Why might electronics prices rise in the near future?

Anastasia Zadnipryanaya, a lawyer at Borisenko & Partners Law Firm, commented for Focus magazine on the possible introduction of additional taxes on smartphones, tablets, televisions, memory cards, paper, etc., in connection with amendments to the law “On the Effective Management of the Property Rights of Copyright Holders in the Sphere of Copyright and/or Related Rights,” which are provided for in Bill No. 3377, adopted on June 16.

1. How, when, and on what legal grounds might the mechanism for levying an increased tax on the sale of electronics (smartphones, televisions, etc.) and office paper be implemented?

Throughout its years of independence, Ukraine has lacked a legal mechanism that would ensure authors, composers, performers, and other creators receive adequate compensation for their creative intellectual work.

To address this problem and bring Ukrainian legislation closer to European standards, the Law “On the Effective Management of Property Rights of Copyright Holders in the Sphere of Copyright and/or Related Rights” was adopted in 2018.

The essence of the reform is that the collection, distribution, and payment of royalties to authors and creators is now handled by so-called collective management organizations (CMOs), which are created by the authors and performers of works themselves. Authors must delegate the relevant powers to these organizations.

CMOs, on behalf of authors, can now enter into agreements with users, agree on the amount of royalties, and collect, distribute, and pay the collected royalties. They will ensure the protection of the intellectual property rights of musicians, writers, artists, and other creative individuals.

The mechanism by which royalties are factored into the price of household appliances and paper was introduced by a 2018 law. The bill, adopted on June 16 of this year, regulates the procedure for establishing the fee for each type of equipment, paving the way for the practical implementation of these rules.

It should be noted that the final text of the law from June 16 is currently unavailable, as it has not yet been signed by the President of Ukraine or published.

Meanwhile, the Ministry of Economic Development has already authorized two private collective management organizations to collect this fee (Ministry of Economic Development Orders No. 267 and No. 268). Importers and collective management organizations still need to agree on the tariff amount, but negotiations on this issue are frozen until the quarantine ends.

2. What logic guided the authorities in making this decision? How adequate is the proposed mechanism to today’s Ukrainian realities?

The legislator and the OCU justify the introduction of the fee by citing the fact that users download movies, for example, to smartphones or televisions and watch them for free, sharing them with other users. This practice harms content producers. Moreover, copyright holders are objectively unable to control the downloading of such content and monetize it. Therefore, according to the legislator, to compensate copyright holders, the fee for private copying should already be included in the price of the imported equipment. The importer would then pay this fee to the OCU, which, in turn, would pay royalties to the authors.

Whether this is fair is a rhetorical question, since in Ukrainian reality, consumers would be paying for the hypothetical possibility of sharing content with others.

Meanwhile, consumers who don’t use pirated content anyway, but buy e-books or listen to music through paid subscriptions, will have to pay twice – when purchasing the equipment and when purchasing the subscription or book.

3. What tariffs may be imposed on goods covered by the law? How will this affect retail prices for the relevant goods?

The OCU is proposing tariffs ranging from 0.44% to 3.01%, depending on the product group, but negotiations are still ongoing. The tariff will be included in the product price, thus placing the burden on the consumer, not the importer.

To be fair, it should be noted that tariffs are not set on the retail price of the product, but on the import price specified in the foreign trade contract or the price specified in the sales or purchase agreement, if the product is Ukrainian-made. Therefore, to predict how prices for the relevant products will increase, adding the specified percentages to the retail price is not entirely accurate, as there is also the markup of stores selling the goods to the end consumer.

4. What is the estimated annual revenue from smartphone sales, etc.? Who will manage these funds, and what might they be used for?

The funds raised from the fee will be managed by two private organizations accredited by the Ministry of Economic Development: the All-Ukrainian Copyright Agency and the Ukrainian Musical Alliance. Up to 20% of these fees will go toward administration, with the remainder paid to copyright holders. However, the procedure for distributing these funds among copyright holders is rather vague.

5. How will the Ukrainian market react to the possible introduction of equipment taxes?

Today, the potential introduction of fees is met with negative reactions not only from equipment importers but also, surprisingly, from copyright holders, as evidenced by the fact that they are challenging the accreditation of collective management organizations. The main argument of the European Business Association, which defends the interests of importers, is that the introduction of a fee will give even more advantages to illegal equipment sellers.

Read more on the Focus magazine website.