Acca Atc f6 Taxation Russia Study System 2013

2013 Edition

STUDY SYSTEM

ACCA Paper F6 | TAXATION (RUSSIA)

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ACCA

PAPER F6 TAXATION (RUSSIA)

STUDY SYSTEM

For Examinations June and December 2013

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©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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CONTENTS

Contents Introduction

(iv)

Syllabus

(v)

Study guide

(ix)

Rates and allowances

(xx)

1

Russian tax system

0101

2

Corporate profits tax – Scope, computation and income recognition

0201

3

Corporate profits tax – Deductible expenses

0301

4

Corporate profits tax – Other income and expenses, branches and payments

0401

5

Personal income tax – Scope, computation and deductions

0501

6

Personal income tax – Special rates and rules

0601

7

Personal income tax – Obligations

0701

8

Value added tax – Common rules

0801

9

Value added tax – Special cases, payment and reporting

0901

10

Social insurance contributions

1001

11

Corporate property tax

1101

12

Tax administration and control

1201

13

Glossary

1301

Index

1401


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INTRODUCTION

Introduction This Study System has been specifically written for The Association of Chartered Certified Accountants Russian variant Paper F6 Taxation (Rus). It provides comprehensive coverage of the core syllabus areas and is designed to be used both as a reference text and as an integral part of your studies to provide you with the knowledge, skill and confidence to succeed in your ACCA examination. ATC International has more than 10 years’ experience in delivering ACCA exambased training for Russian variant law and taxation. How to use this Study System You should first read through the syllabus, study guide and approach to examining the syllabus provided in this session to familiarise you with the content of this paper. The sessions which follow include:



An overview diagram at the beginning of each session. This provides a visual summary of the topics covered in each Session and how they are related



The body of knowledge which underpins the syllabus. Features of the text include: Definitions

Terms are defined as they are introduced.

Illustrations

These are to be read as part of the text. Any solutions to numerical illustrations follow on immediately.

Examples

These should be attempted using the proforma solution provided (where applicable).

Key points

Attention is drawn to fundamental rules and underlying concepts and principles.

Commentaries

These provide additional information.



Focus

These are the learning outcomes relevant to the session, as published in ACCA’s Study Guide.



Example solutions are presented at the end of each session.

A bank of practice questions is contained in the Study Question Bank provided. These are linked to the topics of each session and should be attempted after studying each session.


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SYLLABUS

SYLLABUS

TX (F6) Rus Aim To develop knowledge and skills relating to the tax system as applicable to Russian legal entities and individuals. Main capabilities After completing this examination paper students should be able to: A

Explain the operation and scope of the Russian tax system.

B

Explain and compute the income tax liabilities of individuals in their capacity as individual entrepreneurs and employees.

C

Explain and compute the corporate profits tax liabilities of Russian legal entities.

D

Explain and compute the effects of value added tax on incorporated businesses.

E

Explain and compute the effect of social insurance contributions on employees, employers and individual entrepreneurs.

F

Explain and compute the corporate property tax liability of Russian legal entities.

G

Identify and explain the obligations of taxpayers and/or their agents and the implications of non-compliance.

Relational diagram of main capabilities The Russian Tax System (A)

Income Tax Liabilities (B)

VAT (D)

Corporate Tax Liabilities (C)

Social Insurance Contributions (E)

Corporate Property Tax (F)

Tax Planning, Administration and Control (G)


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SYLLABUS

Rationale This syllabus introduces candidates to the subject of taxation and provides the core knowledge of the underlying principles and major technical areas of taxation, as they affect the activities of individuals and businesses. In this syllabus, candidates are introduced to the rationale behind and the functions of the tax system. The syllabus then considers the separate taxes that an accountant would need to have a detailed knowledge of, such as: 

personal income tax of both employees and individual entrepreneurs;



the corporate profits tax and corporate property tax liabilities of Russian legal entities;



the social insurance contributions liabilities of employees, employers and individual entrepreneurs; and



the value added tax liability of incorporated businesses.

Having covered the core areas of the basic taxes, candidates should be able to compute tax liabilities, explain the basis of their calculations, apply tax planning techniques for individuals and companies and identify the compliance issues for each major tax through a variety of business and personal scenarios and situations. Detailed syllabus A

The Russian tax system

1 2 3

The overall function and purpose of taxation in a modern economy Different types of taxes The tax regulatory framework

B

Income tax liabilities

1 2 3 4 5 6

The scope of individual income tax Income from employment Income earned by individual entrepreneurs Dividend and other income The comprehensive computation of taxable income and individual income tax liability The use of exemptions and deductions in minimising individual income tax liabilities

C

Corporate profits tax liabilities

1

The scope of corporate profits tax

2

Taxable income for corporate profits tax

3

Deductible expenses and tax allowances in deferring and minimising corporate profits tax liabilities

4

The comprehensive computation of corporate profits tax liability

5

Tax accounting for corporate profits tax


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SYLLABUS

D

Value added tax (VAT)

1 2 3

The scope of value added tax (VAT) The computation of VAT liabilities VAT payment and reporting

E

Social insurance contributions (SIC)

1 2 3 4

The scope of social insurance contributions (SIC) Contributions made by employers for employed persons Contributions made by individual entrepreneurs Social funds audits

F


1 2 3

The scope of corporate property tax The computation of corporate property tax liabilities Payments and reporting requirements

G

Tax planning, administration and control

1 2 3

The obligations of the taxpayer and/or their agents The procedures relating to tax audit, appeals and disputes The sanctions for tax violations, tax penalties and interest on late tax payments

Exam structure All Skills module examinations are paper based and of three-hours duration with 15 minutes additional reading and planning time. This time should be used to ensure that all the information and exam requirements are properly read and understood. During reading and planning time candidates may only annotate their question paper. Approach to examining the syllabus The paper will be mainly computational and will have five questions, all of which will be compulsory. 

Questions one and two will be for a total of 55 marks with one of the questions being for 30 marks and the other for 25 marks. One of these two questions will focus on individual income tax and the other question will focus on corporate profits tax.



Question three will be for 15 marks, and will focus on value added tax (VAT) issues.



Questions four and five will be on any area of the syllabus and will be for 15 marks each.

In addition to question 3, value added tax might also be included as part of any other question relating to a business but for no more than a further 10 marks. Corporate property tax may be examined as part of the corporate profits tax question or separately as part of question four or five, but will account for no more than 8 marks in total on any one examination paper. Any of the five questions might include the consideration of issues relating to the minimisation of tax liabilities or tax administration.


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SYLLABUS

Guide to examination assessment ACCA reserves the right to examine anything contained within the study guide at any examination session. This includes knowledge, techniques, principles, theories, and concepts as specified. ACCA publishes examinable documents once a year to indicate exactly what regulations and legislation could potentially be assessed within identified examination sessions. Tax rates and allowances as published by ACCA at: http://www.accaglobal.com/en/student/qualificationresources/acca-qualification/acca-exams/f6-exams.html are reproduced at the end of this session. For paper based examinations regulation issued or legislation passed on or before 30th September annually, will be assessed from June 1st of the following year to May 31st of the year after. Therefore, paper based examinations in June 2013 and December 2013 will be assessed on regulations issued and legislation passed on or before 30th September 2012. Regulation issued or legislation passed in accordance with the above dates may be examinable even if the effective date is in the future. The term issued or passed relates to when regulation or legislation has been formally approved. The term effective relates to when regulation or legislation must be applied to an entity transactions and business practices. ACCA Support For examiner’s reports, guidance and technical articles relevant to this paper see http://www.accaglobal.com/en/student/qualification-resources/acca-qualification/accaexams/f6-exams.html The ACCA’s Study Guide which follows is referenced to the Sessions in this Study System.


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STUDY GUIDE

Ref:

A

THE RUSSIAN TAX SYSTEM

1

Overall function and purpose of taxation in a modern economy

(a)

Describe the purpose (economic, social, etc) of taxation in a modern economy.

2

Different types of taxes

(a)

Explain the difference between direct and indirect taxes.

(b)

Recognise the types of taxes levied on legal entities and physical persons in the Russian Federation.

(c)

List the legal forms of business activities in Russia and identify the relevant taxes for each type of business activity.

3

Tax regulatory framework

(a)

Explain the tax regulatory framework in the Russian Federation including the process for making changes and amendments to the Tax Code (Article 5 of Part I).

(b)

Explain how the tax terms/periods set by the Tax Code (Article 6(1) of Part 1) are determined.

(c)

Outline the application of regional and local tax laws, defining the relevant tax regulatory bodies.

§1

§1

§1

Excluded topics – –

Chapter 4, 5, 6 of Part I of the Tax Code Taxation of branches of foreign legal entities.

B

INCOME TAX LIABILITIES

1

Scope of individual income tax

(a) (b) (c)

Describe the scope of individual income tax. Define residents and non-residents for individual income tax purposes. Recognise the income that is exempt from individual income tax.

§5


Source of income (Article 208 of the Tax Code) Impact of double tax treaties.


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STUDY GUIDE

Ref: 2

Income from employment

(a)

Compute the taxable income from employment.

(b)

Explain how income in kind and material benefits are valued and calculate relevant amounts.

(c)

Compute the imputed income arising from interest savings on mortgage loans received for acquisition or new construction of residential property, acquisition of plots of land or acquisition of shares in the above property.

(d)

Explain the timing of income recognition on salaries accrued, but not paid in a calendar year.

(e)

Compute the taxable amounts of business trip expenses (statutory limits will be provided).

(f)

Compute the exempt and taxable amounts of medical expenses paid by an employer.

§5

Excluded topics –

Income of non-residents.

3

Income earned by individual entrepreneurs

(a) (b) (c) (d)

Compute the business income of an individual entrepreneur. Recognise the expenditure that is deductible (including depreciation allowances). Compute the amount of professional deductions available (norms will be provided). Explain the treatment of losses incurred by an individual entrepreneur.

4

Dividend and other income

(a)

Compute the exempt and taxable amounts of interest on bank deposits.

(b)

Compute the imputed income arising from low interest loans.

(c)

Compute the imputed income arising from the interest savings on new bank loans provided for refinancing the loans received for acquisition or new construction of residential property, acquisition of plots of land or acquisition of shares in the above property.

(d)

Compute the exempt and taxable amounts of gifts prizes and awards, distinguishing between different types of gifts and prizes.

(e)

Compute the taxable amounts of property insurance reimbursements.

(f)

Compute the exempt and taxable amounts of life insurance payments.

(g)

Compute the exempt and taxable amounts under agreements for non-state pension security or obligatory pension insurance concluded with non-state pension funds (Article 213.1).

§5

§6

Excluded topics –

Transactions involving futures and derivatives


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STUDY GUIDE

Ref: 5

Comprehensive computation of taxable income and income tax liability

(a)

Prepare a basic individual income tax computation.

(b)

Apply the correct rates of tax to the different types of income.

(c)

Compute the child deductions.

(d)

Explain and apply the principal social deductions, charity, education and medical (norms will be provided).

(e)

Explain and apply the principal rules of deduction on the sale of residential property.

(f)

Explain and apply the principal rules of deduction on the purchase of residential property, land, including mortgage interest and other acquisition related confirmed expenses (housing incentive).

