Legal Issues in the Food Industry in Russia in 2013
- Service: Food industry
- Date: 08.02.2013
Derek Bloom, Partner of Capital Legal Services
This article summarizes the principal legal issues that food manufacturers, retailers and distributors in Russia are following at the beginning of 2013. These issues include: (1) Russia's accession to the WTO and related customs issues, (2) labeling issues, (3) packaging requirements, (4) antitrust regulatory issues, (5) intellectual property issues, (6) the Law on Trade, (7) price regulation, (8) quality compliance requirements, (9) tax planning for importing agricultural equipment and food production equipment, (10) tax incentives for production, (11) exemptions from tax, (12) GMO issues, (13) penalties for technical violations, (14) government strategy for development of the food industry, and (15) restrictions on advertisements.
1. Russia's accession to the WTO and related customs issues.
On August 22, 2012 Russia became the 156th member of the World Trade Organization (the “WTO”). Foreign companies that export agricultural and food products to Russia will benefit from Russia’s accession to the WTO in several ways.
Under Russia’s WTO Accession Protocol , Russia has agreed to cut the average import tariff from 13.2 % to 10.8 %, making imported goods cheaper for Russian customers. There is a lengthy transition period up to 2020 for reduced tariffs to come in effect completely. As some examples, the duty on pork imported within quota limits has been reduced to zero from the previous 15%, and the import duty on finished meat products is reduced to 20%, but not less than 0.4 Euros per kilo. Purebred breeding cattle may be imported duty-free, while other cattle will be subject to a 5% tariff. The tariff on live poultry will be limited to 5% rate.
The duty on imported butter is limited to 15%, but not less than 0.29 euro per kg against the previous 15%, but not less than 0.4 Euros. The import duty on many cheeses has been reduced. For example, the import duty for young cheese with a fat content of more than 40% has been decreased to 15%, but not less than 0.25 Euros per kilo. The duty on the import of cheeses such as Camembert and Brie has been reduced to 15%, but not less than 0.3 Euros per kilo from the previous 15%, but not less than 0.6 Euros per kilo. Russia will reduce the import duty on most spirits within three years from 2 Euros per liter to 1.5 Euros. There will also be significantly reduced the duties on mineral water, beer, wine, champagne and vermouth.
Further reductions will occur gradually. The Accession Protocol sets out a table of annually reduced import duties . Foreign companies considering the exportation of goods to Russia, should check with the table to make sure whether the rates for their products are expected to be reduced.
WTO membership requires Russia to abide by science-based sanitary and phyto-sanitary standards of the WTO. Measures to protect human or animal (sanitary) or plant (phytosanitary) life and health must be based on science, and risk assessments based on an appropriate assessment of the actual risk involved, and may not unjustifiably discriminate against imports. Governments are required to notify other countries of any proposed changes to SPS requirements which affect trade. Implementation of these standards should help address, for example, significant barriers to U.S. exports of agricultural goods, in particular meat and poultry, and facilitate US exporter’s access to the Russian market.
Notwithstanding, that Russia has joined the WTO, Russia has taken actions, that appear to the other WTO member to be inconsistent with its obligations under the Accession Protocol. The long-running international dispute over ractopamine, a drug used to boost growth and leanness in pork and beef production, has become even more contentious early in 2013. Russia, which is an increasingly important export market for U.S. meat products, announced that starting from February 11, 2013 it will require countries to certify that their meat is ractopamine-free, a comparable requirement as in the European Union. The import ban on ractopamine is blocking about $500 million in U.S. exports to Russia, and giving a short-term advantage at least to meat producing countries such as Brazil until the US expands its ractopamine-free program that is in place for meat headed to the European Union.
Russia also continues to desire to protect domestic producers of meat products and farm equipment. The import duty on farm equipment has been sharply raised to a level higher than it was before Russia's accession of the WTO. The Customs Union, including Kazakhstan and Belarus, announced a 27.5 percent duty on grain harvesters as an interim measure that will apply through July 5, 2013.
