KPMG Pharma Bulletin Issue #1, 2018 (January)

KPMG Pharma Bulletin Issue #1, 2018 (January)

Victoria Samsonova

Director, Head of Healthcare & Pharmaceuticals

KPMG in the CIS



State Duma approved on the bill simplifying imported drugs registration

The State Duma approved in the first reading the Draft Law #327290-7 “On Amendments to the Federal Law ‘On Circulation of Pharmaceuticals’”, that simplifies the state registration of drugs for foreign producers.

Specifically, holders and the owners of registration certificates (marketing authorizations) are now allowed to register several pharmaceuticals produced at the same manufacturing site and having identical INN and different trade names; they will be also enabled to apply for pharmaceuticals registration before the GMP audit of the production site is completed.

In addition, should a foreign producer have no GMP certificate under the Russian standards, it would be possible to replace it by a copy of the decision on inspection of the foreign producer issued by the corresponding foreign regulator. The document should be included into the set submitted to confirm the drug’s registration and the pharmaceutical dossier amendment.

The Draft Law is expected to contribute to contract manufacturing development in the Russian pharmaceuticals market.


Changes expected to the list of medical devices subject to 10% VAT

The Russian Ministry for Industry and Trade developed the Draft Order # 50 dd. 23.01.2018 ‘On Amendments to the Governmental Resolution #688 dd. 15.09.2008’ enabling producers of pharmaceuticals and medical devices to minimize VAT costs associated with import and local sales.

The Order harmonizes classification codes of medical devices VAT-able at 10% (as set out by the Governmental Resolution #688 dd. 15.09.2008) and the codes defined in the Russian Classifier of Products per Economic Activities (ОКПД 2) ОК 034-2014 (КПЕС 2008).

Also, the list of medical devices subject to 10% VAT rate is expanded by adding 65 articles in accordance with the customs classification codes established for the Eurasian Economic Union.!minpromtorgom_rossii_razrabotano_


Control to be tightened over pharmaceuticals entry into circulation

The Draft Law #374838-7 ‘On Amendments to Certain Legislative Acts of the Russian Federation Regarding Entry into Civil Circulation of Pharmaceuticals for Medical Use’ was developed by the Russian Ministry of Healthcare and submitted to the State Duma. It suggests strengthening of the controls over pharmaceuticals and vaccines introduction into civil circulation.

In accordance with the Draft, producers and importers of pharmaceuticals not previously traded in the Russian market must submit to the Federal Service for the Supervision of Public Health and Social Development (Roszdravnadzor) documents supporting the quality of production, as well as confirm the quality level compliance with the rules established for the state registration. For the first three series of pharmaceuticals the following shall be submitted in addition to the standard set of documents:

1. documents conforming the quality of the pharmaceutical and its compliance to the quality requirements established for the state registration;
2. The manufacturer's certificate.
3. The Protocol of testing (examination) of the batch of pharmaceuticals conforming compliance with the quality parameters provided for by law, and the fee for such a Protocol issuance.

The requirements will not apply to pharmaceuticals intended for clinical research and to non-registered pharmaceuticals imported for delivering medical care of vital importance to a specific patient.

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Roadmap for fair competition development in the pharmaceutical market approved by Government

The Government signed the Decree dd. 12.01.2018 # 9-р, approving the Plan (“Road map”) “Developing competition in healthcare sector”. The Plan is supposed to support fair competition in the markets of pharmaceuticals, medical devices, healthcare services and biological additives and includes, inter alia, the following initiatives:

1. Creating the environment for developing fair competition between pharmaceutical producers,
2. Clearing unjustified differences in the instructions for use of interchangeable pharmaceuticals with the same INN,
3. Preventing unjustified inclusion of pharmaceuticals into the Essential drugs list,
4. Informing individuals and healthcare professionals on availability of cheaper analogues of expensive pharmaceuticals; ensuring stable level of demand for mid-low price segment pharmaceuticals; preventing ‘wash-out’ of low-value pharmaceuticals from the market;
5. Combatting sales of counterfeit and low-quality pharmaceuticals through Internet.


Rules for sale of biomedical cell products approved

The Government approved the Resolution dd. 23.01.2018 # 49, setting out the rules for sale of biomedical cell products (BMCP).

