BDO in Ukraine highlights the main aspects of the updated Free Trade Agreement between Canada and Ukraine – modernised CUFTA

12/ 04/ 2024

On March 19, 2024, the Senate of Canada approved in the third reading and as a whole the updated Free Trade Agreement with Ukraine (hereinafter CUFTA, or the Agreement) submitted by the government. For the CUFTA to enter into force, its ratification by the Verkhovna Rada of Ukraine is required. The Agreement provides for the liberalization of the services market according to the negative list meaning that everything is allowed unless reservations provided for by the Agreement. Under the Agreement, employees of Ukrainian companies who will provide services in Canada will be able to enter the country temporarily under the simplified and extended conditions. The updated document expands trade opportunities between Ukraine and Canada whereby cumulation of origin for tax-free goods exported to Canada is provided. This means that for Ukrainian goods it will be possible to use components from partners under the Joint Free Trade Agreement (member-states of the European Free Trade Association, member-states of the European Union, Israel, the United Kingdom of Great Britain and Northern Ireland), which will expand the involvement of Ukraine in global supply chains. The Agreement includes the most-favored treatment, providing services or service providers of the other Party with a treatment no less favorable than that provided under similar circumstances to services or service providers from all the member-states of the Agreement. Also, the Agreement includes a national regime that provides services or service providers of the other Party with a treatment no less favorable than that provided under similar circumstances to its own services and service providers. According to the Agreement, the parties shall not limit access to the services market by setting a limit on the number of suppliers, the total cost of transactions, the total number of operations related to services, neither set other restrictions. If the parties apply certain formal requirements (such as licensing, certification, certain qualification requirements), they are subject to a non-discriminatory basis. The updated Agreement summarizes the electronic trade conditions. In particular, the parties cannot deny the legal validity of the transaction/contract solely due to their electronic form. Furthermore, regulatory transactions/contracts should not be overly regulated. The parties should encourage the use of electronic authentication and electronic signatures, which should have effect in relations, courts, and various administrative bodies. Also, the updated Agreement prohibits tax obligations on a digital product. Below is a brief comparative analysis of the 2017 and 2023 CUFTA by sections: Expanding the market access 2017: In general, tariffs were abolished for a wide range of goods, opening up trade significantly. 2023: Further expanded market access for agricultural products, with a focus on goods, e.g. pork, to eliminate duties. According to the Annex 2-B, the tariff on goods within groups 1-97 of the Harmonized System, which include tariffs at the rate of the most favored nation regime and are not included in the Schedule of the relevant Party, will be completely abolished starting from January 1, 2024; tariffs on goods originating from the relevant Party, specified in the transitional categories in the Schedule of the Party, are reduced; goods originating from the relevant Party, in the total amount of 20,000 metric tons, included in the items marked “Tariff rate quotas for pork (TRQ Pork)” in the Schedule of Ukraine, are exempt from customs tariffs; customs tariffs on goods originating from the relevant Party, marked “Tariff rate quotas for Pork (TRQ Pork)”, in total amounts exceeding 20,000 metric tons, shall be established at a rate not higher than the basic tariff rate determined for such an item in the Schedule of Ukraine. Improvements in the services sector 2017: Limited liberalization of the services sector, focused on key areas. 2023: Significantly expanded scope of the services’ liberalization, including important sectors such as telecommunications, e-commerce and financial services, providing a stable and predictable environment for service providers. In particular, the Parties to the Agreement are prohibited from setting limits on the number of service providers, the total number and value of operations or assets for the provision of services, the total number of individuals who may be employed in a particular service sector/by a particular service provider, and who are required to provide/related directly to a particular service. Protection of investments 2017: Basic investment protection is provided, ensuring non-discriminatory treatment of investors. 2023: A comprehensive investment chapter that significantly strengthens the level of investor protection is introduced, including detailed provisions on direct and indirect alienation, and a clear dispute resolution mechanism has been established. For example, to settle a dispute between an investor and the state, an investor Party can file a lawsuit alleging breach of investment protection obligations by the other Party. In the event of an investment dispute under this Agreement, the investor Party shall attempt to resolve the dispute through consultation, which may use optional third-party procedures, such as bona fides, reconciliation, or mediation. If the dispute is not resolved through consultations, the Party’s investor may file a claim (lawsuit) to arbitration. The Agreement also establishes the parties’ consent to arbitration and an arbitrator’s code of conduct for settling disputes between the investor and the state. Labor and environmental standards 2017: Contained commitments to comply with labor and environmental standards, but without strong enforcement mechanisms. 