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Russian tax policy guidelines for 2011 and the planning periods of 2012 and 2013

The Ministry of Finance proposes a reduction of up to 14% (until 2015, and for some categories – until 2020) of the aggregate rate of insurance contributions.

By Natalia Kuznetsova, PWC
Jan 14, 2011
This flash report is presented by PricewaterhouseCoopers Partner Natalia Kuznetsova.
Original article: http://www.pwc.ru/en/tax-consulting-services/legislation/Osnovnye-napravleniya-nalogovoy-politiki.jhtml

This flash report deals with the document posted by the Russian Finance Ministry on May 31 2010 at: www1.minfin.ru/ru/tax_relations/policy. The document was drafted by the Russian Finance Ministry while preparing the federal budget, and establishes taxation guidelines over a three year period.

According to the Ministry of Finance, these guidelines are in line with previous basic goals and objectives (a similar document published by the Ministry of Finance last year was discussed in detail in our Flash Report No 7 for July 2009).

Below we examine what in our view are the most important anticipated tax law changes.

Stimulating innovation

First, the Ministry of Finance proposes a reduction of up to 14% (until 2015, and for some categories – until 2020) of the aggregate rate of insurance contributions (to the Russian Pension Fund, Social Insurance Fund and compulsory medical insurance funds) as part of insurable annual pay. This incentive will be granted to taxpayers who qualified for a reduced UST rate before its abolishment (i.e., residents of technical and innovation special economic zone, entities engaged in the IT business and exporting/supplying software domestically).

Second, as it did a year ago, the Ministry of Finance proposes revising the approaches to setting useful lives of fixed assets for depreciation purposes. When determining the useful lives, it is suggested to consider, among other factors, the speed of technology development which forces the renovation of fixed assets, and their removal from operation before their physical useful life expires.

Third, the Ministry of Finance proposes to amend tax law with respect to accounting for R&D costs, to eliminate ambiguities and contradictions addressed currently in the clarification issued by the Ministry of Finance. It is proposed to define a precise list of cost items which are attributable to R&D. This aspect is especially topical in connection to the application of a coefficient (1.5) to R&D costs and related abuse by taxpayers. In addition, the Ministry of Finance proposes to enable taxpayers to create provisions for future R&D costs. As proposed, this provision will be similar to other provisions accrued for tax purposes (this provision would be subject to a maximum amount and its unused portion would be written off at the end of a tax period).

Further, the Ministry of Finance supports a reduction in the list of documents required to apply a zero VAT rate for exports; in particular, exclude from the list documents confirming the actual credit of export proceeds to a taxpayer’s bank account in Russia.

To stimulate renovation of industrial capacities, the Ministry of Finance proposes to exempt from property tax for a three-year period from the moment of installation energy-efficient equipment and equipment used for creating R&D deliverables. To this end, it would be required to provide for the criteria of allocating equipment to energy-efficient equipment. At the same time, according to the Ministry of Finance, it is advisable to exempt from property tax any equipment transferred to educational and scientific organisations for the creation of R&D deliverables.

To more actively apply the investment tax credit, the ministry proposes empowering constituent regions of Russia to take a decision on granting investment tax credit on profits tax and corporate property tax. The tax authorities will still be entitled to administer the credit application procedure, but they will no longer make a decision on granting the investment tax credit and its sum. Further, it is proposed to increase the sum of investment tax credit when taxpayers conduct R&D or technical upgrading of own production – from 30% to 100% of the value of the equipment acquired by a taxpayer.

Among other measures that in the opinion of the Russian Finance Ministry may stimulate innovation activity are the following:

allowing a loss carry-forward for operations performed within the scope of a joint venture (under a common partnership contract);
elaborating the Tax Code provisions governing the deductibility of costs for the acquisition of rights to apply computer software and databases under sublicense contracts, and lump-sum payments for the use of rights to the results of intellectual activity and means of individualisation;
introducing a tax exemption for capital gains from sale of unquoted securities held for at least five years (the Ministry of Finance does not specify whether by individuals or legal entities). As proposed, this exemption would apply to securities acquired starting from 2011. This, according to the Ministry of Finance, would enable small innovation companies to attract long-term investments under more advantageous terms and conditions.

Profits tax

As it did in the similar document last year, the Ministry of Finance noted the need to introduce from 2011 a limitation for loss carry-forward with respect to taken-over or acquired companies.

In addition, major changes are planned with respect to interest expense. It is proposed to:

develop rules to determine a comparable interest level to calculate the arm’s length interest in the relationship between related parties and controlled transactions; apply the rules of determining the arm's length price, when applicable, to financial operations between related parties;
refine the procedure for applying thin capitalisation rules in line with the new rules of recognising entities as related parties;
change indicators underlying the computation of limits for interest expense, since they not always reflect the average level of interest rate applicable in practice (e.g., the rate of the Central Bank of Russia in many cases does not reflect the rate currently applied on the debt market);
provide for the taxation of imputed gain from the receipt of interest-free loans, credits, promissory notes, etc.
It is planned to improve from 2011 the method of tax accounting for expenses related to developing natural resources. In particular, the ministry would like to refine the Tax Code provisions with respect to all types of wells used in prospecting and evaluating deposits. It is planned to expand the list of deductible expenses connected with preparing natural resource development.