In addition to import duties, Russia's accession to the WTO has an impact on fees for customs operations. The fees for customs operations were reduced to 30 thousand rubles for goods, the customs value of which is more than 10 million rubles . Entering the WTO also had a positive effect on the Russian legislation regarding customs clearance. Customs charges are reduced by 25% when a declaration is filed electronically . Reduced customs charges follow WTO rules providing that the amount of customs charges may not exceed the approximate cost to customs authorities of undertaking the actions in relation to which a customs fee is charged.
2. Food labeling issues.
The regulation of food labeling in Russia changes dramatically in 2013 with implementation, as of July 1, 2013, of a new regulation of the Customs Union, which includes Kazakhstan and Belarus. The regulation provides a comprehensive set of regulations for food labeling, including requirements for the naming of products, disclosure of their ingredients, their manufacture dates, their shelf life and more. Food producers should examine the new regulation to remove any labeling defects that may arise after July 1st, 2013 due to continued use of old labels.
Detailed regulations apply to specific types of food products. Around 70 new State standards with respect to food products came into force in Russia in 2012 and these standards may affect labeling of certain product groups. In 2012, two new Stare standards were approved with relation to the food labeling, including labeling requirements for the special products, such as diabetic foods, and food additives. The new standards become effective as of July 1, 2013.
New requirements for the disclosure of information to consumers came into effect in Russia as of July 19, 2012. The new requirements specify that food labeling must set out an accurate description of a product, its country of production, information about the manufacturer, restrictions on use, safety instructions, guarantees, procedures for bringing a claim against a manufacturer. Information must be set out in understandable, clear language. The state standards are published on the website of the Federal Agency on Technical Regulating and Metrology: http://www.gost.ru/wps/portal/.
In order to prevent misinformation of consumers, two draft laws related to labeling of biologically active food supplements are presently under consideration by the State Duma . These draft laws would require labeling to emphasize that food supplements are not medications. This draft legislation has been pending in the Duma since 2011, and presently there is no indication that these proposals will be adopted earlier than the summer of 2013.
3. Packaging requirements.
The Eurasian Economic Community, including Russia, Belarus and Kazakhstan, has adopted Technical Regulations “On the safety of packaging”. . A compliance document (a Certificate or Declaration) issued according to these Technical Regulations will be valid in all three countries. Products certified according to country-specific requirements have to be labeled with the mark of Compliance of the country they have been certified for. Labeling of these products with the Eurasian Economic Community mark of Compliance is not allowed.
Products covered by Certificates or Declarations issued before July 1, 2012 will be allowed to circulate within the Eurasian Economic Community market until February 15, 2014 for packaging. According to the Technical Regulations “On safety of packaging” compliance of packaging must be established by a Declaration of Compliance .
4. Antitrust Regulatory Issues.
The Russian Federal Antimonopoly Service ("FAS") plays a number of important roles as a regulator of various aspects of business activities. Some of the FAS issues considered below are typical for all businesses operating through distribution networks, while others are inherent to food industry. It becomes evident that antitrust clearance of both business practices and agreements is essential for most companies operating in Russia, and the food industry is no exception.
Among the most common competition law violations that FAS is determined to repress are abuse of dominance, collusion and unfair competition. Amendments to the Federal Law “On Protection of Competition” are pending in early 2013 that would broaden the authority of the FAS to challenge abuse of a dominant position on a market.
Producing companies may have a dominant position if they have more than a fifty percent share of a particular market, but in certain cases a company could be found to dominate with a smaller share . If a manufacturer has a dominant position, it has to establish transparent rules for distribution of its product. A dominant manufacturer may not reject offers to purchase its products unless such rejection is made solely for economic or technological reasons. Conditions which a dominant producer applies in business relations with different partners must be equal, and discriminatory practices are prohibited.
To avoid being held in violation of the aforementioned rules, it is recommended that a company have an established commercial policy providing a framework for the company’s relations with existing and potential partners. In addition, a procedure exists whereby a company may submit its distribution agreement to the FAS for approval .