2023: Demanding obligations are introduced that encourage parties to adhere to higher standards of labor rights and environmental protection. The Parties to the Agreement accept to ensure such principles in the field of labor as: freedom of associations and effective recognition of the right to collective bargaining; elimination of all forms of forced or compulsory labor; effective abolition of child labor and prohibition of the worst forms of child labor; elimination of discrimination regarding employment and occupation; safe and healthy working environment; acceptable minimum employment standards, such as minimum wages, working hours and overtime pay for the employees, including those not covered by collective agreements; non-discrimination in terms of working conditions for migrants. The Agreement also stipulates the obligations of the parties to cooperate on continuing domestic and global efforts to limit the increase in global temperature to 1.5 degrees Celsius above the industrial level, and transition to zero greenhouse gas emissions by 2050; protection of the ozone layer; protection of the marine environment from ship pollution; improvement of air quality and control of air pollutants; rational management of chemical substances throughout their life cycle in order to strengthen the protection of health and the environment; taking measures to prevent and reduce plastic and waste pollution, etc. Intellectual property rights 2017: Established a basic framework that meets international IP standards. 2023: Significantly strengthened protection of intellectual property rights, improved enforcement mechanisms aligned with the highest international standards. The protection of geographical indications is included for wines and spirits originating from the territory of the other Party in each of the parties; criminal procedures for the Parties to be applied in cases of deliberate counterfeiting of a trademark or piracy of copyright on a commercial scale, unauthorized copying of a cinematographic work or any part thereof from a performance in a cinema, infringement of copyright or related rights over the Internet and other digital networks, etc. Digital trade 2017: Digital trade is barely mentioned. 2023: A comprehensive chapter on digital trade has been introduced, reflecting the modern realities of trade and ensuring the free flow of data across borders. Thus, the Agreement provides mutual obligations for the Parties regarding access to the Internet; recognition of electronic transactions and signatures; protection of consumer rights and personal data of digital trade users; measures to limit unwanted commercial electronic messages; unlimited cross-border transfer of information by electronic means; no customs duties on digital goods transmitted electronically. Government procurement 2017: Limited access to each country’s public procurement markets was granted. 2023: The access is expanded significantly, allowing each country’s businesses to fully participate in other country’s public procurement processes. It is stipulated that each Party shall ensure that criminal, civil or administrative measures are in place to fight corruption, fraud, and other wrongdoing in the course of its public procurement; provides an easy access to information on how to participate in public procurement; defined access schedules to the Parties’ markets. Regulations of origin 2017: Traditional regulations of origin were established, which were quite complex and administratively burdensome. 2023: Simplified rules reduced administrative burden and costs for businesses. Products originating from Ukraine being imported to Canada, and products originating from Canada being imported to Ukraine, are subject to the preferential tariff regime of this Agreement based on the declaration of origin provided in the invoice or any other commercial document describing the original product. In doing so, for goods originating from Ukraine the components from partners under the Joint Free Trade Agreement can be used. Settlement of disputes 2017: A basic trade dispute settlement mechanism was added. 2023: Dispute settlement process is revised radically, making it more efficient. To settle a dispute, a Party may request written consultations with the other Party and may at any time decide to use an alternative dispute resolution method, such as bona fides, reconciliation, or mediation. If the issue is not resolved, the complaining Party may refer the case to the Dispute Settlement Commission. Agricultural trade 2017: Contained quotas and safeguards for sensitive agricultural sectors. 2023: Enhanced measures provide improved market access and adjust quotas. Technical barriers to trade (TBT) and Sanitary and Phytosanitary Measures (SPS) 2017: Standard measures for solving TBT and SPS issues were established. 2023: Cooperation and commitment to reduce these barriers are increased, including the adoption of enhanced risk estimates and mutual recognition of standards. It is ensured that the Parties shall make efforts to strengthen their cooperation in the field of standards, technical regulations, accreditation, conformity assessment procedures and metrology in order to facilitate trade between the Parties. Each Party uses relevant international standards, guidelines, and recommendations as the basis for its technical regulations and conformity assessment procedures. Facilitation of trade 2017: Focus on basic measures to facilitate trade between the two countries. 2023: More detailed provisions are introduced to simplify customs procedures, the use of electronic documentation and encourage of mutual recognition of standards. In particular, the Agreement ensures the simplification and automation of customs procedures, the publication in electronic form of legislation, court decisions and administrative policies related to import or export requirements by the parties. Gender and trade 2017: No specific provisions on gender issues were included. 2023: A separate section on gender and trade is included to provide equal opportunities for different groups of women and men to participate in business, industry and the labor market. The Agreement establishes a Committee on Trade and Gender Issues, which includes representatives from each Party, including the experts on gender equality. Small and medium enterprises (SME’s) 2017: SME’s were mentioned, but with limited provisions specifically designed to facilitate their participation in trade. 2023: Special attention to SME’s, recognition of their critical role in both economies and introduction of specific provisions to support them, including simplification of customs procedures and provision of technical assistance. According to the Agreement, the Parties shall establish the SME Committee, consisting of representatives from each Party, which shall determine ways of assisting each Party’s SMEs in using commercial opportunities under this Agreement, and exchange and discuss experiences and best practices in supporting and assisting SME exporters. The updated CUFTA proposals create more opportunities for the development of trade relations between Ukraine and Canada. The team of BDO in Ukraine is ready to provide additional consultations to companies whose goal is to work with the Canadian market. Please feel free to contact us for consultations and expand the markets of your activity.