(g)

Compute other property deductions, including deductions on transactions in securities.

(h)

Compute the tax payable on dividend income, considering the provisions of item 2 of Article 214.

§5

(i)

Compute the tax payable on income from the sale of listed and unlisted securities based on the provisions of Article 214 (1).

§6 §6 §6

(j)

Compute the tax payable on income from investment funds (PIFs). §6

(k)

Compute the tax on income from lotteries and advertising campaigns. §6

Excluded topics –

All exemptions stated in items 4-8, 11-17, 22-26, 29-33, 35-38, 41-51 in Article 217of the Tax Code

–

Ordinary standard deduction

–

Increased standard deductions except for double deductions for single parents §5

6

Use of exemptions and deductions in minimising individual income tax liabilities

(a)

Explain how the maximisation of available tax reductions and concessions can defer or minimise individual income tax liabilities.

(b)

Identify, compute and apply the right concession/reduction in given circumstances.


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STUDY GUIDE

C

CORPORATE PROFITS TAX LIABILITIES

1

Scope of corporate profits tax

(a)

Describe the scope of corporate profits tax and the types of taxpayer to which it applies.

(b)

Explain the concept of separate sub-division as it applies to corporate profits.

(c)

Explain the procedure for the allocation of profits between head-office and branches.

Ref:

§2 §1 §4

Excluded topics – – – –

Taxpayers: foreign legal entities, banks, insurers, brokerage firms (Article 290-312). The split of tax between the federal, regional and municipal budgets Special economic zones and regime and, production sharing agreements Taxation of branches of foreign legal entities

2

Taxable income for corporate profits tax.

(a)

Income recognition:

§2

(b)

(i)

Define the two income recognition methods (cash and accruals).

(ii)

Explain and apply the effect of both methods on the timing of income recognition.

(iii)

Explain the concept and basic rules principles of transfer pricing rules application based on the transfer pricing chapter of the Tax Code.

Taxation of special types of income: (i)

Explain and apply the rules for the taxation of dividends and calculate profits tax on dividends paid and received by Russian legal entities.

(ii)

Explain the timing of income recognition for the principal on sales made via commissioners and calculate taxable income of both principal and commissioner.

(iii)

Calculate the taxable income on foreign currency transactions and on transactions denominated in “notional” units.

(iv)

Explain the timing of income recognition for factoring operations and calculate the taxable income from trade debt factoring for both parties.

(v)

Compute the taxable gain or loss on fixed asset disposal, including the valuation of depreciable property.

(vi)

Compute the taxable income arising from leasing transactions.

(vii)

State the rules for the taxation of simple partnership income.

(viii)

Calculate the taxable income on p.3 (penalty income), p.4 (rent income), p.6 (interest income), p.7, p.13, p.18, p.20 of Article 250 of the Tax Code.


Certain excluded income items (Article 251, it.1.6-1.8, 1.13-1.31, 1.33, 1.34-1.40, it.2) Recognition date for certain income (Article 271 , it.4.9)


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STUDY GUIDE

Ref: 3

Deductible expenses and tax allowances in deferring and minimising tax liabilities

(a)

Expense recognition for tax purposes:

(b)

§2

(i)

Define the method of expense recognition for tax purposes.

(ii)

Explain the matching principle of expense recognition if the cash method is used for profits tax purposes.

(iii)

State the expense allocation rules between activities taxed at different rates.

(iv)

Explain the rules for recognition of direct and indirect expenses in profits tax accounting for manufacturing and trading companies.

Deductible expenses for corporate profits tax: (i)

Explain and apply the rule for the initial 30% write-off available for new fixed assets.

(ii)

Explain and apply the rules for capital improvements to leased assets (Article 258.1, 259.2).

(iii)

Explain the treatment of expenses incurred on fixed asset acquisitions (including bank interest).

(iv)

Explain the differences in the rules for the recognition of repair and capital improvement expenses.

(v)

Define depreciable tangible and intangible assets

(vi)

Explain and apply the allowable depreciation methods for tax purposes.

(vii)

Explain and apply the rules for the creation and usage of an allowance for bad debts (Article 266).

(viii)

Explain and apply the rules for bad debts write-offs.

(ix)

Apply the expense allocation rules between commissioner and principal.

(x)

Apply the relevant tax rules for losses on fixed assets disposals (Article 323).

(xi)

State the main types of partially deductible and non-deductible expenses.

(xii)

Define and apply the deductibility limits on bank loan interest including the sum differences on liabilities denominated in notional currency units and thin capitalisation rules (Article 269).

(xiii)

Calculate the adjustments for other types of partially deductible expenses (statutory limits will be provided).

(xiv)

Calculate the deductible expenses of both the lessor and the lessee under the different accounting treatments of leased assets.

(xv)

Explain and apply the rules for research and development (“R&D”) deductible expenses.


(xiii)

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STUDY GUIDE

Ref: (c)

Losses: §3 (i)

Define allowable net operating losses and calculate the amount of losses qualifying for the carry forward tax concession.

(ii)

Explain the rules for calculating the maximum amount of losses allowable in each year and calculate the loss carry forward concession.


– – –

Expenses on natural deposits (Article 261) Expenses incurred on social infrastructure (Article 264, it.1.32) Other operational expenses (Article 264, it.1.32, 1.33, 1.38-1.39(2), 1.42-1.44) Non-operational expenses (Article 265, 1.3, 1.4, 1.9, 1.10-1.13, 1.17, 18, 19, 19.2, 2.3, 2.4, 2.6) Certain non-deductible expenses (Article 270, it.10, 11, 13, 15, 17-18, 20, 22, 24-26, 30-32, 35, 37-40, 45-47, 48.1-48.7, 48.9) Repair allowance (Article 260) Special tax reserves (Articles 267, 267(1)) Expenses incurred for acquisition rights for plots of land (Article 264.1)

4

Comprehensive computation of corporate profits tax liability

(a)

Prepare a computation of total taxable income based on the format of the profits tax return. Compute the corporate profits tax liability, applying the correct rates of tax Prepare calculations of the profits tax payable by branches.

–

(b) (c)

§4

Excluded topics –

Dividend income received from foreign legal entities (Article 275,it.1)

–

Trust agreements (Article 276)

–

Charter capital formation (Article 277)

–

Securities income (Articles 280-282)

–

Income of banks, insurance companies, non-state pension funds, brokers and foreign legal entities (Articles 290-300)

–

Income from term deals (Articles 301-305).

5

Tax accounting for corporate profits tax

(a)

Define and apply basic tax accounting rules based on Articles 313-320, Article 322323.

§4

Excluded topics –

Tax accounting special rules for profits tax purposes: for federal institutions (Article 321),repair expenses (Article 324), expenses on exploration of natural deposits (Article 325), for operations with securities (Article 326, 327, 329, 333), for insurers and banks (Article 330, 331), for trusts (Article 332)


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STUDY GUIDE

Ref: 6

Use of exemptions and reliefs in deferring and minimising corporate profits tax liabilities

(a)

Explain how the maximisation of available tax reductions and concessions can defer or minimise corporate profits tax liabilities.

(b)

Identify, compute and apply the right concession/reduction in given circumstances.

D

VALUE ADDED TAX

1

Scope of value added tax (VAT)

(a)

Describe the scope of VAT.

(b)

Identify the VAT rates applicable to different types of activities (no detailed knowledge of the application of the 10% rate is required).

(c)

Explain the difference between zero rated and exempt items.

§4

§8


VAT registration. Waiver of VAT liability (Article 145) VAT related to imported goods, works, services (Articles 150-152, 160) Place of sale of goods, works, services (Articles 147, 148)

2

Computation of VAT liabilities

(a)

Explain how the tax point is determined under the accruals method.

(b)

Apply VAT exemptions to transactions which are not the object of taxation (article 146).

(c)

Explain the consequences of a non-confirmed export and compute the related VAT

(d)

Compute the VAT on trade debt factoring for both parties.

(e)

Compute the VAT on a fixed asset disposal.

(f)

Compute the VAT on a self-supplied construction.

(g)

Compute the VAT on sales made through commissioners for both the principal and the commissioner.

(h)

Compute the VAT on sales performed in a foreign currency.

(i)

Explain the rules of non-recognition of “sum” difference recognition for VAT purposes for both the seller and the customer.

(j)

Explain the general deduction criteria for input VAT.

(k)

Explain the timing and methods of recovery of input VAT.

(l)

State the major cases for the inclusion of input VAT in expenses.

(m)

Explain the allocation principles for taxable and non-taxable activities .

(n)

Compute the allocation of input VAT between taxable and non-taxable activities.

(o)

State the situations where VAT should be included in the cost of asset.

(p)

Explain and apply the specific rules for VAT recovery relating to capital construction and self-supplied construction.


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STUDY GUIDE

Ref: (q)

Claw-back of recovered VAT (i)

Compute the claw-back of recovered VAT on property where it is subsequently used for non-vatable transactions.

(ii)

Compute the claw-back of recovered VAT in case of using goods (services, property rights), including fixed assets and intangible assets for transactions subject to 0% VAT rate in compliance with p.1 Article 164 of the Tax Code.

(r)

Prepare a basic VAT computation showing separately all elements of input and output VAT.

(s)

Explain and apply the specific rules for VAT recovery related to zero rate supplies (export).

(t)

Explain and apply specific rules in respect to taxpayer’s right for early VAT recovery related to advances paid to suppliers.

(u)

Explain the main requirements for declarative procedure of VAT recovery.

(v)

Explain the application of VAT rules and amended VAT invoices in the case of price change or quantity changes for goods (services, property rights) after shipment.

Excluded topics Output VAT: – Zero rate supplies other than export of goods and related services – Types of VAT exempted outputs (Article 149) – Types of income subject to VAT at 10% rate – Self assessed VAT on objects other than capital construction – VAT on income from exchange of goods, works, services – VAT withholdings on income paid to foreign legal entities (VAT reverse charge) – VAT on transport services, on sale of an enterprise (Articles 157, 158) – VAT related to product sharing agreements (Article 178) – Input VAT on payments to foreign legal entities. 3

VAT payment and reporting

(a)

Explain the usage of VAT invoices and journals.

(b)

List the information that must be given on a VAT invoice and amended VAT invoice.

(c)

State the deadlines for the filing of returns and making of VAT payments.

(d)

Explain the procedure for VAT refunds (including the refund of VAT on exports).

(e)

State the set of documents for confirmation of export in a basic situation.

(f)

Requirements for electronic VAT invoice for VAT recovery.

§9

Excluded topics –

Payments of customs VAT


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STUDY GUIDE

E

SOCIAL INSURANCE CONTRIBUTIONS

Ref:

1

Scope of social insurance contributions (SIC)

§10

(a)

Describe the scope of SIC.

(b)

Recognise and apply the major types of income exempt from SIC (sub-points 1, 2d, e, g, i, 3, 5-7, 11-13 of p.1, p.2, p.3 of Article 9 of 212-FZ).

2

Contributions made by employers for employed persons

(a)

Prepare a basic SIC computation in respect of employees under labour agreements, under civil law agreements and under copyright agreements.

(b)

Explain how employers report and pay SIC in respect of employees.

