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Cutting retailers’ fees under food products supplies – any alternatives?
Cutting retailers’ fees under food products supplies
On 15 July 2016 the Federal Law # 381-FZ “On Fundamentals of State Regulation of Trade Activities in the Russian Federation” was amended.
On 03 July 2016 the President of Russia signed the Federal Law # 273-FZ “On Amendments to the Federal Law # 381-FZ “On Fundamentals of State Regulation of Trade Activities in the Russian Federation” and to the Code of Administrative Offences of the Russian Federation” (hereinafter – Trade Law).
What is changed:
1. The total maximum receivable by a retailer under a supply contract for food products is reduced from 10% to 5% of the cost of the purchased goods (net of VAT and excise duties charged by the supplier).
2. The list of remuneration types subject to the said total limit of 5% is enhanced and became open. The “restricted” fee is no longer limited by volume bonuses and embraces the most common types of fees paid to a retailer, in particular:
- Fee (premium, bonus) for purchasing the agreed volume of goods,
- Service fee for promotion of goods (the new Trade Law also introduces the definition of such services),
- Service fee for pre-sale preparation, processing and packaging of goods,
- Fee for logistic and “other similar” services.
Exceeding the 5% limit, as well as stipulating this in contracts signed after 15 July 2016, is subject to an administrative fine for the company, in range from RUB 1 MM to RUB 5 MM per contract.
3. Сertain operations and payment forms between suppliers and retailers are prohibited. In particular, it is not anymore possible to:
- Use agent contracts under which the retailer sells goods without receiving the title from the supplier (or mixed-type contracts containing agency/commission elements);
- Collect (pay) fee for the right to supply food products to points-of-sale, or for changing goods assortment;
- Reimburse the retailer’s expenses resulting from loss or damage of food products upon transferring the title to the retailer.
Identically to the previous version of the Trade Law, paying any other types of fees to retailers under supply contract is expressly prohibited. Goods promotion, pre-sale preparation, processing, packaging and other similar services shall be covered by a separate contract.
4. Maximum payment terms for the retailer in respect of food products are reduced and linked to the goods' shelf-life:
| Product shelf-life | Maximum payment term - previous version | Maximum payment term - new version |
| Less than 10 days | 10 business days | 8 business days |
| 10 – 30 days | 30 calendar days | 25 calendar days |
| Over 30 days, as well as alcoholic beverages, produced in Russia | 45 calendar days | 40 calendar days |
Setting a longer payment term in a supply contract is subject to an administrative fine for the company in range from RUB 1 MM to RUB 5 MM per contract.
5. Liability for breaching the new law requirements applies not only to the supply transaction parties (the food supplier and the retailer), but extends to entities belonging to the same group of persons with the contract parties (as defined by the anti-trust law).
What is required from the business community:
The new version of the Trade Law obliges suppliers and retailers:
- Up to 1 January 2017: to bring the existing contracts in line with the new rules (otherwise, the contracts become invalid),
- Starting from 15 July 2016: to ensure that all new contracts are concluded in accordance with the above rules.
What to expect in practice:
One cannot exclude that in practice the regulators will try to apply the 5% limit to any payments to retailers related to supply or further circulation of food products.
Enactment of the Trade Law amendments will likely lead to reconsidering the food supply contracts between producers and retailers, seeking for new options to structure the retailers’ fees, as well as changing the typical allocation of activities between suppliers and retailers.
What are the next steps:
KPMG team is ready to offer complex support with developing, assessing and implementing alternative arrangements between suppliers and retailers satisfying the new Trade Law’s requirements, in particular:
- Analyzing and advising on ambiguous issues and issues not clearly addressed by law,
- Identifying lawful ways to mitigate the negative impact of the new requirements (including for specific types of goods, contract structures, operating models, types of counterparties),
- Identifying lawful ways to apply other fee types under supply contracts, ensuring compliance with the new law requirements; analyzing tax treatment of such fees;
- Developing other solutions satisfying the above requirements of the law and retaining the shaped-out best practice of commercial arrangements for food products;
- Assistance with implementing the selected solution (in part of documentary exchange processes, accounting, business process redesign, taxation, preparation of necessary documents, accounting systems tune-up, etc.);
- Developing the technical position and defense line, representing your interest when interacting with counterparties and regulators.
Any questions are welcome!