In particular, the BMCP may be delivered on a chargeable and/or gratuitous basis:

− to other BMCP producers for manufacturing purposes;
− to scientific and educational institutions for scientific research purposes;
− to healthcare providers.

The Resolution specifies the list of necessary documents to support a BMCP sale.


Ministry for Industry and Trade published certain clarifications

The Ministry for Industry and Trade published the following documents at ConsultantPlus portal:

“Clarifications on actions to be made by a foreign producer in case the Ministry for Industry and Trade of the Russian Federation refuses to issue a GMP compliance certificate”; the foreign producer is to develop an improvement action-plan (САРА) and provide it to the Ministry for Industry and Trade;

“Clarifications on actions to be made by a foreign producer upon undergoing a GMP inspection for a production site”; the document provides guidelines for eliminating the non-compliance points identified in course of the GMP audit.

The documents were not posted at the Ministry’s official web-site.


Rules approved for recording and reporting ethanol API use for own needs

The Government approved the Resolution dd. 29.12.2017 # 1694, introducing “Rules for Recording the Volume of Ethyl Alcohol (Ethanol) API Produced, Supplied and Used for Own Needs” and “Rules for Reporting the Volumes of Ethyl Alcohol (Ethanol) API Produced, Supplied and Used for Own Needs”.

Companies producing, supplying or using ethyl alcohol for own production needs should keep records of the volumes used, applying the corresponding tools for data record and transmission in USAIS (ЕГАИС) system, and to report the data accordingly to the licensing regulator.

The declarations should be submitted quarterly, not later than on the 20th day of the month following the reporting quarter, in electronic document format signed by the qualified electronic signature.

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Tax disputes: bonuses to suppliers and bad debts write-off

Resolution of the Supreme Court of Russia # 305-КГ17-14988 dd. 19.01.2018 on case # А41-17865/2016

Judges had considered two episodes within the case:

3) Volume bonuses paid to suppliers

The company distributed pharmaceuticals and medical devices and received incentive payments (bonuses) from the suppliers for achieving KPIs (agreed volume of purchases) or for meeting other conditions under the supply agreement.

The tax authority challenged the VAT offset in related to the bonuses received, stating that the company should have adjusted the prices for the goods by the bonuses and reduced the input VAT proportionally.
The transactions under review were performed before 01.07.2013, i.e. before enactment of amendments to Article 154 of the Russian Tax Code (which had linked the impact of bonuses upon the VAT base to the express wording in the supply agreement).

The judges concluded that discounts are generally not supposed to be tax-neutral and supported the tax authority’s position.

4) Bad debts write-off

The tax authority challenged the corporate profits tax deduction of a loss from writing off a bad debt, the statute of limitation for which had expired over a year ago.

The court supported the company and concluded that omitting the statute of limitation expiry date is an error, which the taxpayer may correct in the period when it was discovered (under Article 54 of the Russian Tax Code).

The Collegium of the Supreme Court of Russia specified in its Ruling that a tax audit’s goal is to verify the correctness and timeliness of taxes calculation and payment, but not to assess the correctness of accounting of business transactions. Therefore, the tax authority should have corrected the identified mistake by reallocating the debt write-off loss to the appropriate reporting period, without disallowing the tax deduction.


Tax disputes: reclassification agent arrangements to services and VAT assessment

Resolution of the Arbitration Court of Moscow dd. 30.01.2018 on case # А40-203991/17-140-3689

The company operated as an agent, promoting the products of its foreign affiliated companies, and received the remuneration calculated as “actual costs + agent fee”.

The agent re-charged to the principal a part of its salary cost and fees to individual contractors engaged (hereinafter ‘the challenged expenses’). Corporate profits tax and VAT were applied only to the amounts of the agent fee, while the challenged expenses and their reimbursement were not included into tax base calculations.

According to the tax authority and the court, the agent would have incurred the challenged expenses in any case, even if it had not performed activities on the principal’s behalf, and, therefore, there were no legal grounds to oblige the principal to reimburse them. Using this argumentation, the tax authority re-classified a part of the agent’s cost reimbursement to service fee and assessed output VAT correspondingly.

The company put up counter-arguments on unjustified interference into an arrangement between unrelated parties, which were not, however, supported by the court.

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The previous Pharma Bulletin issues are accessible our site.

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