In order to address unfair sales subsidies given to large-scale distributors, on October 2, 2013 the Korea Fair Trade Commission (hereinafter “KFTC”) enacted “Guidance for Evaluating Unfair Sales Subsidies in Large-Scale Distribution” (hereinafter “Evaluation Guidance”), which will apply to sales subsidy agreements that are entered into after October 8, 2013.

  1. Background of Enacting Evaluation Guidance in Connection with Sales Subsidies
  • “Sales subsidies” are originally designed to be a form of compensation that a supplier voluntarily provides to distributors in return for their sales efforts.  Recently, however, large distributors often abuse sales subsidies as to uniformly collect a certain percentage of the purchase amount according to the KFTC.
    • For the top three large-scale distributors, the total amount of sales subsidies earned accounts for 53.8%-64.4% of their operation profits.

Click here to view graphs. Source: KFTC’s press release dated October 8, 2013

  • Article 13 (2) of the “Act of Fair Transactions in Large-Scale Distribution” (hereinafter “Large-Scale Distribution Act”) provides that sales subsidy programs are allowed “to the extent they are reasonable.”  However, due to the ambiguity of the phrase provided, it is hard to know whether the standards are properly met or not.
    • In light of the concerns above, the KFTC set forth the Evaluation Guidance to regulate and guide sales subsidy programs to the direction that they are adequately utilized as a tool for sales promotions as originally intended under the Large-Scale Distribution Act.
  1. Key Points of the Evaluation Guidance
  • The Evaluation Guidance set forth specific criteria for determining the illegality of sales subsidies.
  1. Given that sales subsidies must have a relationship with sales promotions, any sales subsidy that is not related to sales promotions will be found illegal.
  • e.g., so-called “basic subsidies” that are uniformly given on a basis of a percentage of the purchase amount will be found illegal.
  • In contrast, “performance-based subsidies” are to be provided only when a large-scale distributor achieves the intended goal through the efforts of sales promotions, and therefore such subsidies could be deemed to have a relationship with sales promotions.
  1. Any sales subsidy that unfairly transfers the burden of cost from large-scale distributors to suppliers in direct purchase transactions will be found illegal.
  • e.g., given that large-scale distributors bear the burden of stocktaking in direct purchase transactions, “sales subsidies for stock exhaustion” will be found illegal.
  • “no-return subsidies” – meaning that large-scale distributors receive subsidies on condition that they may not claim for return of the goods purchased, notwithstanding such returning practices are prohibited by law – will be found illegal as well.
  1. Perspective on KFTC’s Policy Directions
  • By setting forth the Evaluation Guidance, the KFTC expects that sales subsidy programs will be set in order and transactions between large-scale distributors and suppliers will become simplified and transparent such that those transactions are structured on a basis of supply costs.
  • Along with the enactment of the Evaluation Guidance, the KFTC plans to consistently strengthen supervision on large-scale distributors to tighten monitoring of unfair trade practices and cartel activities as well as violations of the Large-Scale Distribution Act.