3

Contributions made by individual entrepreneurs with the disbursements to physical persons

(a) (b)

Prepare a basic SIC computation for an individual entrepreneur. Explain how individual entrepreneurs report and pay SIC.

4

Social funds audits

(a)

State the limitations and conditions under which these specific tax audits can be carried out.

§10

§10

§10

Excluded topics – – – – – –

SIC for expatriates employed in Russia SIC for Russian employees offshore SIC for agricultural units, North residents and lawyers SIC for individual entrepreneurs who do not pay to the other physical persons SIC exemptions other than specifically stated above SIC for employees in technoparks (special innovative areas with low rates)

F

CORPORATE PROPERTY TAX

1

Scope of corporate property

(a)

Describe the scope of corporate property tax.

(b)

Define the tax base in respect of both head office property and the property of separate subdivisions of Russian legal entities.

(c)

State the maximum tax rate and tax period.

2

Computation of corporate property tax liabilities

(a)

Describe the method of property valuation used to determine the corporate property tax base.

(b)

Compute the corporate property tax base for both a head office and its separate subdivisions.


§11

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STUDY GUIDE

Ref: 3

Payment and reporting requirements

(a)

State the deadline for the filing annual tax return and advance tax calculations (Article 386).

(b)

State the deadline for property tax payments and advance tax payments (Article 383).

§11

Excluded topics –

Article 373 (taxpayers)

–

Property taxable for both foreign legal entities with permanent establishments in Russia and foreign legal entities without activity via permanent establishments.

–

Article 374 (it.2, 3, 4.2), Article 375 (it.2), Article 376 (it.2.5), Articles 377-378, 381, 382(it.5), 383(it.4-6), 384, 385

G

TAX PLANNING, ADMINISTRATION AND CONTROL

1

Obligations of the taxpayer and/or their agents

(a)

Taxpayers and tax agents: (i) (ii)

(b)

§1

Differentiate between taxpayers and tax agents. Explain the rights and obligations of both taxpayers and their agents.

Individual income tax: §7

(c)

(d)

(i)

Explain the filing requirements and payment deadlines for employees

(ii)

Explain the filing requirements and payment deadlines for employers (as tax agents)

(iii)

Explain the filing requirements and payment deadlines for individual entrepreneurs and self-employed persons.

(iv)

Explain the procedure for obtaining deductions and exemptions at source and upon the year-end tax declaration.

Corporate profits tax: (i)

Explain the filing requirements and payment deadlines for corporate profits tax.

(ii)

Explain taxpayer’s right for the adjustments of tax base and tax in tax period when the mistakes have been found out related to previous tax periods (paragraph 3 p.1. of Article 54).

Explain the refund procedure and deadlines for individual income tax and corporate profits tax.

Excluded topics –

Profits tax administration rules for: low income entities (Article 286, it.3), foreign legal entities (Article 286, it.4), withholding corporate tax (Article 287, it.2)


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STUDY GUIDE

Ref: 2

Procedures relating to tax audit, appeals and disputes

(a) (b) (c)

State the limitations related to tax audits conducted by tax authorities. State the conditions under which the consequent tax audit can be carried out. Tax appeal order in respect of first tax decision received (Article 101.2).

§12

Excluded topics –

All topics other than specified above.

3

Sanctions for tax violations, penalties and interest on late tax payments

(a)

Explain and calculate the administrative tax sanctions for non-compliance.

(b)

Explain the difference between interest on late tax payments and tax penalties.

(c)

State the amounts of penalties for tax underpayments or non-payments.

(d)

Compute interest on late tax payments.

(e)

State the amounts of penalties for non-filing or late filing of tax returns.

(f)

Explain the procedure by which the tax authorities collect penalties from taxpayers.

(g)

Explain the procedure of interest accrued in favour of taxpayer in case of tax authorities breach the term of cancellation the decision on blocking the accounts in taxpayer’s bank.

(h)

State the amount of penalties for non-compliance with transfer pricing rules.


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RATES AND ALLOWANCES

RATES AND ALLOWANCES The following tax rates and allowance are to be used in answering the questions unless the question states otherwise. Personal and children allowances Standard personal allowance Children allowance : First child Second child Third and subsequent child

None (from 1 January 2012) 1,000 RR per child (up to 280,000 RR) 1,400 RR per child (up to 280,000 RR) 3,000 RR per child (up to 280,000 RR)

General limitation on “property” allowance Investments in residential property and land for tax purposes Statutory exclusions from taxable income Prizes and awards Gifts at work Support payments

2,000,000 RR (upper limit)

4,000 RR (upper limit) 4,000 RR (upper limit) 4,000 RR (upper limit)

Maximum limit for social deductions listed below 120,000 RR (medical, personal educational, non-state pension insurance and voluntary pension insurance and additional insurance contributions for the accumulated part of labour pension – subject to certain conditions set out in the law) Educational deduction for children

50,000 RR (upper limit)

Professional deduction – general – for architects – for music writer – for sculptor – for designers, film editors

20% 30% 40% 40% 40%

Charity deduction

up to 25% of income

Gains on property sales: – immovable property – movable property

1,000,000 RR (upper limit) 250,000 RR (upper limit)

Housing allowance (deduction)

2,000,000 RR (upper limit)

Statutory per diem rate for personal income tax: – for domestic business trips – for foreign business trips

700 RR per day 2,500 RR per day

Threshold interest rates for personal income tax purposes Rouble bank deposits CB refinancing rate increased by 5% Foreign currency bank deposits 9% Rouble loans 2/3 of the CB refinancing rate Foreign currency loans 9% Threshold interest rates for profits tax purposes Foreign currency loans Rouble loans received


15% 1.1 of the CBR refinancing rate

(xx)

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Single threshold for social insurance contributions for the year 2013 (several categories of insurance contributions subject to special incentives and reduced rates are not examined)

Income amount Rate For employers (general) and individual entrepreneurs up to 512,000 RR 30% excess over 512,000 RR 10% For employers (license, copyrights, civil contracts)

up to 512,000 RR excess over 512,000 RR

27.1% 10%

Expenses for profits tax purposes Voluntary medical insurance expenses (subject to conditions set out in the law) are limited to 6% of labour costs. Voluntary life insurance expenses (subject to conditions set out in the law) are limited to 12% of labour costs. Voluntary personal insurance against accident at work resulting in death or permanent physical disability are limited to 15,000 RR per insured employee per annum. Certain advertising expenses listed in the law are limited to 1% of sales revenue. Reimbursement of interest on employees’ mortgage loans is limited to 3% of labour costs. Entertainment expenses (subject to conditions set out in the law) are limited to 4% of labour costs for the reporting period. Special depreciation ratios Fixed assets received in financial leasing

3 (upper limit)

Historic cost of depreciable non-current assets

40,000 RR (minimum)

Allowances for receivables General limitation Aged 0-44 days Aged 45-90 days Aged more than 90 days

10% of sales 0% of receivable 50% of receivable 100% of receivable

Value added tax (VAT) rates Standard Reduced Exports and sales of diplomatic missions

18% 10% 0%

Limit for VAT-exempt promo presents

up to 100 RR (upper limit)

General profits tax

20%

Tax on dividends for residents Tax on dividends for foreign companies

9% 15%

Property tax rate


2.2%

(xxi)

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Personal income tax rates Basic rate Higher rate

13% 35%

Tax on dividends for residents

9%

Central Bank refinancing rates (notional) 1 January to 30 April 2013 1 May to 30 September 2013 1 October to 31 December 2013

15% 8% 20%

Number of days in calendar months for the year 2013 January February March April May June July August September October November December

31 28 31 30 31 30 31 31 30 31 30 31


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RUSSIAN TAX SYSTEM

OVERVIEW Objectives 

To explain the tax regulatory framework in Russia.



To summarise the types of taxes levied on legal and physical persons in Russia and explain each tax and its operation.



To introduce the concept of transfer pricing.



To explain rights and obligations of taxpayers and tax agents in Russia.



To summarise the types of business activities in Russia.

FUNCTION AND PURPOSE OF TAXATION

REGULATORY FRAMEWORK

CONDITIONS OF TAXATION

DIFFERENT TYPES OF TAXES       

Federal, regional and local taxes Direct and indirect taxes Profits tax Personal income tax Value added tax Social insurance contributions Corporate property tax

  

Funding for government spending Redistribution of income and wealth Correcting market inefficiencies

      

Tax Code Amendments to the Tax Code Calculation of time-limits (art. 6.1) Regional and local tax legislation Tax regulatory bodies International tax legislation Court system

 

Elements of taxation Definitions

TYPES OF BUSINESS ACTIVITIES

TAXPAYERS AND TAX AGENTS  


Taxpayers Tax agents

0101

 

General Branches of Russian legal entities

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RUSSIAN TAX SYSTEM

1

FUNCTION AND PURPOSE OF TAXATION

1.1

Providing funding for government spending

Taxation is the process whereby charges are imposed on entities, individuals or property and collected to raise finance for the state and public purposes. So, the primary purpose of taxation in an economy is to provide funds for government spending on areas such as education, health care, defence and law and order. This primary function is normally guided by principles of: 

Economic efficiency – the tax system will affect the incentive people have to work. If taxes are high, this may provide a disincentive to work.



Equity – the system should be “fair”.



Simplicity – the more complex a tax system is, the more expense tax payers will incur in minimising their taxes.



International competitiveness – in the modern world, where economies have become much more open, there is a risk that high tax economies suffer, as companies move their operations to lower tax economies. Also, individuals may prefer to move from high tax countries to lower tax jurisdictions.

1.2

Redistribution of income and wealth



Some policy makers see the taxation system as a way of redistributing wealth – imposing higher taxes on the rich, and redistributing it to the poor.



Providing support to poorer families through unemployment benefits and child benefits is one means commonly used to redistribute income.

1.3

Correcting market inefficiencies

Where markets fail to factor in pollution or the health effects of certain behaviour (e.g. drinking and smoking) policy makers may use indirect taxation to correct these. For example, by imposing excise duties on fuel, alcohol and tobacco products. 2

REGULATORY FRAMEWORK

2.1

Tax Code



The Tax Code is the main tax legislative act, which consists of two parts: (1)

Defines the basic concepts used throughout the Code (e.g. types of taxes, definition of taxes, sales revenue, market price for tax purposes, etc), provides general rules for tax payment and collection, lists rights and responsibilities of tax payers and tax authorities, etc.

(2)

Is designed to govern the procedure of calculation and payment of specific taxes and other fees.


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RUSSIAN TAX SYSTEM

2.1.1

Tax Code (Part I)



Tax Code (Part I) contains the following main sections:       

types of taxes and fees levied in the RF rights and obligations of taxpayers; rights and obligations of tax authorities; grounds for origination (amendment, termination) of tax liability; forms and methods of tax control; tax fines and penalties; tax appeal procedure.