Market sharing, price-fixing and collective boycott are not allowed between competing entities, whether written or verbal . In the food industry, collusion among retailers is commonly encountered, and is considered highly detrimental to competition and is, currently, one of the main targets of FAS regulation. Usually the purpose of such collusion is to fix prices for a certain product, which is prohibited under Clause 1 of Article 11 of the Law “On Protection of Competition”. There have been a number of high-profile cases, such as collusion which led to the fixing of prices for flour and buckwheat in 2010, which led to fines being imposed. During 2012, the FAS imposed fines on cartels of meat producers and distributors , and infant food producers and distributors . Other high-profile cartel cases were initiated in 2012 involving fish sales.
In December 2012, a Code of best practices governing the relationship between retailers and suppliers (the “Code”) was finalized and approved by the FAS . The Code elaborates on the Law on Trade and is intended to help companies solve conflicts without governmental interference. The Code gives guidance about many aspects of the relationship between retail chains and their partners for negotiating amended terms and conditions, and conducting marketing campaigns. Time periods are set out for regulating disagreements over price changes. The Code has already been adopted by an association of retailers and several industry organizations representing the following suppliers among other: “Rusbrand”, “Rusprodsoyuz”, “Soyuzmoloko”, the Oils and Fats Union, the National Meat Association, and the Fish Union.
Unfair competition, as laid down in the Law “On Protection of Competition”, involves a range of issues, among which the food industry mostly encounters unauthorized use of intellectual property, and misrepresentation as to the qualities, quantities or origin of products. Regarding this latter issue it should be noted that FAS considers the slightest of inconsistencies in product’s marketing. For example, in a recent case, a dairy products company was fined for using the term ‘dairy butter’ on the product’s package, while, in fact, the product included vegetable oil as well.
The FAS also enforces the Law on Advertising which prohibits many types of activities that may apply to food products, such as claiming that a product has healing properties, unless it is advertised as a medical product , or indication that the product is approved by state or municipal authorities . According to Clause 1 of Article 36 of the Law on Advertising, the FAS is authorized to control the compliance with the Law on Advertising requirements, in particular, the absence of unfair competition in advertising of goods. For example, the advertising phrases such as “Best”, “Unique”, “№ 1”, which are quite commonly used, often lack specific criteria of comparison, and proof of such statements, which may mislead consumers as to the quality of advertised goods.
5. Intellectual Property Issues.
Two options that may be used to protect trademarks used in the food industry are administrative proceedings and court proceedings. Article 14 of the Antitrust Law states that the sale of goods is not allowed if a product involves illegal use of intellectual property, or the means of identifying a legal entity, products, works or services, such as by company names, commercial names, and trademarks.
“Unfair competition” is defined to include the fraudulent acquisition and use of exclusive rights to means of identification. Misleading consumers with regard to goods or their manufacturer is also prohibited. The latter provision allows manufacturers, even if they do not possess registered trademarks, to commence administrative proceedings against the use of similar names by competitors, if such actions may be shown to be unfair.
The power to protect rights to intellectual property that are violated through unfair competition is vested in the FAS. The FAS is authorized to investigate violations of the law on competition independently by means of its own inspections. However, in most instances, such cases alleging infringement on intellectual property rights are initiated by aggrieved individual or companies.
The FAS may issue specific instructions to rectify violations or to restore the state of affairs existing prior to a violation. The FAS may impose a fine in an amount from 100,000 to 500,000 rubles for legal entities or, in the event goods are introduced into a market unlawfully in violation of another party's intellectual property rights, in an amount from 0.01 percent to 0.15 percent of the infringer’s revenue from sales of the goods in question. The officials of a company found to be competing unfairly involving unauthorized usage of intellectual property may be fined for 20 000 rubles or disqualified for 3 years. The Russian Code on Administrative Offences allows penalizing both the legal entity and its officials in case of violations , as also confirmed by court practice .
The FAS used these powers, for example, and imposed fines on the Slavyanka Confectionary Plant, which was fined by FAS in an amount over 3.5 million rubles for using another company’s trademark on the packaging of a chocolate product.
Defendants may seek to reduce a fine by appealing a decision of the FAS to court. In the Slavyanka case, the amount of fine was reduced on appeal to approximately 700,000 rubles.
