An additional tax on consumer electronics will not help de-shadow the market

19/ 01/ 2021

In civilized countries, any use of the copyright object is carried out only with the consent of its owner. There are specific cases when such use is possible without the respective consent, but with the payment of appropriate remuneration. For example, this may apply to the consumption of music, movies, books, etc. However, in Ukraine, the system of paying fees for private copying and reprographic reproduction is outdated and inefficient and was developed in times of analog devices. The fee is included in the cost of equipment and storage media and can range from 0.1% to 5% of the cost of equipment (depending on the device). However, manufacturers and importers of equipment do not receive any percentage of such a tax. All tax revenues go to collective management organizations. This system deliberately violates the principle of fair remuneration, as it is physically impossible to identify each copyright holder whose creative work is privately reproduced. Therefore, it is not possible to ensure fair remuneration to each of these subjects. Thus, the business has identified 5 key disadvantages of such a system. First, it does not ensure the proper realization of the right of the copyright holder, whose creative work has been used, to receive a fair reward because it is impossible to know which authors work was copied, and how many times and on which devices this action was done. Also, according to a recent Music Industry Study supported by the Ukrainian Cultural Foundation, 69.3% of songwriters in Ukraine are not legally registered, so they are unlikely to have a contractual relationship with an accredited CMO (a collective management organization that collects and distributes contributions among the authors). Second, it significantly reduces the authors / performers cash flow due to the unfair and non-transparent distribution of funds by accredited CMOs as they have issues regarding transparency and accountability. Thus, according to the Music Industry Study, 65.6% of authors/performers do not receive royalties for the use of music created or performed by them which according to the analysts of the Music Industry Study is due to inefficient collective management of copyright and related rights in Ukraine and low legal awareness of authors/performers. Third, it is not fair to consumers. After all, not all consumers resort to unauthorized copying of work on a device or storage media. However, everyone has to pay according to the existing system. Also, the law clearly states that the fee should be paid exclusively for private copying of legal content while copying illegally posted content on the Internet is the subject of a completely different legal regulation. At the same time, according to a study by GfK in Ukraine, only 13% of consumers in Ukraine use legal content, but everyone is still forced to pay the same taxes. Fourth, it introduces an additional fee which according to legal businesses deepens the crisis in the electronics trade where every third smartphone or TV is illegal. And the additional fee will further complicate the situation and negatively affect the competitiveness of law-abiding companies, improving the price attractiveness of illegally imported equipment. Fifth, it does not promote consumer and business confidence in the copyright institution due to the lack of a transparent and clear procedure for setting tariffs, distribution of collected resources, which could potentially lead to ongoing litigation in the future and negatively affect Ukraine’s investment attractiveness. It is worth noting that although various models of the distribution of remuneration for private copying and reprographic reproduction are currently being discussed, none of them is perfect, as it is based on certain assumptions and does not provide fair remuneration to each of the legal entities. At the same time, the last 20 years have seen significant changes in society, including the development of digital technologies. Thus, in todays reality, the conclusion of a license agreement between the user and the right holder can be done quickly and conveniently, even if the user and the right holder are at a considerable distance from each other because digital technology allows you to conclude a license agreement remotely. As a result, streaming resources and paid subscriptions to music and video channels are becoming increasingly popular and allow for more effective enforcement of the authors right to receive fair remuneration without the involvement of collective management organizations in the process. Also, today, most of the equipment subject to deductions cannot be used to make copies on other storage media such as disks or flash drives. Currently, most TV manufacturers use special hardware, such as DRM, to limit the functionality of such equipment to reproduce the content. Similar protection mechanisms are installed by manufacturers in MP3 players, music centers, radios, DVD players, etc. Meanwhile, the Verkhovna Rada has recently registered the draft Law №4537 which will help modernize this rudimentary system. Thus, it aims to ensure transparency in the distribution of funds raised by collective management organizations among the authors. Also, the draft law proposes to abolish the fee for reprographic reproduction (copying books, photographs, scientific articles) and significantly reforms the fee for private copying of video and audio works. According to the draft law, the fee should be imposed exclusively on the storage media, such as flash drives or disks, and the percentage of deductions should be determined by the Government and may not exceed the maximum percentage set by the draft law. According to the business community, the adoption of the draft law №4537 will reduce the number of abuses in the distribution of funds collected as deductions, reduce litigation between importers and authorized collective management organizations, and abolish the additional tax on consumer equipment, imposing such a fee exclusively for certain types of physical media that can be used to make and store copies of copyright objects. Therefore, the European Business Association appeals to the Chairman of the Verkhovna Rada of Ukraine – Mr. Dmytro Razumkov to support this document as one that will foster the principles of fairness and de-shadowing. Thus, it will ensure fairness in relation to copyright holders and content consumers and contribute to the de-shadowing of the consumer electronics market. Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.