Part I of the Code came into force (except for a few provisions) on 1 January 1999. 2.1.2

Tax Code (Part II)



The following chapters of Tax Code (Part II) are effective in 2013:                

Chapter 21 (VAT); Chapter 22 (Excises); Chapter 23 (Personal Income Tax); Chapter 25 (Corporate Profits Tax); Chapter 25.1 (Tax on Objects of Wild Nature, Water and Biological Resources)**; Chapter 25.2 (Tax on Water)**; Chapter 25.3 (State Duty)**; Chapter 26 (Tax on Excavation of Mineral Resources)**; Chapter 26.1 (Unified Agricultural Tax)**; Chapter 26.2 (Simplified System of Taxation)**; Chapter 26.3 (Unified Tax on Imputed Income)**; Chapter 26.4 (Taxation of Product Sharing Agreements)**; Chapter 28 (Transport Tax)**; Chapter 29 (Tax on Gambling Activities)**; Chapter 30 (Property Tax); Chapter 31 (Land Tax)**.

Commentary Chapter 24 (Unified Social Tax) became inoperative when social insurance contributions replaced UST with effect from 1 January 2010. ** Are not examinable in F6-Rus. 2.2

Making amendments to the Tax Code



Any changes in the Tax Code are made through the adoption of corresponding federal laws.



All federal laws are adopted first by the State Duma and then the Federation Council, and signed by the President. They enter into force not earlier than after their official publication.

2.2.1

Article 5, Part 1



Acts of tax legislation that increase tax rates, or which in any other way worsen the position of taxpayers, may not apply retroactively.


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RUSSIAN TAX SYSTEM



Tax acts become effective not earlier than one month after the date of their official publication and not earlier than the first day of the following tax period for the corresponding tax.



The provisions of laws, which improve a taxpayer’s position, may be retroactive and can become effective from the date of their official publication.

Example 1 Suppose that a new Law introducing a change to the Tax Code Chapter 22 “Excises” was officially published on 5 January 2013. The law states that it comes into force from the date of official publication. According to the new Law the excise rate on beer is reduced retroactively starting 1 January 2013. Assume one month as a tax period for excises. Required: Briefly comment on the effective date of the law.

Example 2 Facts as in Example 1 except that according to the new Law the excise rate on beer is increased retroactively starting 1 January 2013. Required: Briefly comment on the effective date of the law. 2.3

Calculation of time-limits (art. 6.1)



The time-limit on taxes and fees is determined by a calendar date or the expiry of a period of time that is calculated in terms of years, quarters, months, weeks or days.

Time calculated in terms of:

Expiry

Explanation of period

Years

In the corresponding month and on the day of the last year of the period.

Any period of 12 successive calendar months is recognised as a year

Quarters

Last day of the last month of the period.

A quarter is 3 months. Counted from beginning of the year.

Months

In the corresponding month and on the day of the last month of the period

A calendar month is a month. If there is no corresponding day then the last day (e.g. 28th or 29th in February).

Weeks

Last day of a week.

Five working days in a row.



Where a time limit (e.g. for filing a return or making payment) falls on a holiday, then the next working day is applied as the deadline. Performance can be met up to midnight of the final day, and may be effected at a post office or other communications organisation.


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RUSSIAN TAX SYSTEM

2.4

Regional and local tax legislation



The constituent republics of the Russian Federation, krais, oblasts, autonomous formations, federal cities Moscow and St. Petersburg (commonly referred to as regions or “subjects” of the Russian Federation) issue laws on regional taxes and regional rules affecting some federal taxes.



Municipal (local) legislative authorities within the regions issue acts on local taxes. Regional tax laws and local tax acts must not contradict federal tax laws.

2.5

Tax regulatory bodies



Tax Code states that the tax legislation is comprised of:   

the Tax Code itself and other federal laws; laws of the subjects of the Russian Federation; legislative acts of municipal authorities adopted in accordance with the Tax Code.

Commentary For example, regions can set rates of corporate profits tax and corporate property tax within stipulated federal limits. 

The Government, the Ministry of Finance, the Federal Tax Service (FTS) of the Russian Federation, State Customs Committee, Central Bank, etc may regulate the tax rules only in the cases specifically provided by the tax legislation; they cannot amend the tax legislation.

Illustration 1 Chapter 25 (corporate profits tax) of the Tax Code has given Russian Government the right to establish the classification of fixed assets into depreciation groups for profits tax purposes, therefore this classification approved by the Government is binding for taxpayers. Ministry of Finance has the right to issue clarifications on taxation issues. 

Instructions, letters, telegrams and other regulations issued with respect to federal, regional, and local taxes by the FTS, state tax inspectorates in the regions and municipalities, as well as by other executive bodies may not introduce tax rules affecting principal tax matters (i.e. should generally cover administrative tax issues only).

2.6

International tax legislation



One of the constitutional principles is the rule that international agreements concluded by the Russian Federation take precedence over its national legislation.



This rule is reiterated by the Tax Code and is equally applicable to conventions for avoidance of double taxation and prevention of fiscal evasion with respect to taxes (“double tax treaties”) and other international tax agreements of the Russian Federation.


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RUSSIAN TAX SYSTEM

2.7

Court system



The Russian tax regulatory framework does not explicitly recognise the concept of a precedent as a legal source. However, decisions and clarifications of the Supreme Arbitration Court of the Russian Federation, which is the highest court in resolving disputes between corporate taxpayers and the tax authorities, are binding for the lower arbitration courts, which handle the majority of tax cases.

Commentary Thus, such decisions and clarifications effectively establish the ultimate approach towards a disputed tax matter. 

The other two of Russia’s highest courts (the Constitutional Court and the Supreme Court) play an active role in testing the legality of tax acts and, thus, also effectively change the tax rules by means outside the scope of the legislative process. In quite an impressive number of decisions, parts of tax laws have been declared invalid as contradictory to the Constitution (by the Constitution Court), and Presidential Decrees, Governmental Regulations, FTS Instructions contradictory to tax laws (by the Supreme Court).

3

CONDITIONS OF TAXATION

3.1

Elements of taxation

A tax is established if tax payers and all elements of taxation are defined:      

tax object; tax base; tax period; tax rate; procedure for tax calculation; procedure and deadlines for tax payment.

3.2

Definitions

Tax object – any object (property, profit, income etc.) having a cost, quantitative or physical characteristic whose existence is linked to the emergence of a tax liability of the taxpayer is deemed to be an object of taxation. Each tax has an independent object of taxation defined in compliance with part II of the Tax Code (art.38). Tax base represents a value, physical or other parameter of a taxable item (art.53) A tax period is a year or any other period of time with regard to a taxpayer's liabilities for individual taxes after the end of which the tax base is determined and the due amount of tax assessed (art.55). The tax period may consist of one or more accounting periods, tax reporting periods or advance payment periods. The tax period will normally correspond with a calendar year, but will differ when an organisation is established or wound up during the course of a year. (This will normally result in a tax period of less than twelve months, but in the case of a new business commencing in December, the tax period can run until the following 31 December.) Tax rate represents the amount of tax levied on a unit of measurement of a tax base (art.53).


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RUSSIAN TAX SYSTEM

4

DIFFERENT TYPES OF TAXES

4.1

Federal, regional and local taxes

The Russian tax system consists of federal, regional and local taxes: 

Federal taxes:      



Regional taxes:   



corporate profits tax (CPT); value-added tax (VAT); customs duties, customs fees; excise duties; personal income tax; other federal taxes.

corporate property tax; transportation tax; gambling tax.

Local taxes:   

land tax; individual property tax; other local taxes and fees.



Federal taxes are levied throughout the territory of the Russian Federation, while regional and local taxes are levied on the taxpayers registered or operating within the territory of the region (municipal district).



No federal, regional or local taxes can be established which are not provided for by the Tax Code.



The rates (within the limits set at the federal level) of regional/local taxes are normally set and respective tax concessions are granted at the regional/local level. The results vary over the territories: 

some territories introduce as many taxes as possible and raise their rates to the maximum;



others refrain from introduction of excessive number of taxes and use their authority to establish lower tax rates, thus, offering a more favourable tax regime to lure inbound investments.

4.2

Direct and indirect taxes



Direct tax is normally taken to mean situations where the tax authorities collect tax from the person who is being taxed – so most taxes are categorised as direct taxes.



Indirect tax is where the tax is collected from another party – not the party who is suffering the tax. VAT is an example of an indirect tax. The seller of the goods adds VAT on to the price – so the final consumer is the person who suffers the tax. However, it is the seller who collects the tax and passes it on to the tax authorities.


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RUSSIAN TAX SYSTEM

4.3

Profits tax on corporate incomes



Profits tax is payable in Russia on the profits of Russian legal entities and foreign legal entities carrying out business activities in the Russian Federation, calculated as operational and non-operational income less tax deductible expenses and losses.

Commentary – Exam advice Profits tax levied on foreign legal entities is not examinable. 

It is still possible for profits taxation purposes to recognise revenues either on a cash basis or on an accruals basis for CPT purposes.

Commentary The choice of cash method for CPT is not available to taxpayers with average quarterly income exceeding 1 million. RR (excluding VAT). 

Under the accruals method operational income and expenses are recognised when they are accrued, while under cash method they are recognised when paid.



A corporate taxpayer must maintain a tax accounting system for the purpose of calculating corporate profits tax (CPT) liabilities. Reconciliation between accounting and taxable profits is not required.



Deductibility of certain categories of business expenses and losses is restricted under the Russian taxation rules, while a few types of expenses are wholly non-deductible.



The profits tax rate is set at 20% of the taxable business profits, where 2% is payable to the federal budget and 18% to the regional budget. The regions have been granted the power to decrease the regional rate down to 13.5% for certain categories of taxpayers.



Some categories of income are subject to withholding profits tax. For example dividend income payable by a Russian company to another Russian company with a participatory share less than 50% is taxable at source at the rate of 9%.



Since 1 January 2012 consolidated tax reporting has been allowed for large groups with subsidiaries that are at least 90% owned by the parent company. Few groups qualify, however, as the conditions are that the group must have at least:   

annual turnover – 100 billion roubles; and assets – 300 billion roubles; and total tax take – 10 billion roubles per year.

Commentary – Exam advice Unified tax on imputed corporate income (a simplified tax for small businesses) and withholding income tax on income of foreign legal entities are not examinable.


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RUSSIAN TAX SYSTEM

4.4

Personal income tax



Personal income tax (PIT) applies to income of individuals.



Base PIT rate in 2013 is 13%. Rates of 9%, 30% and 35% apply to certain types of income.



A taxpayer is granted a number of standard, professional, social and property deductions (allowances) when calculating his taxable income.



All Russian legal entities are required to withhold individual income tax from the salaries of their employees (individuals engaged under labour contracts) and income paid to other individuals engaged by them under civil-law contracts.



Individual entrepreneurs pay PIT themselves and make regular advance payments of PIT.

4.5

Value added tax



Value added tax (VAT) is generally chargeable on sale of all goods and services in Russia and on importation of goods into the territory of the Russian Federation. The standard rate of VAT is 18%. Certain food products and goods for children are charged a 10% VAT, while exports of goods and related works and services are subject to VAT at 0% rate.



Sales of certain goods (works, services) are VAT exempt.

Key point

 VAT rules for exempt operations and operations subject to 0% rate are very different. 

Input VAT (i.e. VAT paid to suppliers) is generally allowed as a credit against output VAT (i.e. VAT charged to customers and payable to the budget) after the services/materials/fixed or intangible assets are reflected on the books.



Exemption from VAT of certain sales may be disadvantageous to the supplier since VAT incurred on inputs may not be recovered and so charged to the costs of production. Sales subject to 0% VAT (e.g. exports) allow recovery of input VAT.