After obtaining a FAS decision recognizing the use of intellectual property rights as unfair competition, an applicant may file an objection against a trademark registered with Rospatent, the Russian patent authority. When examining the substance of objections to a registered trademark, Rospatent determines whether FAS has established the fact of a violation of law involving a fraudulent registration of a trademark. Rospatent is not authorized to disregard a decision by FAS.
As an example, Starbucks Corporation fought to defend its Starbucks trademark in Russia for almost four years. In particular, Starbucks Corporation initially filed its objection to the registration with Rospatent of a trademark for the name “Starbucks”. The registration of the trademark “Starbucks” by the Russian company was acknowledged as invalid by Rospatent based on the grounds that this registration could mislead consumers with regard to the manufacturer of goods. This position of Rospatent was upheld by the courts at the first and second levels of appeal.
In such cases, the aggrieved party must provide, as evidence, samples of goods of the infringer, and evidence of the fact that infringing goods were distributed on the Russian market, in advertising catalogs, and photographs of goods. Additionally, public opinion polls and expert opinions may be provided as evidence.
Practitioners are of the view that FAS acts more efficiently on behalf of aggrieved parties than the courts. Administrative procedures at FAS may require approximately four months, though this term may be extended to a year. According to the Arbitration Procedural Code of the Russian Federation, the consideration of a case in the court of first instance should take no more than three months. However, due to the large workload of courts, in practice, it often takes more time to receive a court decision.
6. The Law on Trade.
The Russian Trade Law establishes rules for the sale of food products, establishes rules for distributorship agreements and prohibits discrimination in business activity. The Trade Law limits the amount of bonuses payable by a supplier to a distributor to not more than 10 percent of the price of food products. A distributor may not deduct more than this amount as part of the cost of goods sold. The price of food products should not include the amount of such bonuses. In case a distributor provides bonuses in supply contracts which exceed 10 percent of the price of the food products, an administrative fine may be imposed, ranging from 20,000 to 40,000 rubles for company officers and from 1,000,000 to 5,000,000 rubles for legal entities .
It is prohibited to include in contracts for supply of food products any kinds of bonuses connected to the pricing of goods other than the ones linked with purchase by a distributor of a certain amount of goods. Bonuses which do not comply with this restriction cannot be deducted from a distributor’s taxable revenue. Furthermore, providing such restricted bonuses in contracts for supply of food products is subject to a fine in amount of 20,000 to 40,000 rubles for officials and/or in amount of 1,000,000 to 5,000,000 rubles for legal entities .
The Trade Law does not restrict the manner of payment of bonuses. Bonuses may be paid in monetary form, by transfers of cash to bank accounts, or as a set off, or as a prepayment, a reduction of debt, a discount on prices, or by the delivery of additional goods.
The Russian Government has set up a list of “socially important goods” (staple foods) with regard to which the payment of bonuses is prohibited. This list includes “socially important goods with regard to which maximum allowable retail price limits may be established”. This list includes beef (other than boneless meat), pork (excluding boneless meat), lamb (except for boneless meat), chicken (except chicken drumsticks), frozen fish, butter, sunflower oil, drinking milk, chicken eggs, sugar, salt, black tea, wheat flour, rye bread, rye-wheat bread and bakery products made of wheat flour, milled rice, millet, buckwheat, vermicelli, potatoes, cabbage, fresh onion, carrots and apples.
The Trade Law fixes the term for payment for shipments, starting from the date of supply: If the shelf life of a food product is less than 10 days, then payment is to be no later than 10 days later. If the shelf life of a food product is about 10-30 days inclusive, then payment is to be no later than 30 days. For food products with shelf life of over 30 days, and for alcohol products manufactured in Russia, payment is to be not later than 45 days later. Providing in supply contracts longer terms for payment of food products is subject to a fine in amount of 20,000 to 40,000 rubles for officials and/or in amount of 1,000,000 to 5,000,000 rubles for legal entities .
Trading networks should inform distributors of food products about the criteria for selecting distributors and conditions of a distributorship agreement through an Internet site or by providing information within 14 days upon request by a distributor. Such information should be provided free of charge. Failure to provide with such information is subject to a fine in amount of 20,000 to 40,000 rubles for officials and/or in amount of 300,000 to 500,000 rubles for legal entities .