VAT

As proposed, a statutory legal framework (including amendments to the Russian Tax Code) should be developed to enable e-VAT invoices dissemination already in 2010.

Application of negative VAT invoices (credit-invoices) may be permitted for granting discounts.

The ministry plans to address the reinstatement of VAT sums previously recovered in the event of goods’ (including fixed assets) disposal unrelated to sale. For example, the law would provide that upon the disposal of fixed assets as a result of emergency situations and natural calamities, any previously recovered VAT shall not be reinstated.

Tax Code provisions in respect to sum differences (arising upon the sale of goods (work, services), property rights under contracts payable in Russian roubles in amounts equivalent to a definite sum in a foreign currency or conventional units) will be revised.

The ministry would like to refine the list of documents to be filed to the tax authorities to confirm a zero VAT rate application in export sales, when sales revenue is received from third parties.

Excise

As compared to other excisable goods, it is proposed to adjust, as the first priority, excise rates for alcoholic, alcohol-based and tobacco products.

The ministry proposes amending the current procedure for calculating and paying excise on ethyl alcohol, alcoholic and alcohol-based products.

Real estate tax

In the mid-term it is planned to introduce a real estate tax. To this end, it is necessary to implement several measures, in particular to create a real estate cadastre and develop a procedure of real estate cadastral valuation.

Property tax

It is planned to address the taxation of property (including land) transferred to mutual funds. According to the Ministry of Finance, it is advisable to oblige a management company to pay tax on mutual funds’ property.

MRET

The ministry is examining widening the application of MRET tax holidays on oil fields in the north of the Yamalo-Nenets District.
To stimulate the development of small fields, the ministry plans to consider establishing reduction coefficients to the MRET rate on oil production within new subsoil plots with limited initial recoverable reserves. Availability of these coefficients will be subject to effective administration and identification of subsoil plots, to which they should be applied (to prevent the minimisation of taxes by way of splitting subsoil plots).

The Ministry of Finance confirmed its intention to introduce tax incentives for the further use/processing of associated petroleum gas, and consider abolishing a zero rate applied to actual oil losses and the taxation of oil produced at the wellhead, which will entail the creation of corresponding accounting systems for oil and associated gas.

The ministry would like to elaborate and formalise in tax law a mechanism enabling tax incentives to be created for oil production from complex fields.

It is planned to analyse an optimal rate of MRET on natural gas in the context of fluctuations of natural gas prices, and analyse whether a reduction of the tax burden on production companies is advisable against the background of constantly growing gas prices in the domestic market.

The Ministry of Finance confirmed its intention to develop methods of migrating in the long run to the taxation of natural resource production on the basis of financial and operating results (and introduce a tax on additional income).
The ministry would also like to address the taxation of natural resource production on the continental shelf of Russia, in the exclusive economic zone of Russia, and in the Caspian Sea water area.

Transfer pricing, introduction of consolidated taxpayer regime, limitation of benefits under double tax treaties

These issues were covered in detail by us in the following flash reports:
Transfer pricing – No. 12 of November 2009 and No. 7 of March 2010
Consolidated taxpayer – No. 9 of March 2010
Limitation of benefits under DTTs – No. 16 of December 2009. We would like to add that the Ministry of Finance emphasised in the Tax Policy Guidelines for 2011 and Schedule Period for 2012 and 2013 that benefits and preferences provided under DTTs would not apply in case when a beneficial owner of income is not a resident of the respective treaty member-state.

What should taxpayers be considering at this stage?

In our view, the document published by the Ministry of Finance accords with its previous position and has not brought about any surprises for taxpayers. However, while planning for the future, taxpayers should once again consider the impact of the following potential amendments to tax law:
  • taxpayers which carry out or plan to carry out innovation activity should consider the economic impact of introducing the respective benefits;
  • taxpayers (most likely both individuals and legal entities), which plan to acquire as from 2011 unquoted securities should remember that subject to a holding period of more than five years, capital gains from sale of such securities will not be taxed;
  • taxpayers which issue debt financing should be aware that transfer pricing rules are likely to apply to interest rates on debt obligations. Borrowers should be aware that economic benefit generated from interest-free loans will be subject to profits tax;
  • taxpayers using mutual funds should remember about pending changes to the taxation of property transferred to such funds;
    subsoil users should analyse the expected amendments to Chapters 25 and 26 of the Tax Code, including the intention to create tax incentives for the further use/processing of associated petroleum gas;
  • new TP provisions will affect the majority of taxpayers. In the previous flash reports we addressed in detail any necessary steps to be taken by taxpayers to prepare for the coming changes.