There is a uniform invoicing procedure for VAT purposes applicable to all taxpayers providing goods, works, or services. VAT invoices of a standard format (“schet-factura”) are to be issued and registered in a sales journal of the seller and incoming VAT invoices from suppliers are to be recorded in a purchases journal of the buyer. Compliance with the VAT invoicing procedures is critical to the buyer’s ability to recover input VAT.

Commentary – Exam advice The VAT withholding requirement (“reverse charge” VAT) applicable to payments made to foreign companies is not examinable.


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RUSSIAN TAX SYSTEM

4.6

Social insurance contributions



Social insurance contributions (SICs) are not taxes; they are obligatory payments for the mandatory social insurance, so they are not regulated by the Tax Code, but by the Federal Laws and respective regulatory legal acts. SIC legislation provides rules for calculations, payments, reporting and control and can be changed and amended more easily than tax legislation.



Currently, the main regulation rules established by the Federal Law # 212-FZ are very close to the Tax Code rules but there are some differences (e.g. concerning the guarantee of SIC payers’ rights).



SICs combine payments to several state funds, which are made by employers and individual entrepreneurs to secure state medical, pension and social insurance.

Commentary Although the contributions go to several specific funds, for exam purposes these contributions are usually treated as one obligatory payment. 

SICs represent: 

for employers an additional cost (on top of the salaries) which is allowed as a deduction in arriving at the corporate profits tax base;



for an individual entrepreneur an additional cost generally deductible from taxable business income.

4.7




Property tax is payable on assets of Russian and foreign legal entities located in Russia based on the annual average net book value of fixed assets. The property tax rate is set at the regional level and may not exceed 2.2 %.

5

TAXPAYERS AND TAX AGENTS

5.1

Taxpayers



Taxpayers and payers of levies are organisations and individuals having an obligation to pay taxes and/or fees, respectively.



In most cases a taxpayer will need to register, file regular tax returns and make tax payments.

5.1.1

Principal rights (art. 21)



To receive from the tax authorities at the place of registration free information on current taxes and levies (including information on laws on taxes and levies and other tax related acts).



To use established tax allowances.



Not to comply with illegitimate acts and requirements of the tax authorities.



To appeal against the decisions of the tax authorities as well as their actions.


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RUSSIAN TAX SYSTEM



To claim full compensation of any losses incurred due to the unlawful decisions, actions (inaction) of the tax authorities.



To receive timely offset or reimbursement of the tax amounts paid or collected in excess of the correct amount.

5.1.2

Principal obligations (art. 23)



To register for tax purposes if required by the Tax Code.



To pay lawfully established taxes.



To file tax declarations.



To maintain records of their income (costs) and taxable subjects.



To provide the tax authorities with the necessary information and documents required to calculate and pay taxes.



To comply with the lawful demands of tax authorities to rectify violations of tax and levies legislation.



To keep for four years the accounting records and other documents required for the calculation of taxes and confirming payment of taxes and levies.

5.2

Tax agents

Definition Persons (both individuals and legal entities) who, in accordance with the Tax Code, must calculate and withhold relevant taxes from payments to taxpayers and remit these amounts to the budget. 

A tax agent does not bear the cost of the tax himself but rather acts as a collecting “agent”.



Examples are:  

an employer with regards to salaries paid; a payer of dividends.



Tax agents generally have the same rights as taxpayers.



Tax agents have the following main obligations:





to notify within one month local tax authorities of the inability to withhold tax and the amount of the taxpayer’s liability;



to maintain records of income paid to taxpayers, taxes withheld and remitted to budgets (non-budget funds), including personalised data on each taxpayer;



to file with the tax authorities documents necessary for the tax authorities to monitor accuracy of the calculation, withholding and remittance of taxes.

The Tax Code provides for a penalty for failure to transfer the tax that should have been withheld and transferred to the budget. The penalty is established at 20% of the relevant tax amount.


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RUSSIAN TAX SYSTEM

Example 3 Darya starts employment for ZAO Sterling as a translator. On joining she advises Ilya, the chief accountant, that the company should not deduct any tax from her salary as she has income from other sources, including publishing books. She demands to be paid gross declaring that her tax adviser will account for her liabilities when submitting returns. Required: Explain whether the company can agree to Darya’s request.

6

TYPES OF BUSINESS ACTIVITIES

6.1

General



Business activities in Russia may be conducted in the following forms: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11)

full partnership (“polnoie tovarischestvo”); commandite partnership (“tovarischestvo na vere”); limited liability company; company with additional liability (“obshestvo s dopolnitelnoi otvetstvennostju”); closed joint stock company; open joint stock company; production co-operative; individual in business (individual entrepreneur); simple partnership (created under a “joint activities” agreement); branch of Russian entity; branch of foreign entity.



Entities listed under items 1-7 are legal persons subject to corporate taxes.



Individual entrepreneurs are liable to personal income tax (PIT) and social insurance contributions. They are also VAT payers with certain limitations.



A simple partnership’s profit is added to other income of the partner and taxed according to corporate or personal income tax rules as appropriate.


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RUSSIAN TAX SYSTEM

6.2

Branches of Russian legal entities



The Tax Code operates with a notion of a “separate sub-division” of a legal entity.

Definition Any sub-division with permanent working places in a location other than the location of the head office. 

The working place is considered to be “permanent” if it is created for more than one-month period.



Branches (separate sub-divisions) are not considered to be independent taxpayers. The organisation has the obligation to pay taxes locally at the place of location of its separate sub-divisions.



Corporate profits tax is allocated between a branch and its head office according to special rules which will be explained in detail in relevant sections.



Property tax of a branch is calculated based on the value of the property of the branch and is paid to the tax inspectorate at the branch location at that local rate.



Individual income tax on wages and salaries of the employees in the branch are calculated based on the salaries of relevant employees.

Commentary – Exam advice Taxation of branches of foreign legal entities is not examinable. FOCUS You should now be able to: 

describe the purpose (economic, social, etc) of taxation in a modern economy;



explain the tax regulatory framework in the Russian Federation including the process for making changes and amendments to the Tax Code (art. 5 of Part I);



explain how the tax terms set by the Tax Code (art. 6.1 of Part 1) are determined;



outline the application of regional and local tax laws, defining the relevant tax regulatory bodies;



explain the difference between direct and indirect taxes;



recognise the types of taxes levied on legal entities and physical persons in the Russian Federation;



list the legal forms of business activities in Russia and identify the relevant taxes for each type of business activity;



differentiate between taxpayers and tax agents;



explain the rights and obligations of both taxpayer and their agents;



explain the concept of separate “sub-division” as it applies to corporate profits.


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RUSSIAN TAX SYSTEM

EXAMPLE SOLUTIONS Solution 1 The Law establishes more favourable rules for taxpayers and may therefore be retroactive. There is nothing wrong with the effective date being 1 January 2013. Solution 2 The Law worsens the taxpayer’s position and cannot be retroactive. It will enter into force one month after the date of its official publication (February 5th) but not earlier than the first day of the reporting period (March 1st). Therefore, the effective date is 1 March 2013. Solution 3 No. ZAO Sterling is the tax agent in respect of Darya’s salary and must withhold personal income tax. Failure to do so would result in the company being liable to penalties.


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CORPORATE PROFITS TAX – SCOPE, COMPUTATION AND INCOME RECOGNITION


To understand the scope of corporate profits tax.



To demonstrate the computation of corporate profits tax liability.



To explain the methods of income and expense recognition for tax purposes.

SCOPE

TAX LIABILITY

   

Taxpayers Tax object and tax base Tax and reporting periods Tax rates

    

Computation Income classification Expense classification Exclusions Direct vs indirect expenses

ACCRUALS METHOD OF INCOME RECOGNITION        

TRANSFER PRICING

CASH METHOD OF INCOME RECOGNITION   

General rules Sales income Production and sales expenses Allocation of direct expenses Non-operational income Non-operational and other expenses Accruals method summary Special rules     

Income Expenses Taxable profits

New legislation Controlled transactions Transfer pricing methods Reporting and control Advance Pricing Agreements

Note: All article references are to the Tax Code unless otherwise stated.


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1

SCOPE

1.1

Taxpayers (art. 246)



Enterprises and organisations, that are legal entities created under Russian Law, are subject to the corporate profits tax (CPT) with certain exceptions (none of which are examinable).

1.1.1

Exceptions

   

Entities subject to unified tax on imputed income (a simplified tax for small business). Small enterprises using simplified tax and accounting systems. Gambling businesses (this income is subject to special tax on gambling business). Agricultural entities (with the exception of agricultural enterprises of industrial type).

Specific taxation rules relating to certain categories of taxpayers (e.g. banks, credit institutions, insurance companies, pension funds, etc) are not examinable (art. 290 – 300). Taxation of foreign legal entities acting in Russia through permanent establishments (art. 306-308) is not examinable. Withholding profits tax on income of foreign legal entities from sources in the Russian Federation (art. 309-312) is also not examinable. 1.2

Tax object and tax base (art. 247, 274)



Tax object for CPT is the taxpayer’s profit, calculated as gross income (operational and non-operational) reduced by tax deductible expenses and losses.



Tax base is the profit defined as a tax object in money terms.

Income received in-kind (non-monetary) is determined based on the agreement terms taking into account the market price (art.40). 1.3

Tax and reporting periods (art. 285)



The tax period (“nalogovyi period”) is a calendar year.



The reporting period (“otchetnyi period”) may vary, depending on the CPT payment system, used by a taxpayer: 

if a taxpayer uses a quarterly system, the reporting periods are first quarter, half a year and 9 months of the year;



if a taxpayer makes monthly advance payments of CPT based on actual profits, the reporting period is a month, two months, three months and so on until the end of the calendar year.


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Illustration 1 XYZ Company’s data follows (in million RR): 1st quarter

2nd quarter

3rd quarter 4th quarter

200

180

220

300

Deductible expenses (non-cumulative) (80)

(70)

(100)

(150)

9 months

year

350

500

Taxable revenue (non-cumulative)

st

st

1 quarter 1 half Taxable profits (cumulative)

120

230*

* taxable profits for the half of the year include 120 from the 1st quarter and 110 from the 2nd 1.4

Tax rates (art. 284)

1.4.1

General profits tax rates



The general CPT rate is fixed at 20%, this rate is provided in the examination.



The total rate is comprised of the federal and regional portions.



In 2013:  

the federal portion of the tax is fixed at 2%; the regional portion of CPT is set at 18 %.



The regional rate can be decreased by the local legislative body for certain categories of taxpayers by 4.5% maximum (i.e. from 18% to 13.5%).

1.4.2

CPT rates on dividends



The Tax Code provides for special tax rates on dividend receipts and distributions.



If an entity pays dividends it must withhold CPT at source at: 

0% if dividends are paid to a Russian legal entity which has owned for at least 365 days not less than 50% of the entity;



9% if dividends are paid to a Russian legal entity (unless the recipient is entitled to 0% rate);



15% if dividends are paid to a foreign legal entity.



These rates will be provided in the examination.



If an entity receives dividends it pays CPT at:





0% if dividends are received from a Russian legal entity (as either specifically qualifying for zero rate or already subject to 9% tax at source);



9% if dividends are received from a foreign legal entity.