The Trade Law prohibits a distributorship agreement for the supply of food products from requiring the buyer to provide services to promote the food products. Marketing, promotion and similar services are to be addressed in separate service agreements. Such expenditures may be recognized as expenses for corporate profit tax purposes only if such expenditures are made pursuant to a separate service agreement. Non-use of separate service agreements is subject to fine in amount of 20,000 to 40,000 rubles for officials and/or in amount of 1,000,000 to 5,000,000 rubles for legal entities .
A substantial part of the Trade Law is dedicated to antitrust regulation of the food retail sector. Retail chains and food product suppliers are forbidden to obstruct access to the market or to violate the procedures for establishing prices. Commission agreements in the wholesale trade of food products are forbidden. The following clauses are prohibited in distribution agreements:
- a restriction on the execution of agreements with third parties conducting similar activities, on similar or other conditions;
- liability for failure to supply food products on terms more favorable than the terms provided to third parties conducting similar activities;
- a demand for disclosure of information on transactions with third parties conducting similar activities on similar or other conditions;
- entrance fees for the right to deliver food products to a retailer’s sales facilities;
- listing fees for changing the assortment of food products;
- price discounts down to the level of the minimum sales prices established by other suppliers conducting similar activities;
- compensation of damages to the retailer in case of damage to goods after their delivery, except in the case of a supplier’s responsibility;
- compensation of expenditures unrelated to supply agreements or the subsequent sale of a particular consignment; and
- the return of goods to suppliers if the goods were not sold within a certain time period.
An interpretation with regard to the return of goods to a supplier has been published by the FAS. Where, according to Sanitary Regulations , certain products such as bread and flour must be returned to a supplier after their expiry date, the FAS ruled that including such provisions in a supply agreement does not violate antitrust legislation .
Retail chains are banned from acquiring or leasing premises in a certain region, municipal region or city district if, after such acquisition, the market share of the retail chain would exceed 25 percent. All transactions made in violation of this rule will be held null and void upon the request of any interested party, including the antitrust authorities.
7. Price Regulation.
The Federal Law on Trade allows the federal government to set maximum retail prices for “socially important goods” for up to 90 calendar days if there has been an increase in prices of thirty percent or more within thirty days.
A draft law “On Pricing Policy on the Food Market” is under consideration by the state Duma (the “Draft Pricing Law”). The Draft Pricing Law would establish a mechanism by which the government could regulate prices on the food market, in particular, with regard to agricultural products, raw materials and food. The Draft Pricing Law would regulate the amount of price mark-up in the cost of food products. According to the Draft Pricing Law the government may be granted the right to establish (i) a maximum ratio between food retail prices and related wholesale prices of agricultural products and raw materials, and (ii) guaranteed prices at which agricultural products and raw materials may be bought from agricultural producers.
The Draft Pricing Law provides that certain food products such as meat and meat products, milk and dairy products, vegetable oil, fish, seafood and fish products, bread and bakery products, and other products listed in Sub-Clause 1.2 of Article 164 of the Tax Code (the “Tax Code”) the price markup may not exceed 25 percent of the price at which the products were sold to the first wholesaler.
The Duma is considering draft amendments to the Federal Law on Trade that would allow governmental regulation of food prices for certain types of agricultural products, and socially important food products . The amendments would establish a maximum trade margin for refiners of 15 percent of the price of raw materials; in the wholesale trade of 10 percent of the price paid to manufacturers of food products; for retail organizations of 15 percent of producer prices for food products or wholesale prices; for public catering of 15 percent of the price of manufacturer or wholesale prices for food. The draft law would also prohibit obligatory provisions for the buy-back (return) of unsold food and goods that are not sold by their expiration date.
8. Quality Compliance Requirements.
New quality compliance requirements were introduced in 2012. Declarations of compliance may be registered in an electronic form . The party submitting a declaration of compliance is required to retain evidence of the product's compliance for ten years. Only legal entities or individual entrepreneurs registered in accordance with Russian legislation may file declarations, and only if they are manufacturers or sellers of the products in question, or are carrying out such functions for a foreign manufacturer. Documents establishing compliance and research protocols and test protocols from locations outside Russia can be accepted in accordance with certain treaties of the Russian Federation.
