Control (Identification) Marks: Market Protection or Hidden Tax?

On November 25, 2014,the Association of European Businesses held a roundtable Protection Mechanisms of the Internal Market: Problems and Prospects in President Hotel, Minsk. Beer and soft drinks producers, Ministry of Taxation, State Marks Department of the Ministry of Finance, the Eurasian Economic Commission, Foreign Trade Department of the Ministry of National Economy of the Republic of Kazakhstan, law offices Stepanovski, Papakul and Partners and leading economic media attended the event.

After signing and ratification of the Treaty on the Eurasian Economic Union, Belarus seeks to establish a common market for goods, services, capital and labor with partner countries. In this context, the Association of European Business organized an open dialogue to discuss feasibility and necessity of non-tariff protection of the internal market.

At the roundtable, the participants exchanged their opinion on the use of control (identification) marks introduced in 2004 to protect the Belarusian market form counterfeit products. According to Galina Yanushkevich, the head of Control over Excisable Goods, the Ministry of Taxes and Duties, now in Belarus practically there is no illegal import of beer and other goods, and interests of consumers are fully protected due to this measure. “Each state protects its domestic market. Control (identification) marks are a means of protecting the domestic market from illegal turnover,” she said.

However, businesshas a different opinion. According to Vladislav Skrebtsov, the head of Brewers Guild, the control function of the marks system has transferred into a fiscal one where marks has become a kind of hidden tax. The costs of the marking remain significant for brewers and result in washout of huge chunk of working capital: In January - November this year, breweries bought control identification marks for 10.2 million euros.

“The share of control marks in the cost of beer rose from 1% to 4%. In fact, it is a new turnover tax now. In addition to the increased cost of the final product, mandatory labeling of beer with control marks entails slowing down of production lines at 1-5% and a decrease in the productivity of enterprises,”said the director of Brewers Guild.

Audrius Miksys, the General Director of JSC Lidabeer, compares the costs of purchasing control marks with the price on malt (the main raw material for the production of beer): they are not much different. Next year, according to its budget Lidabeer will spend 5 million euros on the purchase of malt and 3.5 million euros on control marks.

“These costs reduce our competitiveness in comparison with Russian manufacturers. These funds could have been allocated for purchase of equipment, modernization of production lines, or improvement of product quality.”

Denis Sherstennikov, the Director General of Olivaria, is of the same opinion. “This really reduces our competitiveness. The fewer there are of these tools, the better it is for the economy,” he said and added that the company annually takes out about 4 million dollars from working capital for the purchase of control marks (in addition to the indirect costs of storage, accounting, and ordering the marks).

According to Tatiana Razzhivina, deputy head of State Marks, the Ministry of Finance, Borisov Paper Plant produces and sales control identification marks to business entities at the costs of the national budget. Profitability of the production is limited to 13 percent.

“Manufacturing of marks is funded from the national budget. Borisov Paper Plant is obliged to provide control marks to a company within three days after it places the order. To do this, the plant must have a reserve of signs and plan the purchase of materials at its own account. There are situations when one order exceeds the semi-annual volume of all orders.”

The Eurasian Economic Commission also took part in the discussion about the use ofcontrol (identification) marks. Valery Zakharov, Head of Business, Services and Investments, Department of Entrepreneurship Development, the EEC, believes that the criteria by which some products should be marked and others not, is incomprehensible. Artem Yulegin, Head of Business Development, Department of Entrepreneurship Development, the EEC, suggested that the control measures should be applied when there are confirmed cases of gray imports, and it is important to pay attention to the product itself.

Another argument of beer and soft drinks producers in favor of abolition of the marking is that there were no evidence of falsification of their products in the past few years. Andrey Roshupkin, First Deputy Director General of SP Coca-Cola Beverages Belarus, believes that the abolition of the marking will not lead to an increase in counterfeit soft drinks in Belarus.

“Cancelling of control marks for mineral and drinking water did not lead to an increase in counterfeit goods on the Belarusian market. In my opinion, this control system for manufacturers of non-alcoholic drinks is excessive. Most probably, such a mechanism does not make much sense.”

Vasily Tsanov, Managing Director of IZAO Heineken Brewery, believes that reducing the fiscal burden will allow breweries increase investment in production, improve product quality and promote it on the market.

 “Consumption of beer in Belarus per capita is only 49 liters today. For comparison, it is 95 liters in Poland, 75 liters used to be in Russia, now there is a decrease, about 80 liters in Lithuania. By receiving additional opportunities for investment and development, breweries can increase the consumption of beer, and then through tax and other deductions the budget will receive more money than it receives now from the sale of control marks,” he said.