For more details see Session 4.


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2

TAX LIABILITY

2.1

Computation



Taxable profit includes profits from sales of goods (works, services) and nonoperational profits. Outline of computation of tax liability +

Sales income

–

Sales expenses

=

Operational profit

+

Non-operational income (Session 4)

–

Non-operational expenses ( Session 4)

=

Tax base (before loss carry forward)

–

Loss carried forward from previous years (Session 4)

=

Tax base (after loss carry forward)

×

Tax rate

=

Tax liability

Detailed proformas for the calculation of tax liabilities for production and trading companies are set out in Session 4. 2.2

Income classification (art. 248, 249, 250, 315)



Taxable income consists of sales income (“dohodi ot realisatsii” art. 249) and nonoperational income (“vneralizatsionnie dohodi” art. 250).



Income in tax accounting is classified into the following main “baskets”* (art. 315):    

BASKET 1 - income from sales of goods (works performed, services rendered); BASKET 2 - income from trading operations (sales of purchased goods (merchandise inventory)); BASKET 3 - income from sales of fixed assets; BASKET 4 - non-operational income.

Income is determined without including taxes (mainly VAT in all examinable cases) to be reimbursed by the buyers according to the Tax Code. * The term “baskets” (korzini) is used for convenience only, as there is no such definition in the Tax Code. There are more “baskets” according to the Tax Code classification, however for exam purposes only the main baskets are covered. 

Non-operational income is all other types of income than sales, for example, it can be rental income, foreign currency exchange gains, interest income, etc. Nonoperational income and the moment of its recognition are described more fully in section 3.5 below (and Session 4).


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2.3

Expense classification (art. 252, 315)



The Tax Code (art. 252) defines expenses as justifiable (“obosnovannyie”) and documentary proved costs. Justifiable expenses mean economically sound expenses.



For deductibility purposes an expense must be linked to income-generating activity.



Like income, expenses are classified into production and sales expenses (“rashodi, svjazannie s poizvodstvom i realisatsiei”) and non-operational expenses (“vneralizatsionnie rashodi”).



The “basket” concept is applicable to expenses as well. For exam purposes there are three baskets of production and sales expenses and one basket for nonoperational expenses. Profit (or loss) is established for each basket first and then the results are added up to determine the total taxable profit or loss.



Note: Losses received in certain baskets cannot decrease profits in others or can only decrease it according to special rules (Session 3).



Expenses in tax accounting are classified into the following “baskets”:    

BASKET 1 – expenses on production and sales of goods (works, services); BASKET 2 – expenses incurred on sales of merchandise inventory; BASKET 3 – expenses incurred on sales of fixed assets; BASKET 4 – non-operational expenses.



Other types of expenses are not examinable.



For the purposes of taxable profits calculation on accrual basis, sales and production expenses are further split into direct and indirect categories (see section 2.5).



Non-operational expenses are not split into direct and indirect. They decrease the taxable base of the period when they are recognised for tax purposes (see section 3.6).



Deductibility of certain expenses is limited by statutory norms (see next session).



Losses incurred by taxpayer can also be attributed to expenses according to special rules (Sessions 3 and 4).

2.4

Exclusions (art. 251, 270)



Certain types of income/expenses are excluded from taxable base, which means that although they represent economic income for the company they are not subject to profits tax.

2.4.1

Excluded income (art. 251)

The following items are not taken into account when defining the tax base: 

advances received by taxpayers using accruals method of income recognition;



property received as a deposit (guarantee) for enforcement;



contributions received to charter capital (including additional paid-in capital);



VAT received within contributions to charter capital which is subject to deduction by the receiver (according to Chapter 21 of the Tax Code);


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

property (including cash) received by commissioner (except commission income);



loans received;



interest amounts received from the State budget in respect of tax overpayments ;



investments in the form of integral improvements to rented property made by the lessee (or made by a borrower who has free use of such property);



property received free of charge by a Russian legal entity from a legal entity which owns more than 50% of the taxpayer;*



property received free of charge by a Russian legal entity from a legal entity which is more than 50% owned by the taxpayer;*



property received by a Russian legal entity from a physical person who owns more than 50% in the capital of the taxpayer.*

* This property (with the exception of cash) is excluded from income unless it is transferred to a third party within one year from the date of receipt. 2.4.2

Excluded expense (non-deductible)

The following items should be remembered (art. 270): 

advances for goods (works, services) made by taxpayers who recognise income/ expenses on an accruals basis;



dividends and profits distributions;



penalties and fees paid to budget and state bodies;



contributions to charter capitals;



expenses incurred for purchase or production of depreciable property (Session 3);



partially deductible expenses in excess of statutory norms;



property (including cash) transferred to a commissioner (except commission expense);



loans given to other companies or payments (cash or other property) transferred for redemption of the principal amounts of loans received;



gifts in cash or in-kind and related expenses payable to employees which are not included in a labour contract;



property given free of charge and expenses related to such commitment;



financial aid to employees (“materialnia pomosch”);



price differences when selling goods (works, services) to employees below market prices;



free or subsidised meals to employees, compensation of commuting expenses to and from the work place (except such costs provided under labour contracts);



various other benefits for employees (i.e. non business travel, recreation, sports, entertainment) (art.270). These are excluded even if provided for in the contract;



payments to the members of the board of directors of the taxpayer’s organisation;



taxes that are included in the sales price (e.g. VAT, excises);



expenses, which are not justifiable and/or documentarily proved.


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2.5

Direct vs indirect expenses (art. 318, 320)



The Tax Code further classifies production and sales expenses (baskets № 1 and № 2 only) into direct and indirect for the purposes of tax accounting for those organisations applying the accruals method.



Tax-deductible direct expenses of the reporting period partially decrease taxable base, partially are allocated to work-in-progress and finished goods (see 3.4 below).



Tax deductible indirect expenses incurred in the reporting period decrease the taxable base of this period.



This classification is not applied to non-operational expenses. Classification rules are different for production and trading operations (see section 3.4).

3

ACCRUALS METHOD OF INCOME AND EXPENSES RECOGNITION

3.1

General rules (art. 271, 272)



Under the accruals method income and expenses are recognised in the reporting period to which they relate, regardless of the timing of money and/or property receipts/payments.



Income and expenses under the accruals method should be matched with each other. Those expenses which relate to several income generating activities should be allocated between them based on percentage from these activities.



If income/expenses are related to different reporting periods they must be split according to the terms of the sales agreement.



Income is recognised for CPT purposes under the accruals method on shipment (transfer) date: This date is defined (art. 39) as the date of transfer of the title of ownership for goods (works, services). Thus, if the goods were shipped to customer but the title of ownership remains with the seller (“goods in transit” – not delivered to customer’s warehouse or special conditions of the contract) the “shipment date” in a tax sense has not occurred yet.



Under the accruals method advances (prepayments) received from customers are not subject to CPT until the dispatch (title transfer) takes place.



If the sale is performed through commissioner (agent), the shipment date is defined according to the sale date indicated in the commissioner’s report. However the Tax Code provides that a commissioner must inform the principal about the sale within three days after the end of the reporting period in which the sale took place (art. 316).

3.2

Sales income (art. 271)



The following table summarises the timing of sales income recognition under the accruals method:


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Type of income

Timing of recognition

Income on sales of goods

The date of transfer of the title to goods

Income on sales of securities

The date of transfer of the title of securities or the date of offsetting of counter-claims

Income on sales of works

The date of transfer of the results of completed works to customer

Income from services (other than factoring services)

The date of services provision (as per acceptance act)

Income on sale of property rights (i.e. factoring)

The date of transfer of these rights to a new creditor

Income from factoring services (not on initial debt assignment)

The date of receivable collection or its subsequent sale by its new holder

Income from sale of goods (works, services), property rights through commissioner (agent).

The sale date indicated in the commissioner’s report (see above).



Income received in foreign currency is converted to roubles on the date when it is recognised (art. 271.8).

Example 1 State the date of income recognition for CPT purposes for the following transactions. Assume that the company uses the accruals method and pays CPT on a monthly basis: (1)

On 20 January ZAO Alfa made a delivery to ZAO Beta, which issued a promissory note with a two-month payment term. Alfa received the money on the note’s redemption on 20 March.

(2)

On 25 January Alfa shipped goods worth 10 million RR to Beta. According to the terms of agreement title to the goods passes to Beta only after Beta receives and inspects them in its warehouse. The receipt and inspection occurred on 5 February.

(3)

Alfa sells its goods through a commissioner Beta. Alfa has delivered the goods to Beta in February. Beta has delivered the goods to a final customer in May. The customer paid to Beta in June. Beta paid to Alfa in July.

(4)

Alfa has shipped some goods to a foreign customer on 1 March. It presented the package of export confirmation documents to the tax authorities on November 20.

(5)

Continuing from (4), assume that a prepayment for exported goods was received in January.

(6)

Alfa has an account receivable, which it considered as non-collectible. The delivery was made in January. In August Alfa has sold this receivable to Beta, which paid for it in September.


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Solution (1) (2) (3) (4) (5) (6) 3.3

Production and sales expenses (art. 272)



The table below summarises the timing of recognition of production and sales expenses under the accruals method: Type of expense


Raw and other materials used in production

The date of transfer from warehouse into production

Depreciation/amortisation expense*

Monthly at the date of accrual of this expense

Wages and salaries expenses Works, services used in production

The date services are provided (as per acceptance act)

Mandatory and voluntary insurance expenses

The date of payment. For payments covering more than one reporting period the expense is allocated in equal portions over the agreement term based on the number of days. This means that there is an additional condition (i.e. they must be paid for) for such expenses to be recognised for CPT on accruals basis.

* This starts from the month following the month when the asset was put into use. 

Expenses incurred in foreign currency are recalculated to roubles on recognition.

Example 2 State the timing of inclusion in deductible expenses of the following items for an accrual basis taxpayer, which pays and reports CPT on a monthly basis: (1)

Materials booked in February, consumed in production in March, paid in April.

(2)

Fixed assets booked and put in use in April, paid in June.

(3)

Capital repair services received in July, prepaid in June.

(4)

Intangible assets with estimated 5-year service life, purchased in January, booked and put in use in February.

(5)

Voluntary medical insurance paid on the 15 March for the period from 5 March 2013 to 5 March 2014.


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Solution (1) (2) (3) (4) (5) 3.4

Allocation of direct production and sales expenses (art. 318, 319, 320)



Split of operational expenses into direct and indirect with their further allocation is performed only if the accruals method is used for CPT purposes.

3.4.1

Trading operations (art. 320)



In tax accounting production and sales expenses are classified into direct and indirect. This does not apply to non-operational expenses. Classification rules are different for production and trading operations.



For trading operations the rules are straightforward and easy to remember:  

direct expenses – are the purchase cost of merchandise inventory and related transportation costs on delivery of goods to the warehouse of taxpayer; indirect expenses – are all other expenses incurred on purchase and sales of merchandise inventory.

Note that bonuses from a seller to a customer subject to certain conditions in agreements (volume bonuses) are included in non-operational expenses. 

Tax deductible indirect expenses incurred in the reporting period decrease taxable base of this period and are not prorated (allocated between different tax periods).



