RS Brief news Tax innovations in 2011

Tax innovations in 2011

March 2011

Draft laws that won’t make Russian tax payers happy

Alexey SmirnovTax incentives for innovations, changes in the procedure for the payment of corporate income tax by consolidated groups of taxpayers, the procedure for the payment of VAT, improvement in the tax control over the use of transfer pricing, amendments to special tax regimes – all of these are among the main priorities for the development of tax policy in the Russian Federation and in all probability all of them will be passed into law in 2011. The document defining the main priorities for the development of tax policy in the Russian Federation was approved in 2010.

…practically all of these proposed innovations came into criticism from practicing taxation experts and the business community…

All of the aforementioned priorities for the development of the country’s tax climate have already been submitted to the Russian State Duma as separate draft laws. Notably, practically all of these proposed innovations came into criticism from practicing taxation experts and the business community.

Let’s take a closer look at the draft laws under consideration

The draft law on the establishment and taxation of consolidated groups of tax payers aims to establish a practice of consolidating the taxable base of affiliated taxpayers in Russia. At that the draft laws proposes that the right to create such consolidated groups should only be granted to Russian organisations that pay corporate income tax. A consolidated group of taxpayers can be created if the interest of affiliates in each other is at least 90% and all the affiliates together meet a number of other conditions, one of which is the amount of tax paid in the previous year (according to the current version of the draft law it should be at least 15 billion rubles), as well as similar restrictions on the group’s total revenue and the value of its assets. At this time it is rather difficult to predict how these provisions would be applied in practice but in any case it is obvious that they would only apply to a very limited number of taxpayers and would have no impact on the rights and obligations of the vast majority of organisations.

A draft law that aims to eliminate the contradictions in the application of the provisions of the Tax Code on VAT has also been submitted to the State Duma. The draft law expands the list of cases when previously deducted tax has to be reclaimed. This list now includes the disposal of inventories and fixed assets, theft and shortages identified after an inventory is taken. This amendment is viewed by most experts as a negative innovation.

… the fact that this draft law was not signed into law last year was lauded by tax lawyers as one of the most positive events of the year …

The transfer pricing draft law, which has already been much discussed in the Russian press, has already been considered by the legislators for quite a long time but so far there is no information about whether or not it is going to be passed into law any time soon. The draft law should replace the provisions of the Tax Code on control over prices to ensure their being in line with the going market rates. In essence, these legislative initiatives seek to introduce stricter controls over taxpayers and thus may in the future lead to unfavourable consequences. It ought to be noted that the fact that this draft law was not signed into law last year was lauded by tax lawyers as one of the most positive events of the year.

Картинка – нужно что-нибудь с деньгами и жадными тянущимися ручками

Another document can have a lot of influence on the Russian tax climate is the draft law on stimulating the development of small businesses by improving the simplified taxation system for sole traders operating on the basis of patents and the taxation of agricultural producers (unified agricultural tax). In particular, it is proposed that a separate chapter on Patent Taxation System should be introduced into the Tax Code of the Russian Federation, that certain aspects of the simplified taxation system should be spelled out in greater detail and that the Unified Tax on Imputed Income should be repealed on January 1st 2014. These legislative initiatives would significantly change the taxation of small businesses but their authors believe that they will serve as incentives for the development of small business in Russia.

One-day firms have become the scourge of Russian tax payers and the most frequent cause of legal prosecution by the tax authorities.

The so called ‘draft law on one-day firms’, which is a draft law amending the Criminal Code of the Russian Federation, has also been submitted to the Russian legislators. It should be noted that one-day firms have been among the most popular tax avoidance schemes for several years now. The proposed draft law makes it a crime to set up a commercial entity for the purpose of committing crimes. These can include one or several illegal activities involving financial operations, the acquisition of a personal identification document as well as coercion into the provision of a personal identification document or the provision of such a document for the establishment (setting up, reorganisation) of a commercial entity for the purpose of committing financial crimes. According to the new draft law all these violations should be punishable by fines or custodial sentences. One-day firms have become the scourge of Russian taxpayers and the most frequent cause of legal prosecution by tax authorities. Yet another draft law targeting one-day firms does not make Russian tax payers any more optimistic.

Our view

In our opinion one of the most relevant draft laws in 2011 would be a draft law resolving the situation with the increase in the effective rate of social insurance contribution paid to the Pension fund and other off-budget funds. In 2010 the effective social insurance contribution rate was 26% but in 2011 it has increased to 34% and further increases have been planned for later on. The social insurance contributions are charged on the pay of employees and as a result increasing its effective rate has a number of negative consequences which include employers having to budget for significant additional costs and/or choosing to pay their employees cash ‘under the table’ while recording minimal official wages in the ledgers. Therefore, we believe that at present in order to avoid these negative outcomes the best course of action for both employers and the budget would be for the government to reduce the effective rate of the social insurance contribution.

Alexey Smirnov,
Leading consultant with ICLC