percentage of the level of localization will increase by 5 units, up to and including 2028, until it reaches the mark of 40%.

What Goods Are Subject to the Rule on the Level of Localization?

The new changes also establish a non-exhaustive list of goods that will be subject to the localization regulations from July 14, 2022. The list of such goods is defined in paragraphs 2 clause 6-1 of Chapter X of the Law. Currently, it includes various generator sets, transformers and capacitors; vehicles for transporting passengers or goods; fire, utility and repair equipment and vehicles; trailers and semi-trailers; locomotives and wagons; trolleybuses and trams; helicopters and airplanes; engines, motors and turbines; pumps and compressors; mining and construction equipment – about 100 items in total.

Localization

At the same time, the Cabinet of Ministers of Ukraine, in agreement with the committee of the Verkhovna Rada of Ukraine, which deals with the issues of industrial policy and the development of certain branches of production, may approve an additional list of goods that belong exclusively to the products of the processing industry.

Thus, as of July 13, 2022, the Law defined a clear list of goods to which localization regulations will begin to apply as of July 14, 2022. However, it should be understood that the government may expand such a list in the future by adopting relevant regulatory documents.

We also draw your attention to the fact that if the customer plans to purchase works or services and if the performance of such works or provision of services involves the customer acquiring goods for which requirements regarding the level of localization have been established, the procurement procedures for such works or services are carried out taking into account the norms on the level localization.

Who Determines the Level of Localization of Production?

The level of localization of production is determined independently by the manufacturer of the goods, which is the subject of procurement, and is confirmed by the Ministry of Economy of Ukraine (hereinafter referred to as the Ministry of Economy) in accordance with the procedure established by the Cabinet of Ministers of Ukraine. The relevant order was developed by the government and regulated by the Resolution of the CMU dated August 2, 2022 No. 861 "On approval of procedures for confirming the level of localization of production of goods and monitoring compliance with the requirements regarding the level of localization of production of procurement items included in the list of goods that are the subject of procurement, with by the confirmed level of localization of production".

It is assumed that the manufacturer of the product must determine what share of costs in the cost price of the product falls on the local component. When calculating the level of localization, the manufacturer must apply the formula provided by the Law on localization of production. It takes into account the cost of the product, the customs value of raw materials, materials, units, aggregates, parts, etc., imported into the customs territory of Ukraine by the manufacturer for the production of this product, or the cost of imported raw materials, materials, units, aggregates, parts, etc., purchased for the production of the product, which is the subject of purchase, from the supplier – a resident of Ukraine, excluding value added tax. In this way, it is established what percentage of the product's cost price is of Ukrainian and not foreign origin.

In addition, in accordance with the innovations, the Ministry of Economy forms and maintains a list of goods that are the subject of procurement with a confirmed level of localization of production, which is published on its official website.

Thus, information on goods and manufacturers that have confirmed compliance with the level of localization will be displayed in the corresponding list (register), which will be published on the website of the Ministry of Economy and in parallel on the Prozorro web portal.

What Should Be Done by the Manufacturers Whose Goods Are Subject to Regulations on the Level of Localization?

In the near future, the Ministry of Economy will create the necessary profiles for goods. After that, the manufacturers of goods subject to the rule on the level of localization must take the following steps on SmartTender.biz:

1. Register or log in to the site as a "Supplier" (registration instructions).
2. Pass the qualification, which, according to its algorithm, resembles the qualification process for Prozorro Market.
3. Add their product to the list of localized products in the relevant profiles created by the Ministry of Economy.

For details on the process of qualifying manufacturers and adding products, read our localization instructions.

Once qualified, a manufacturer's application card will be created on the manufacturer's registry page. Thus, each manufacturer will have their page on which they can create products.

The product is added from the SmartTender.biz site by filling out an electronic form and uploading documents. It is not possible to edit a product from the List, in case of changing product data, the manufacturer must create a new application. Applying the QES is mandatory for the creation of the product.

The manufacturer confirms the compliance of the product with the following requirements:

- compliance with the criteria specified in Clause 6-1 of Chapter X "Final and Transitional Provisions" of the Law of Ukraine "On Public Procurement";
- available design and technological documentation and/or registered intellectual property rights for goods reflected in the balance sheet;
- one of the elements of the product is produced on the territory of Ukraine, namely assemblies, assemblies, parts and components and/or such assemblies, parts and components manufactured on the territory of Ukraine are used;
- warranty and post-warranty service is provided.

Also, the manufacturer indicates the following data about the product:

1. Application for inclusion in the list of goods with a confirmed level of localization
2. Name of goods
3. Technological operations carried out on the territory of Ukraine
4. СЛ, % level of localization
5. C, UAH cost price of goods
6. МВ, UAH customs value of components imported to Ukraine by the manufacturer for the production of goods
7. ІВ, UAH value of imported components purchased separately and/or as part of the product by the manufacturer for the production of machinery and equipment from a supplier who is a resident of Ukraine, excluding value added tax
8. Calculation of the cost price of the product with an indication of the customs value of imported components (imported by the manufacturer and/or purchased from suppliers who are residents of Ukraine):

- - raw materials, components, purchased semi-finished products;
  - fuel and energy and technology targets;
  - basic and additional wages;
  - calculation of a single contribution;
  - equipment maintenance and operation costs (including depreciation);
  - general expenses;
  - production cost;
  - administrative expenses;
  - selling expenses;
  - other operating expenses;
  - full cost (C).

We emphasize that it is necessary for manufacturers of goods to register and add relevant goods. Therefore, if you are a dealer, distributor, manufacturer's representative, etc. in public procurement and offer a product that is subject to the regulations on the level of localization, then you need to contact your manufacturer and warn them about the need to go through the appropriate registration procedure and add products, so that state customers would have the opportunity to purchase such goods in the future.

What Should the Customers Know?

The customer does not have the tools to determine the real level of localization of the production of a specific product. According to the Law, the customer must rely on the value of the level of localization, confirmed by the Ministry of Economy, provided by the manufacturer.

Taking into account the innovation, when purchasing goods that are subject to the regulations regarding the level of localization, customers must take into account the regulations regarding the localization of goods in their tender documents/announcements, etc., in order to have a legal basis for rejecting the offers of such participants in the future.

We emphasize that for customers who purchase goods subject to localization regulations for an amount equal to or exceeding 200,000 hryvnias, compliance with the new localization requirements is an imperative that must be strictly followed. At the same time, there is no difference whether the customer conducts open tenders or buys based on the results of the negotiation procedure, because the norm applies to all purchases in general.

Follow the news so you don't miss important things about localization! Take care of yourself!