The Agreement provides for the liberalization of the services market according to the negative list meaning that everything is allowed unless reservations provided for by the Agreement.

Under the Agreement, employees of Ukrainian companies who will provide services in Canada will be able to enter the country temporarily under the simplified and extended conditions.

The updated document expands trade opportunities between Ukraine and Canada whereby cumulation of origin for tax-free goods exported to Canada is provided. This means that for Ukrainian goods it will be possible to use components from partners under the Joint Free Trade Agreement (member-states of the European Free Trade Association, member-states of the European Union, Israel, the United Kingdom of Great Britain and Northern Ireland), which will expand the involvement of Ukraine in global supply chains.

The Agreement includes the most-favored treatment, providing services or service providers of the other Party with a treatment no less favorable than that provided under similar circumstances to services or service providers from all the member-states of the Agreement.

Also, the Agreement includes a national regime that provides services or service providers of the other Party with a treatment no less favorable than that provided under similar circumstances to its own services and service providers.

According to the Agreement, the parties shall not limit access to the services market by setting a limit on the number of suppliers, the total cost of transactions, the total number of operations related to services, neither set other restrictions.

If the parties apply certain formal requirements (such as licensing, certification, certain qualification requirements), they are subject to a non-discriminatory basis.

The updated Agreement summarizes the electronic trade conditions. In particular, the parties cannot deny the legal validity of the transaction/contract solely due to their electronic form. Furthermore, regulatory transactions/contracts should not be overly regulated.

The parties should encourage the use of electronic authentication and electronic signatures, which should have effect in relations, courts, and various administrative bodies. Also, the updated Agreement prohibits tax obligations on a digital product.

Below is a brief comparative analysis of the 2017 and 2023 CUFTA by sections:

Expanding the market access

2017: In general, tariffs were abolished for a wide range of goods, opening up trade significantly.
2023: Further expanded market access for agricultural products, with a focus on goods, e.g. pork, to eliminate duties.