The manufacture and sale of defective products which diverge from their declared contents may constitute a criminal or administrative offence. Commencing in 2012, the sale of goods which do not conform to the required quality is subject to an administrative fines that increase if there are repeated violations, and non-conforming products may be seized. The manufacture and sale of defective products which diverge from their declared contents may also constitute a criminal or administrative offence.
There was a loosening up of requirements for certification of food safety in 2012. In January 2012 Rospotrebnadzor removed a requirement that producers obtain a certificate of quality and safety for food products. Although Trade rules require certificates of the quality and safety of food products, violation
of this requirement is not an administrative violation under the Russian Code of Administrative Offences.
A manufacturer may voluntarily can go through the procedure of certification its goods. The procedure would be the same as for a mandatory certification. Voluntary certification has become popular since it increases the perception of the reliability of the products among consumers.
9. Tax planning for Importing Agricultural.
Equipment and Food Production Equipment
When importing agricultural and food production equipment to Russia, there are several ways to document such transactions, each having different tax consequences. Generally, tax planning is connected with import VAT. Since July 2009, the import of equipment that has no analogues manufactured in Russia is not subject to VAT.
The import of equipment through customs, and the sale of the equipment are considered different actions for VAT purposes. If a import chain is not set up in an optimal manner, then there is a risk that a taxpayer will need to pay the 18 percent VAT normally due for imports and an additional 18 percent VAT on sale of the equipment within Russia.
It should be noted that, according to a general rule, only a Russian entity or individual may act as a “declarant” and to file a customs declaration to the Russian Customs Service. A foreign company is allowed to do so only in case it has a representative office in Russia and imports goods for the in-house needs of its representative office.
10. Tax Incentives for Production.
Important tax incentives for the food industry include a decreased corporate profit tax rate of 20 percent, as compared to 24 percent; an increased rates at which loan payments can be deducted for corporate profit tax purposes; an increase in allowable amortization amount of 30 percent, as compared to 10 percent; and an acceleration of VAT offset providing, for non-monetary forms of accounts, the monetary VAT payment is not compulsory.
There are also other special tax incentives in Russia which can be used by certain kinds of food manufacturers and distributors, mostly those operating in the agricultural sector, in planning their business in Russia, including a special Uniform Agricultural Tax allowing agricultural manufacturers to be exempt from the generally applicable corporate profit tax and VAT, with some exceptions. The Uniform Agricultural Tax may be used by taxpayers with at least 70 percent share of income derived from the sale of the agricultural goods they produce, or fish they breed.
Starting from January 1, 2008, and until December 31, 2014, agricultural producers which do not use the Uniform Agricultural Tax may use a lower corporate profit tax rate. The lower rate on corporate profit varies depending on the period when the tax is to be paid. For the years 2004 to 2012, the rate of 0 percent is applicable. For 2013 to 2015, the rate of 18 percent is established. Starting from 2016 such taxpayers shall pay profit tax at the generally applicable rate, which is today 20 percent.
In addition, if a food manufacturer buys equipment for technical re-equipment or for improving power consumption in a production process, it is entitled to receive an investment tax credit in the amount of up to 100 percent of the cost of such equipment. The investment tax credit is granted to a taxpayer if such taxpayer files an appropriate application with the appropriate documents attached and an agreement is concluded to this effect between a respective authority and the taxpayer.
10.2 10 percent VAT rate, or exemption.
For the producers of certain kinds of products, the Tax Code provides , instead of the general 18 percent VAT rate, provides a 10 percent VAT rate. The lower rate applies to the production of meat and meat products, milk and dairy products, margarine, sugar, spaghetti, pasta products, fish and seafood products, food products for children and diabetics, vegetables, and certain other products. Starting from January 01, 2013 leasing services connected with the transfer of pedigree cattle and poultry, with a lessee’s right to buy the livestock, is subject to 10 percent VAT, until January 1, 2018.
