KPMG: Remuneration for Reproduction of Media for Personal Use

Under Part 4 of the Russian Civil Code (§ 1245), authors, performers and producers of phonograms and audiovisual works are entitled to remuneration for the free reproduction (copying) of phonograms and audiovisual works exclusively for personal use. This remuneration shall be paid for out of fees charged manufacturers and importers of equipment and physical media used for such reproduction. Until now, this regulation has not been applied in practice, as the procedure for levying the fees has not been determined.

Dmitry Pozharny
Tax & Legal Consultant
KPMG in Russia and the CIS

Before Part 4 of the Civil Code was adopted in 2006, similar regulations existed in § 26.2 of Law 5351-1, On Copyright, of July 9, 1993. But it was only on December 5, 1998, five years after that law came into effect, that Presidential Order 1471, On measures to enforce the rights of authors of works and performers and producers of phonograms to remuneration for the reproduction for personal use of audiovisual works or sound recordings, aimed at ensuring the remuneration rights specified by the article, was adopted.

According to this order, from February 1, 1999, for equipment (except professional equipment not for home use) and physical media used to reproduce audiovisual works or sound recordings for personal use to be released for free circulation if imported into Russia, the foreign trade participants (the product importers) were to pay fees to the authors of the works and the performers and producers of the phonograms in compensation for the reproduction of the audiovisual works or sound recordings for personal use. The list of types of equipment and physical media subject to this regulation was to have been confirmed by the government within 3 months of the effective date of the order. However, the relevant government resolution was never adopted.

On September 20, 2005, the Russian Copyright Society (RCS), Russian Society for Allied Rights (RSAR), Russian Society for the Management of Performers' Rights (RSMPR), Russian Society for the Management of Copyrights and Allied Rights (RSMCAR), and the Russian of Rights Holders in the Audiovisual Sphere (RRHAS) concluded a General Agreement, On the procedure for collecting and distributing remuneration for the reproduction of audiovisual works or sound recordings for personal use. The agreement granted the RSAR exclusive rights to collect the fees referred to in § 26 of the Copyright Law. The agreement was meant to last until December 31, 2010, but when Part 4 of the Civil Code took effect, on January 1, 2008, the introduction of a government accreditation body for collective management organizations made implementing the agreement impossible due.

Even so, on April 20, 2010, the Federal Customs Service (FCS) issued Letter 01-11/19707, announcing a Temporary Control Procedure for the import of equipment and physical media used for free reproduction for personal use. Under this, compliance with the release conditions for the products specified in Presidential Order 1471, of December 5, 1998, was to have been confirmed by documents confirming payment of the fee or settlement of the payment procedure. On June 16, 2010, however, the Supreme Court, in Ruling VAS-6978-6979/10, declared the letter invalid as it had not been registered with the Justice Ministry or properly published. As a result, the FCS issued Letter 01-11/31548 on June 28, 2010, withdrawing the Temporary Control Procedure.

Finally, on October 22, 2010, Government Resolution 829, On remuneration for the free reproduction of phonograms and audiovisual works for personal use, of October 14, 2010, ("the Resolution") was published. This confirmed the list of equipment and physical media on which production/import fees going to the authors, performers and producers would be levied, as well as the fee collection and distribution procedure.

The manufacturers will pay the fee quarterly, by the 10th of the month after the reporting period (unless the contract specifies another reporting period), on the basis of records submitted by the manufacturers to the accredited organization. For products transferred free of charge in product exchanges, and in similar cases, the fee is based on the price similar products would normally fetch if sold for a charge in comparable circumstances.

The fee will not apply to equipment and physical media being exported, or to manufacturers of professional equipment not for home use. Here, the exportation needs to be confirmed by presenting the relevant documents to the accredited organization.

Nor will the fee apply to equipment made from components entirely produced in Russia or from imported components on which the fee has already been levied. This also requires document confirmation.

The accredited organization will be entitled to question entities reselling equipment and physical media about their manufacturer, classification and acquisition price.

Within 10 business days of the relevant products being placed under customs procedures for release for domestic consumption, the importers will have to notify the accredited organization of this, specifying the customs value of the products. After this, the accredited organization, within 20 business days, will have to compare that statement with the import information to be provided it by the customs authorities. The accredited organization will then have to send the importer the calculation of the amount payable, which the importer must pay within 10 business days of receipt of the calculation.

The collected fees will be distributed at least once a year in the following proportions: 40% to authors, 30% to performers, and 30% to producers. Here, the size of the fee paid to each recipient is to be calculated on the basis of data on the use of the phonograms and audiovisual works when publicly performed or communicated to the public by wire or wireless means (this data being provided under data exchange agreements by collective rights management organizations with government accreditation to engage in the relevant forms of activity), as well as on statistical information obtained from regular surveys performed by the accredited organization or commissioned by it and performed by another body.

The Resolution will apply until the Belarus-Kazakhstan-Russia Customs Union agreement on this issue takes effect. In addition, the State Duma is currently reviewing draft amendments to the Law On Telecommunications and the Civil Code, under which telecommunications operators earning income from providing users with services related to the free reproduction of audiovisual works and phonograms would have to pay 2% of that income into a specially created fee pool. The authors of the works will then be paid out of the pool.

Thus, we can see that arrangements for protecting the exclusive rights of the authors, performers and producers of audiovisual works and phonograms when they are reproduced for personal use are being developed. It should be noted that, despite some superficial similarity with taxation, the arrangements do not belong under tax law. They are covered by the Civil Code, not the Tax Code, the money raised will not go to the budget, and the procedures will not be controlled by the tax authorities.

The Resolution specifies that the fee amount will be based on data provided by collective rights management organizations on the use of the phonograms and audiovisual works when publicly performed or communicated to the public by wire or wireless means, as well as on statistical information based on regular surveys. In effect, this means that much will depend on the work of the organizations collecting and processing the data. The accuracy and reliability of their figures will directly affect how fairly the fees are distributed among the authors, performers and producers. One of the problems here is that often the number of, say, radio broadcasts of a work of music depends not so much on the performer's actual popularity as on the agreements the performer has with the stations. Here, high payments to the performer would not reflect the true picture.

In addition, the list of items on which the manufacturers and importers will have to pay the fees does not always seem rational. It is extremely wide-ranging, and includes products (digital cameras, fixed phones, DVD players and decks) that are not designed for copying. Blank recordable CDs can also be used to store, say, personal photographs, without infringing any copyright law.

To sum up, we can say that eliminating the current contradictions and checking that all the participants in the process perform their obligations in good faith are the key factors in whether implementation of the new arrangements will be a success.

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