However, in Ukraine, the system of paying fees for private copying and reprographic reproduction is outdated and inefficient and was developed in times of analog devices. The fee is included in the cost of equipment and storage media and can range from 0.1% to 5% of the cost of equipment (depending on the device). However, manufacturers and importers of equipment do not receive any percentage of such a “tax”. All tax revenues go to collective management organizations.

This system deliberately violates the principle of fair remuneration, as it is physically impossible to identify each copyright holder whose creative work is privately reproduced. Therefore, it is not possible to ensure fair remuneration to each of these subjects.

Thus, the business has identified 5 key disadvantages of such a system.

First, it does not ensure the proper realization of the right of the copyright holder, whose creative work has been used, to receive a fair reward because it is impossible to know which author’s work was copied, and how many times and on which devices this action was done. Also, according to a recent Music Industry Study supported by the Ukrainian Cultural Foundation, 69.3% of songwriters in Ukraine are not legally registered, so they are unlikely to have a contractual relationship with an accredited CMO (a collective management organization that collects and distributes contributions among the authors).

Second, it significantly reduces the authors ‘/ performers’ cash flow due to the unfair and non-transparent distribution of funds by accredited CMOs as they have issues regarding transparency and accountability. Thus, according to the Music Industry Study, 65.6% of authors/performers do not receive royalties for the use of music created or performed by them which according to the analysts of the Music Industry Study is due to inefficient collective management of copyright and related rights in Ukraine and low legal awareness of authors/performers.

Third, it is not fair to consumers. After all, not all consumers resort to unauthorized copying of work on a device or storage media. However, everyone has to pay according to the existing system. Also, the law clearly states that the fee should be paid exclusively for private copying of legal content while copying illegally posted content on the Internet is the subject of a completely different legal regulation. At the same time, according to a study by GfK in Ukraine, only 13% of consumers in Ukraine use legal content, but everyone is still forced to pay the same taxes.

Fourth, it introduces an additional fee which according to legal businesses deepens the crisis in the electronics trade where every third smartphone or TV is illegal. And the additional fee will further complicate the situation and negatively affect the competitiveness of law-abiding companies, improving the price attractiveness of illegally imported equipment.

Fifth, it does not promote consumer and business confidence in the copyright institution due to the lack of a transparent and clear procedure for setting tariffs, distribution of collected resources, which could potentially lead to ongoing litigation in the future and negatively affect Ukraine’s investment attractiveness.

It is worth noting that although various models of the distribution of remuneration for private copying and reprographic reproduction are currently being discussed, none of them is perfect, as it is based on certain assumptions and does not provide fair remuneration to each of the legal entities.

At the same time, the last 20 years have seen significant changes in society, including the development of digital technologies. Thus, in today’s reality, the conclusion of a license agreement between the user and the right holder can be done quickly and conveniently, even if the user and the right holder are at a considerable distance from each other because digital technology allows you to conclude a license agreement remotely. As a result, streaming resources and paid subscriptions to music and video channels are becoming increasingly popular and allow for more effective enforcement of the author’s right to receive fair remuneration without the involvement of collective management organizations in the process.

Also, today, most of the equipment subject to deductions cannot be used to make copies on other storage media such as disks or flash drives. Currently, most TV manufacturers use special hardware, such as DRM, to limit the functionality of such equipment to reproduce the content. Similar protection mechanisms are installed by manufacturers in MP3 players, music centers, radios, DVD players, etc.

Meanwhile, the Verkhovna Rada has recently registered the draft Law №4537 which will help modernize this rudimentary system. Thus, it aims to ensure transparency in the distribution of funds raised by collective management organizations among the authors. Also, the draft law proposes to abolish the fee for reprographic reproduction (copying books, photographs, scientific articles) and significantly reforms the fee for private copying of video and audio works. According to the draft law, the fee should be imposed exclusively on the storage media, such as flash drives or disks, and the percentage of deductions should be determined by the Government and may not exceed the maximum percentage set by the draft law.

According to the business community, the adoption of the draft law №4537 will reduce the number of abuses in the distribution of funds collected as deductions, reduce litigation between importers and authorized collective management organizations, and abolish the “additional tax” on consumer equipment, imposing such a fee exclusively for certain types of physical media that can be used to make and store copies of copyright objects.

Therefore, the European Business Association appeals to the Chairman of the Verkhovna Rada of Ukraine – Mr. Dmytro Razumkov to support this document as one that will foster the principles of fairness and de-shadowing. Thus, it will ensure fairness in relation to copyright holders and content consumers and contribute to the de-shadowing of the consumer electronics market.

Be the first to learn about the latest EBA news with our Telegram-channel – EBAUkraine.