According to the Annex 2-B, the tariff on goods within groups 1-97 of the Harmonized System, which include tariffs at the rate of the most favored nation regime and are not included in the Schedule of the relevant Party, will be completely abolished starting from January 1, 2024; tariffs on goods originating from the relevant Party, specified in the transitional categories in the Schedule of the Party, are reduced; goods originating from the relevant Party, in the total amount of 20,000 metric tons, included in the items marked “Tariff rate quotas for pork (TRQ Pork)” in the Schedule of Ukraine, are exempt from customs tariffs; customs tariffs on goods originating from the relevant Party, marked “Tariff rate quotas for Pork (TRQ Pork)”, in total amounts exceeding 20,000 metric tons, shall be established at a rate not higher than the basic tariff rate determined for such an item in the Schedule of Ukraine.

Improvements in the services sector

2017: Limited liberalization of the services sector, focused on key areas.
2023: Significantly expanded scope of the services’ liberalization, including important sectors such as telecommunications, e-commerce and financial services, providing a stable and predictable environment for service providers.

In particular, the Parties to the Agreement are prohibited from setting limits on the number of service providers, the total number and value of operations or assets for the provision of services, the total number of individuals who may be employed in a particular service sector/by a particular service provider, and who are required to provide/related directly to a particular service.

Protection of investments

2017: Basic investment protection is provided, ensuring non-discriminatory treatment of investors.
2023: A comprehensive investment chapter that significantly strengthens the level of investor protection is introduced, including detailed provisions on direct and indirect alienation, and a clear dispute resolution mechanism has been established.

For example, to settle a dispute between an investor and the state, an investor Party can file a lawsuit alleging breach of investment protection obligations by the other Party. In the event of an investment dispute under this Agreement, the investor Party shall attempt to resolve the dispute through consultation, which may use optional third-party procedures, such as bona fides, reconciliation, or mediation. If the dispute is not resolved through consultations, the Party’s investor may file a claim (lawsuit) to arbitration. The Agreement also establishes the parties’ consent to arbitration and an arbitrator’s code of conduct for settling disputes between the investor and the state.

Labor and environmental standards

2017: Contained commitments to comply with labor and environmental standards, but without strong enforcement mechanisms.
2023: Demanding obligations are introduced that encourage parties to adhere to higher standards of labor rights and environmental protection.

The Parties to the Agreement accept to ensure such principles in the field of labor as: freedom of associations and effective recognition of the right to collective bargaining; elimination of all forms of forced or compulsory labor; effective abolition of child labor and prohibition of the worst forms of child labor; elimination of discrimination regarding employment and occupation; safe and healthy working environment; acceptable minimum employment standards, such as minimum wages, working hours and overtime pay for the employees, including those not covered by collective agreements; non-discrimination in terms of working conditions for migrants.

The Agreement also stipulates the obligations of the parties to cooperate on continuing domestic and global efforts to limit the increase in global temperature to 1.5 degrees Celsius above the industrial level, and transition to zero greenhouse gas emissions by 2050; protection of the ozone layer; protection of the marine environment from ship pollution; improvement of air quality and control of air pollutants; rational management of chemical substances throughout their life cycle in order to strengthen the protection of health and the environment; taking measures to prevent and reduce plastic and waste pollution, etc.

Intellectual property rights

2017: Established a basic framework that meets international IP standards.
2023: Significantly strengthened protection of intellectual property rights, improved enforcement mechanisms aligned with the highest international standards.

The protection of geographical indications is included for wines and spirits originating from the territory of the other Party in each of the parties; criminal procedures for the Parties to be applied in cases of deliberate counterfeiting of a trademark or piracy of copyright on a commercial scale, unauthorized copying of a cinematographic work or any part thereof from a performance in a cinema, infringement of copyright or related rights over the Internet and other digital networks, etc.