Direct expenses of the reporting period partially decrease taxable base and partially are allocated to work-in-progress and finished goods.



Cost of closing merchandise inventory is determined using one of the following costing methods (art. 268):    



First-in, first-out (“FIFO”); Last-in, first-out (“LIFO”); Weighted average cost; Actual unit cost.

Transportation costs, which are billed separately (i.e. delivery is not included in the purchase cost and paid for as an additional expense) are allocated to the closing merchandise inventory using the following steps:


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Step 1:

Add up transportation costs allocated to the opening merchandise inventories and incurred in the current reporting period.

Step 2:

Add up the cost of closing inventory and merchandise sold.

Step 3:

Divide the result in Step 1 by the result in Step 2.

Step 4:

Multiply the average percentage (Step 3) by the cost of closing inventory to give the transportation costs to be allocated to the closing inventory.

Illustration 2 Company A has started its operation in January 2013. The following data is available for January (VAT is ignored for simplicity): On 5 January the company purchased 3000 units at 160 RR per unit. Agent’s commission 80,000 RR, insurance costs – 50,000 RR, transportation costs 140,000 RR. On 15 January the company purchased 3000 units at 190 RR per unit. Agent’s commission 100,000 RR; loading costs – 30,000 RR; transportation costs 175,000 RR. In January the company sold 4000 units at 320 RR per unit. LIFO method is used for tax accounting purposes. (1) (2) (3) (4) (5)

Cost of goods purchased is 1,050,000 RR ((3,000 × 160) + (3,000 × 190)) Cost of goods sold is 730,000 RR ((3,000 × 190) + (1,000 × 160)) Closing inventory 320,000 RR (1,050,000 – 730,000) Indirect expenses are 260,000 RR (80,000 + 100,000 + 50,000 + 30,000) Direct expenses (transportation costs) are 315,000 RR

Allocation of direct expenses: Step 1:

Sum of transportation costs in the opening inventory and costs incurred in January: 0 + 315,000 = 315,000 RR

Step 2:

Sum of the cost of goods sold and closing inventory 1,050,000 RR

Step 3:

Average percentage 315,000/1,050,000 = 0.3

Step 4:

Transportation expenses allocated to closing inventory 320,000 × 0.3 = 96,000. The remainder (219,000) decreases the CPT taxable base of the reporting period.

Calculation of taxable profits: RR 000 Sales income Less: cost of goods sold direct transportation costs indirect expenses

(730) (219) (260) ______

Taxable profits


RR 000 1,280

(1,209) _____ 71 _____

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3.4.2

Production operations (art.319)



All expenses of production company must be prorated (i.e. apportioned or split) between:  

cost of sales (i.e. decrease taxable base); inventories (work-in-progress, finished goods, goods in transit).

Illustration 3 Direct expenses allocated to opening inventory – 50,000 RR Direct expenses incurred in the reporting period – 200,000 RR Direct expenses in goods sold – 180,000 RR Direct expenses allocated to closing inventory: 50,000 + 200,000 – 180,000 = 70,000 RR 

For production operations expenses are classified into direct and indirect as follows: - direct expenses – direct materials, depreciation of production fixed assets, direct wages and salaries and related social insurance contributions (SIC); - indirect expenses – all other production expenses which are not connected directly to production process. These expenses include:      

material expenses other than direct; depreciation of fixed assets which are not used in production directly; 10% (30%) write-off of initial cost of fixed assets; depreciation of intangible assets; indirect wages and connected SIC and voluntary insurance; and other production costs according to art.264.



“Direct” materials are defined as materials and components directly used in production (art. 254). The purchase price of materials includes related transportation fees, commission expenses, and customs duties.



“Indirect” materials include materials used for packaging, fuel and energy, instruments, special cloths, low-value items that do not fall into fixed assets category.



Tax deductible indirect expenses incurred in the reporting period decrease taxable base of this period and are not prorated (i.e. not allocated between periods).



Direct expenses of the reporting period partially decrease taxable base, partially are allocated to work-in-progress and finished goods. The allocation principles must be stated in the tax accounting policy of the company.



Allocation of direct expenses depends on the types of taxpayer’s activities: Type of activities

Method of allocation of direct expense

Production of finished goods (processing of raw materials)

Percentage of raw materials in closing inventory to total raw materials (in natural units)

Works and services

Direct expenses in this case could be recognised in the reporting period without allocation (item 2 art. 318).


0212

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

Allocation of direct expenses of a production processing company is illustrated as follows:

Illustration 4 A company processes apples into apple juice. Opening inventory included:  

Work in progress (1,000 kg of apples consumed) valued at 900 RR; Finished goods (30,000 kg of apples consumed) valued at 29,000 RR;

During the reporting period 79,000 kg of apples worth 81,100 RR were purchased for production. Direct wages and salaries, related SIC and direct depreciation of the reporting period were 78,000 RR. Closing inventory included:  

Work in progress (8,000 kg of apples consumed) Finished goods (25,500 kg of apples consumed)

Direct expenses will be distributed as follows (VAT is ignored for simplicity): Work-in-progress (a)

Total weight of apples in the opening WIP + weight of apples purchased during the period: 1,000 + 79,000 = 80,000 kg

(b)

Weight of apples consumed in production (i.e. transferred from WIP to finished goods): 80,000 – 8,000 = 72,000 kg

(c)

Allocation percentage to finished goods: 72,000/80,000 × 100% = 90%

(d)

Direct expenses allocated to finished goods (900 + 81,100 + 78,000) × 0.9 = 144,000 RR

Finished goods (e)

Total weight of apples in the opening finished goods + weight of apples consumed into juice during the period: 30,000 + 72,000 = 102,000 kg

(f)

Total weight of apples in juice, which was sold in the period 102,000 – 25,500 = 76,500

(g)

Allocation percentage 76,500/102,000 × 100%= 75%

(h)

Deductible direct expenses (29,000 + 144,000) × 0.75 = 129,750 RR


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

Allocation of direct expenses of a service company is illustrated as follows:

Illustration 5 A company performed repair services to five customers for 20,000 RR in total. However, one customer has not accepted the work (amount of the bill – 3,000 RR). Total direct expenses for the period are 12,000 RR (no direct expenses exist as at the beginning of the reporting period). Direct expenses will be allocated as follows (VAT is ignored for simplicity): (a) (b) (c)

average percentage 3,000/20,000 = 15%; direct expenses allocated to ending balance 12,000 × 15% = 1,800 RR direct expenses decreasing taxable base of the reporting period (12,000 – 1,800) = 10,200 RR

3.5

Non-operational income (art. 271)



The table below summarises the timing of recognition of non-operational income under the accruals method: Non-operational income

Interest income on loans and liabilities (debt securities)

The earlier of the last day of each month (if the loan term exceeds the reporting period) or the date of agreement termination (or cancellation of liability).

Claw-backs of allowances and provisions (Session 4)

Last day of reporting (tax) period.

Income from participation in simple partnership Rental income* Licence payments (including royalties)* Penalties for the breach of commercial contracts

The invoicing date as provided in the agreement or the last day of the reporting (tax) period. Date of debtor’s acceptance of the claims or effective date of court decision.

Compensations for losses Income of previous years identified in the current year

Either the date of income discovery or previous period (see Session 4 section 1)

Gifts in-kind (i.e. property, works, services)

The date of signing the act of property (works, services) transfer.

Gifts in cash

The date of cash receipt.

Dividends Property (materials) received due to dismantling of liquidated fixed assets

The date of official act of fixed asset liquidation

Surpluses of commodity materials exposed due to stocktaking

The date of discovery of surpluses (the date of physical inspection)

* For exam purposes this income is recognised on the earlier of the invoicing date as provided in the agreement or the last day of the reporting (tax) period.


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Non-operational income Positive “sum” differences** for a buyer.

The date of payment of liability or the receipt date in case of prepayment for goods (works, services).

Positive “sum” differences for a seller.

The date of payment of receivable or the shipment date in case of prepayments.

Foreign exchange gains.

Receivables and payables expressed in foreign currency are recalculated into RR on the earlier of :

** When a purchaser is invoiced in a foreign currency payable in RR at the Central Bank rate on the day of payment, a “sum” difference may arise due to exchange rate differences (between the day of receiving the invoice and the payment date).

– their fulfilment; or – the last day of each month. Assets expressed in foreign currency are recalculated into roubles on the earlier of: – transfer of title date; or – the last day of reporting (tax) period.

Example 3 State the timing of inclusion of the following items in taxable income for an accrual basis taxpayer, which reports and pays CPT on a monthly basis (VAT is ignored): (1)

ZAO Axis rented one of its buildings for 12 million RR. The term of rental agreement is one year, starting 1 January 2013. The agreements provide for 4 equal rental payments to be made on the last day of each quarter.

(2)

In June 2013, Axis has discovered that sales income pertaining to 2012 was not accounted for tax purposes in that year.

(3)

On 1 January 2013 Axis gave its subsidiary a loan of 10 million RR for 1 year. Interest on loan is 12% per annum paid on 1 January 2014.

(4)

The same as above with the exception that interest is to be paid in 2 equal portions on 1 July 2013 and on 1 January 2014.

(5)

Axis shipped goods worth 100 million RR to ZAO Basis on 11 March 2013. The payment term indicated in the agreement is 20 days after the shipment date. With effect from the 21st day (1 April) a 0.1% fine should be applied for the delay in payment. No payment was received in 2013. No court case was filed.

(6)

In January 2013 Axis received 1 million RR of dividends from OOO Gamma (a Russian company). These dividends relate to the 2012 profits of Gamma.

Solution (1) (2) (3) (4) (5) (6)


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3.6

Non-operational and other expenses (art. 272)



The table below summarises the timing of recognition of non-operational and other expenses under the accruals method: Other expenses

Accrual of those taxes, which are recognised as expenses by the Tax Code

Accrual date

Commission fees

The invoicing date as provided in the agreement or the last day of the reporting (tax) period.

Works, services rendered by third parties Business travel expenses

Date of approval of expense report (“avansovyi otchet”).

Business entertainment expenses Compensation for usage of private cars for business purposes

Compensation payment date.

Non-operational expenses Interest expense on loans and on debt securities (bonds and notes)

Earlier of the last day of each month (if the loan term exceeds the reporting period) or the date of agreement termination (or cancellation of liability).

Rental payments


Creation of tax deductible allowances

Accrual date.

Penalties for the breach of commercial contracts

Date of debtor’s acceptance of the claims or effective date of court decision.

Compensations for losses Foreign exchange losses

As for foreign exchange gains.

Negative “sum” differences for a seller

The date of payment of receivable or the shipment date in case of prepayments

Negative “sum” differences for a buyer

The date of payment of liability or the receipt date in case of prepayment for goods (works, services)

Bank services costs

The last day of the reporting (tax) period (in accordance with the documents)

Expenses of the shareholders meeting

The invoicing date

Bonus (discount) paid to a customer for the fulfilment of certain conditions (e.g. volume of purchases)



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3.7

Accruals method summary



In order to calculate taxable profits under the accruals method the following steps are necessary: Step 1:

Find right income “basket” for income received.

Step 2:

Recognise income in the appropriate “basket” at the date of its receipt for tax purposes.

Step 3:

Find right expense “basket” for expense incurred.