10.3 Justification of Sales Expenses.
The Russian tax service takes the view that a retailer, and not a wholesaler, should bear all expenses for merchandising activity aimed at deriving income. In general, the Russian courts uphold wholesalers' expenditures and wholesalers are able to deduct expenditures for merchandising for corporate profit tax purposes if such expenses are duly documented.
The tax authorities often allege a taxpayer’s expenditures on marketing services provided by an outside firm are not justified for corporate profit tax purposes if a taxpayer has its own in-house marketing staff. The tax authorities believe that in-house marketing staff must service the company’s purposes in their entirety, i.e. without the need for any other expenditure for marketing purposes.
Notwithstanding the position of the tax authorities, the courts typically uphold the deductibility of such expenditures. To justify such expenditures, a taxpayer should meet certain requirements:
- Document and demonstrate the commercial marketing goals that have been planned and achieved;
- Document and demonstrate the differences between commercial marketing functions and its own marketers' duties; and
- Document and demonstrate how the taxpayer has actually used the commercial marketing results for the performance of activity aimed at deriving income.
If such requirements are met, the courts typically hold that a taxpayer has justified its expenditures for commercial marketing services, even though it has its own marketers on staff. If a business experiences losses, the tax authorities assume that the taxpayer’s expenditures connected with such activity should not be deductible, being unjustified for corporate profit tax purposes. Generally, Russian courts nonetheless allow such deductions and the taxpayer is able to decrease the corporate profit tax base by the amount of such expenditures in spite of the overall losses. In all these cases the taxpayers must carefully document such expenses.
11. Exemptions from Tax.
Agricultural manufacturers enjoy certain tax incentives such as an exemption from corporate profit tax, corporate property tax and value added tax. Requirements to qualify for the benefits include that companies must produce agricultural products and complete their initial and further industrial processing and sale. The share of profit from the sale of agricultural products should constitute not less than 70 percent of the entire profit of the business.
Companies denied the tax exemption may appeal. Under the Tax Code acts of the tax authorities, and their omissions, may be appealed to a higher tax body or to court. In some cases, a regulatory appeal must precede the filing of a claim with a court. Administrative appeals must be completed with regard to decisions to hold a taxpayer liable for tax violations or a refusal to hold a taxpayer liable based upon the results of a tax audit. Other acts, such as decisions to refuse to make an offset or to return taxes paid, or a demand for payment of a tax, penalty or fine may be appealed to a court without preliminary consideration by a higher administrative tax body.
In March 2010, the Presidium of the Supreme Commercial Arbitration Court of the Russian Federation considered a case brought by OOO Dirol Cadbury against Tax Inspectorate No.9 of the Novgorodskaya District. The complaint alleged there was a decision on carrying out a repeat tax audit in connection with a specified tax declaration. In 2007, OOO Dirol Cadbury submitted to the tax inspectorate an adjusted tax declaration for income tax for 2005. According to the declaration, the sum of expenses connected with the manufacture and sale of products increased by 280 million rubles due to correction of data on non-operational income and expenses, resulting in a larger loss for the period, which increased from 28.6 million rubles to 307 million rubles. Repeated tax audits were carried out with regard to the tax period. OOO Dirol Cadbury disagreed with the decision to carry out the repeat tax audit, and appealed to court. This case was considered by three levels of appeal before reaching the Supreme Commercial Arbitration Court.
The Supreme Commercial Arbitration Court stated that carrying out a repeat tax audit in case of processing an adjusted tax declaration is possible, but such an audit should not be a full audit. In particular, repeat audits may only be carried out with regard to information contained in an adjusted tax declaration which entails reduction of taxes calculated earlier. In addition, the results of a repeat audit may not overrule a court decision delivered earlier on a claim by a taxpayer on appeal of an initial tax audit.
This decision of the Supreme Commercial Arbitration Court is significant because many companies are forced to file an adjusted declaration every month and do so unwillingly, since this fact may entail a repeat audit. By this decision, the Supreme Commercial Arbitration Court has provided some authority for taxpayers to avoid unending bureaucratic inspections.
12. GMO issues.
As of the present time according to the information of the Federal Service on Consumer’s rights Protection and Human Well-being Surveillance (Rospotrebnadzor) there are 16 types of the vegetable-based food products obtained with use of transgenic technologies registered and permitted for use in the food industry: 3 cultivars of soya, 7 cultivars of corn, 4 cultivars of potatoes, 1 cultivar of sugar beet, and 1 cultivar of rice and 5 types of genetically modified microorganisms.