Digital trade

2017: Digital trade is barely mentioned.
2023: A comprehensive chapter on digital trade has been introduced, reflecting the modern realities of trade and ensuring the free flow of data across borders.

Thus, the Agreement provides mutual obligations for the Parties regarding access to the Internet; recognition of electronic transactions and signatures; protection of consumer rights and personal data of digital trade users; measures to limit unwanted commercial electronic messages; unlimited cross-border transfer of information by electronic means; no customs duties on digital goods transmitted electronically.

Government procurement

2017: Limited access to each country’s public procurement markets was granted.
2023: The access is expanded significantly, allowing each country’s businesses to fully participate in other country’s public procurement processes.

It is stipulated that each Party shall ensure that criminal, civil or administrative measures are in place to fight corruption, fraud, and other wrongdoing in the course of its public procurement; provides an easy access to information on how to participate in public procurement; defined access schedules to the Parties’ markets.

Regulations of origin

2017: Traditional regulations of origin were established, which were quite complex and administratively burdensome.
2023: Simplified rules reduced administrative burden and costs for businesses.

Products originating from Ukraine being imported to Canada, and products originating from Canada being imported to Ukraine, are subject to the preferential tariff regime of this Agreement based on the declaration of origin provided in the invoice or any other commercial document describing the original product. In doing so, for goods originating from Ukraine the components from partners under the Joint Free Trade Agreement can be used.

Settlement of disputes

2017: A basic trade dispute settlement mechanism was added.
2023: Dispute settlement process is revised radically, making it more efficient.

To settle a dispute, a Party may request written consultations with the other Party and may at any time decide to use an alternative dispute resolution method, such as bona fides, reconciliation, or mediation. If the issue is not resolved, the complaining Party may refer the case to the Dispute Settlement Commission.

Agricultural trade

2017: Contained quotas and safeguards for sensitive agricultural sectors.
2023: Enhanced measures provide improved market access and adjust quotas.

Technical barriers to trade (TBT) and Sanitary and Phytosanitary Measures (SPS)

2017: Standard measures for solving TBT and SPS issues were established.
2023: Cooperation and commitment to reduce these barriers are increased, including the adoption of enhanced risk estimates and mutual recognition of standards.

It is ensured that the Parties shall make efforts to strengthen their cooperation in the field of standards, technical regulations, accreditation, conformity assessment procedures and metrology in order to facilitate trade between the Parties. Each Party uses relevant international standards, guidelines, and recommendations as the basis for its technical regulations and conformity assessment procedures.

Facilitation of trade

2017: Focus on basic measures to facilitate trade between the two countries.
2023: More detailed provisions are introduced to simplify customs procedures, the use of electronic documentation and encourage of mutual recognition of standards.

In particular, the Agreement ensures the simplification and automation of customs procedures, the publication in electronic form of legislation, court decisions and administrative policies related to import or export requirements by the parties.

Gender and trade

2017: No specific provisions on gender issues were included.
2023: A separate section on gender and trade is included to provide equal opportunities for different groups of women and men to participate in business, industry and the labor market.

The Agreement establishes a Committee on Trade and Gender Issues, which includes representatives from each Party, including the experts on gender equality.

Small and medium enterprises (SME’s)

2017: SME’s were mentioned, but with limited provisions specifically designed to facilitate their participation in trade.
2023: Special attention to SME’s, recognition of their critical role in both economies and introduction of specific provisions to support them, including simplification of customs procedures and provision of technical assistance.

According to the Agreement, the Parties shall establish the SME Committee, consisting of representatives from each Party, which shall determine ways of assisting each Party’s SMEs in using commercial opportunities under this Agreement, and exchange and discuss experiences and best practices in supporting and assisting SME exporters.

The updated CUFTA proposals create more opportunities for the development of trade relations between Ukraine and Canada. The team of BDO in Ukraine is ready to provide additional consultations to companies whose goal is to work with the Canadian market. Please feel free to contact us for consultations and expand the markets of your activity.