Marketers facing new taxes

Related tags Cent Tax Advertising Marketing Russia

Marketers of fast moving consumer goods in Russia may now think
twice about using free samples to promote their products, following
a decision to tax them. Angela Drujinina reports.

As of January 2005, promotional samples given away free of charge will be subject to VAT at a rate of 20 per cent, according to the Russian tax authorities. Samples of products such as alcoholic beverages will be subject to both VAT and excise duty.

The use of free samples to promote products - from food and drink products to branded clothing, headwear, and bags - is widespread in Russia, as it is elsewhere, with observers estimating that companies spend up to 5 per cent of their profits on such promotions.

The new ruling - article 146 of the Russian Tax Code, which stipulates that 'the transmission of goods is considered as being equivalent to the sale of goods and must be subject to taxation' - means that the cost of such promotions is likely to rise by around 20 per cent.

But while the Russian treasury's coffers will obviously be swollen by the additional revenues, the authorities claim that the move is not simply designed to raise more money. Companies have been writing off the value of an increasingly large number of products against tax, arguing that they are for promotional purposes, the tax authorities said. As a result, many companies, in particular those who do not sell via the established retail trade, have been getting away without paying any tax whatsoever.

The question now is whether the new taxation regulations will take the wind out of the fast-growing Russian marketing industry, which has been growing at an annual rate of around 20 per cent and topped the $1 billion mark last year.

Expenditure on consumer promotions last year was $275 million, up 25 per cent on the previous year, according to the Russian Association of Marketing Services (RAMS), while trade promotions were valued at $250 million dollars, also up 25 per cent. Expenditure on direct marketing was $313 million, up 25 per cent, and point-of-sale/in-store marketing was up 30 per cent to €156 million.

Expenditure on event marketing - the use of sponsorship or VIP events - increased by around 30 per cent, due mainly to sponsorship programmes for the Olympic Games and the European Football Championship.

Irina Vasenina, president of RAMS, said: "The marketing services industry has grown steadily in 2004, topping $1 billion for the first time and accounting for 27 per cent of total advertising expenditure. Last year was particularly important as many companies increased their below-the-line agency budgets, which means that the quality of the marketing services in Russia is improving.

"Another major development was that of nationwide advertising campaigns, which have traditionally been rare in Russia. This has led to increased expenditure on advertising and marketing in many of the country's remoter regions, and the creation of new regional advertising agencies."

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