List of feed additive for animals with GMO could be found on the official web-site of the Federal Service for Veterinary and Phytosanitary Surveillance and contains around 150 items that are currently permitted by the authorities . Use non-registered additives is not allowed.
Since labeling of GM food products is mandatory in Russia (if a product contains more than 0.9 percent of GMO it shall be labeled ) violation of this requirement entails sanctions depending on elements of such violation . It should be noted that penalties for such kind of violation are upgraded (please see section 12 below).
Draft amendments to the Federal law “On quality and safety of food products” related to banning GMOs in baby food were considered by the State Duma, but rejected .
In addition, it should be noted that two draft laws were under consideration by the State Duma that would require indication of information in respect to GMO even less 0.9 percent on the food labels and creation of buffer zones, i.e. land zones between land parcels with GMO plants and land parcels without GMO plants (in order to avoid cross-pollination) . However, the law on additional GMO-related food labeling was rejected, and the law on creation of buffer zones is still being considered.
13. Revised penalties for technical violations.
Revised penalties came in to force in 2012. These amendments to the Russian Code on Administrative Offences include penalties for:
- violation of the technical regulations requirement by the producer, executor, seller ;
- misleading compliance statements concerning products ;
- violation of a products sales procedure that is subject to mandatory confirmation of compliance ;
- violation of a products labeling procedure which are subject to mandatory confirmation of compliance ;
- violation of rules on execution of certification works ;
- presentation of misleading results of examination (testing) of the products ;
- violation of mandatory requirements with respect to defense products (executed works, rendered services) ; and
- failure to comply with requirements for submission of sample of products, documents or information necessary for exercising of state control in the sphere of technical regulation .
Sanctions for violations range from a fine of RUR 100,000 to administrative suspension of activities in the case of multiple violations.
14. Government strategy for development of the food industry.
The Russian Government issued Resolution #559R on April 17, 2012 which approved the Strategy for Development of the Russian Food Industry until 2020 (the “Strategy”).
The Strategy contains production targets for 2020 and confirms the need to modernize the industry. The Strategy is aimed at modernizing food processing production facilities and increasing their capacity through innovation and technologies as well as at increasing production of goods and development of infrastructure for food products distribution system.
Main targets of the Strategy are as follows:
- Increasing food production;
- Modernization of facilities;
- Increasing competitiveness and create conditions for import replacement;
- Develop vertical integration, infrastructure and logistics of agro-food market;
- Improvement of quality and safety of raw materials and food products;
- Modernize and foster technological innovation.
As a whole the Strategy is expected to enhance the economic well being of the industry.
15. Restrictions on Advertisements.
Advertising food and drink products in Russia was subject to substantial regulatory changes in 2012. Beer is now regulated as an alcohol product subject to regulation in the same manner as other alcoholic beverages .
Advertisements may not assert that consumption of alcohol is important for public recognition, for professional, athletic or personal success, or contributes to improvement of one's physical or emotional state. The law prohibits discouragement of abstinence from drinking alcohol products or claiming that alcohol products are harmless or beneficial for human health, or are a desirable way to satisfy thirst. Moreover it is prohibited to use images of people and animals, including animated images.
Alcohol advertisements may not be placed on any kind of transportation, on roofs, exterior walls and other structural elements of buildings, in children's, educational, medical, health, military, theatrical, museums, residential, concert, exhibition halls and athletic facilities. Such advertisements may not be closer than 100 meters from such buildings.
Alcohol advertisements must contain a warning regarding the hazards of overuse, and such warnings must occupy not less than ten percent of advertising space. Alcohol advertisements may not be placed in TV, radio programs and cinema facilities. From January 01, 2013 alcohol advertisements may not be placed in printed periodical publications or shown over the internet.
The Federal Law "On Advertising" also contains requirements for disclosing additives and nutritional supplements, as well as for advertisements of baby food products. The requirements are aimed at preventing misleading and unfair advertising