Step 4:

Analyse whether expense is deductible in full or partially.

Step 5:

Analyse whether expense is direct or indirect (for baskets № 1 and № 2 only). If indirect – include in the appropriate expense basket in the proper amount. If direct – prorate between cost of sales and closing inventory.

Step 6:

Results per each basket are added up to come to overall taxable profits/loss. Exceptions: losses on fixed assets sales and losses on factoring which are treated separately (not mixed with results in other baskets).

3.8

Special rules of income/expense recognition

3.8.1

Simple partnerships (art.278)



The purpose of simple partnership is to separate revenue and expenses of joint business efforts of several companies without creating a separate legal entity.



Simple partnership has its own balance sheet on which it accounts property received from partners. It also separately determines the profits or loss from its operations not later than at the end of each reporting period. This profit is then added to the financial results of each participating partner.

Illustration 6 Two companies created a joint partnership which generated profits of 1 million RR. The share of the first partner is 40%, while the remaining 60% belongs to the second one. The first company will add 400,000 RR to its taxable profits, the second company 600,000 RR. 3.8.2

Commission income and expenses



Income received by a commissioner from the final customer should be allocated to the principal in the full amount. Agent’s commission represents an expense for the principal.

Illustration 7 

Some goods were sold by an agent for 10,000 RR (this is the amount received from customers) and the agent withheld 10% commission.



The revenue of the principal will be 10,000 RR. Commission expense will be 1,000 RR. The revenue of the agent is 1,000 RR.


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

The principal must report its income in the period when shipments were made by the agent to customers.

Example 4 In July 2013 ZAO Alto delivered its products to OOO Bass which acted as a commissioner for Alto for a commission fee, which was determined as 5% of the sales proceeds (net of VAT at 18%) received from the final customer. Bass delivered the products to the final customer in November 2013. The final customer paid 18,880 RR (gross) to Bass in December 2013. Bass paid the sales proceeds net of commission fee to Alto in January 2014. Required: Explain the tax treatment of the above for ZAO Alto. Solution

4

CASH METHOD OF INCOME RECOGNITION (ART. 273)

4.1

Income



A taxpayer can use cash method only if its average sales of goods (works, services) (without VAT) for the previous four quarters did not exceed 1 million RR each quarter.



If a taxpayer chooses the cash method, but during the tax period the taxpayer’s average sales of goods (works, services) (without VAT) exceeded 1 million RR per quarter, it must recalculate its sales on the accruals basis from the beginning of the tax period.



Income is recognised under cash method on:   



receipt of cash to bank account or petty cash fund; receipt of property (works, services) or property rights; cancellation of liabilities to the taxpayer by any other means.

For example, under cash method income will be recognised in the following cases:   

mutual settlement (“zachet”) is performed; receivable is factored to a third party (in the amount of cash received from factor); property in-kind (including securities) is received.



The issuance of a promissory note by the buyer to the seller of goods (works, services) does not constitute a cash receipt for the seller. The payment is recognised on the day when the payment against the note is actually made or on the day when the note is sold or transferred to a third party.



Under the cash method advance payments received from customers are taxable upon receipt.


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4.2

Expenses



Expenses are recognised on the cash basis only after they are actually paid. The term “payment” is understood as cancellation of liability to the seller for the purchased goods (works, services). List of expenses (art. 273)

Timing of expense recognition

Raw materials

When paid and consumed in production.

Wages and salaries, interest expenses and services rendered by third parties

When paid.

Depreciation

Amounts accrued for the reporting (tax) period on fixed assets paid for and used in production.

“Sum” differences (“Summovie raznitsi”)

Not recognised under the cash method.

Example 5 State the timing of inclusion of the following items in deductible expenses for a cash basis taxpayer (assume CPT monthly reporting and payment system): (1) (2) (3) (4) (5)

Materials booked in February, paid in March, consumed in production in April. Fixed assets booked in March, put in use in April, paid in June; Capital repair services received in July, prepaid in June; Rent of the building accrued for January – March was paid in April. Interest on loan accrued for January – June was paid in August.

Solution (1) (2) (3) (4) (5) 4.3

Taxable profits



In order to calculate taxable profits under the cash method the following steps are necessary: (1)

Find right income “basket” for income received.

(2)

Recognise income in the appropriate “basket” at the date of its receipt for tax purposes.

(3)

Find right expense “basket” for expense incurred.


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(4)

Analyse whether expense is deductible in full or partially.

(5)

Recognise expense in the appropriate “basket” at the expense date for tax purposes. A split of expenses into direct and indirect is not required under the cash method.

(6)

Results for each basket are added up to come to overall taxable profits. Exceptions: losses on fixed assets sales and losses on factoring which are treated separately (not mixed with results in other baskets).

Example 6 Company ABC uses the cash method for CPT purposes. Data for the year is as follows: Billings to customers Cash receipts Bad debts write-offs Materials purchased Wages accrued Depreciation accrued

RR 000 200 120 10 80 (paid 60, consumed 55 – all paid for) 30 (paid 25) 15 (all fixed assets are paid for)

Required: Calculate taxable profits for the year. (Ignore VAT.) Solution RR 000

RR 000

Sales income Deductible expenses:

________ _________

Profits ________


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5

TRANSFER PRICING

5.1

New legislation

In order to avoid loss of tax revenues from profits being artificially manipulated between parties, the Russian Federation has, like other advanced economies, introduced comprehensive measures to control transfer pricing. New legislation has been adopted to take effect from 1 January 2012. This legislation seeks to identify “controlled transactions”, in respect of which the taxpayer has to document and justify the pricing methods applied, and report these to the tax authorities. If the tax authorities do not accept that the pricing method has achieved a fair market price, then they can recalculate the tax based on a market price. 5.2

Controlled transactions

There are various types of controlled transactions, each with different threshold amounts. Threshold amounts relate to cumulative transactions between the same parties during a calendar year. 5.2.1

Cross-border transactions

  

Related party transactions, no minimum amount. Third party transactions, sale of certain mineral commodities in excess of 60 million RR. Transactions with parties in “blacklisted” offshore tax jurisdictions, in excess of 60 million RR.

5.2.2

Domestic transactions



Related party transactions where one party is exempt from corporate profits tax (in excess of 60 million RR).



Related party transactions where one party pays unified tax (in excess of 100 million RR).



Other related party transactions (in excess of 3 billion roubles for 2012, 2 billion roubles for 2013, reducing to 1 billion roubles by 2014). Commentary Other categories are also specified to come into effect from 2014. Certain detailed exclusions apply (e.g. members of a consolidated tax group, or parties within the same administrative region with no branches or losses).

5.2.3

Related parties



The term “related parties” is not exhaustively defined or listed, but generally refers to “parties, the relationship between which may influence conditions or results of transactions”. In particular these will include: 

two companies where one holds directly or indirectly more than 25% of the other;



two companies with the same parent holding directly or indirectly more than 25% of each;



companies with the same CEO or controlling directors.


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5.3

Transfer pricing methods



If a controlled transaction is to occur, the taxpayer parties are required to consider the appropriate market price range before the contract is concluded.



Five acceptable methods are listed: (i) (ii) (iii) (iv) (v)

Comparable uncontrolled price (CUP); Resale minus; Cost plus; Comparable profitability; Profit split.



Method (i), comparable uncontrolled price is the preferred approach and method (v) profit split is a last resort; the others are applied as best fits the circumstances. Other, different, methods could be used by the taxpayer, if justifiable.

5.4

Reporting and control



Taxpayers are required to submit documentation to tax authorities justifying prices applied in all controlled transactions no later than 20 May in the following year.



Tax authorities can request more detailed information if needed. Such documentation should be provided within 30 days but cannot be demanded before 1 June following the year of transaction.



For transactions concluded in 2012, transfer pricing control by the tax authorities will run until 31 December 2013 (i.e. audits will not be started after this time).



For 2013, control of transactions will run until 31 December 2015, and subsequently a three year period will apply.

5.5

Advance Pricing Agreements



Large Russian taxpayer companies (e.g. annual tax payments in excess of 1billion RR) may seek to reach Advance Pricing Agreements (“APAs”) with the tax authorities which will guarantee against price adjustments and additional tax assessments.



The taxpayer company needs to file a detailed application to the Federal Tax Service together with supporting documentation. The application should be examined within six months of being filed (but this may be extended to nine months if necessary).



Agreeing an APA is a voluntary procedure for all parties and the Federal Tax Service may decline to participate (e.g. if it might facilitate tax evasion).



Only Russian organisations may make application for an APA. (Permanent establishments of foreign companies cannot use this procedure.)



APAs will run for three to five years and will apply from 1 January following agreement (so agreements reached in 2012 will be effective from 1 January 2013).


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FOCUS You should now be able to: 

describe the scope of corporate profits tax and the types of taxpayer to which it applies;



define the two income recognition methods (cash and accruals);



explain and apply the effect of both methods on the timing of income recognition;



explain the timing of income recognition for the principal on sales made via commissioners and calculate taxable income of both principal and commissioner;



apply the expense allocation rules between commissioner and principal;



state the rules for the taxation of simple partnership income;



define the method of expense recognition for tax purposes;



explain the matching principle of expense recognition if the cash method is used for profits tax purposes;



state the expense allocation rules between activities taxed at different rates;



explain the rules for recognition of direct and indirect expenses in profits tax accounting for manufacturing and trading companies.


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EXAMPLE SOLUTIONS Solution 1 (1)

20 January, assuming that the title passes upon the delivery.

(2)

5 February, which is the title transfer date.

(3)

May. In this month the delivery is made to the final customer. The commissioner must inform Alfa about the sale within 3 days from the end of reporting period.

(4)

March, no special rules of income recognition apply to export sales under profits tax rules.

(5)

March, as the prepayment is not recognised for CPT purposes under the accruals method.

(6)

January, assuming that the title passes upon the delivery.

Solution 2 (1)

March (after materials are consumed in production).

(2)

Tax deductible depreciation will start in May (the next month after April when assets were put into use).

(3)

July.

(4)

1.67% of the original value per month with effect from March.

(5)

In March – 27/365 of the total insurance deductible amount, in April 30/365 of the total insurance etc.

Solution 3 (1)

Rental income is recognised at the end of each month.

(2)

Amended tax return for 2012 must be submitted. Taxable income for 2013 is not affected.

(3)

Interest income is recognised at the end of each month.

(4)

Interest income is recognised at the end of each month.

(5)

If Basis accepts the claim (which should be stated by the examiner) Axis should accrue penalty income with effect from 1 April 2013 and include it in CPT taxable base at the end of each month. Otherwise, there is no interest to be accrued.

Commentary – Exam advice If this information was missing from a question you would need to write an assumption and base your solution on it. (6)

Dividends are income of 2013 (the year when cash is received). Dividends from a Russian company are subject to withholding tax payable by Gamma at 9% rate.


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Solution 4 Alto should recognise the income on the sale of products in November 2013 when delivery is made to the final customer in the amount of 18,880 RR (including VAT of 2,880). The amount of the commission fee expense will be recognised by Alto when either the acceptance act is signed or at the date when invoice from Bass is received depending on the provisions of the commission agreement. The commission amount is 944 RR (including VAT of 144 RR). Solution 5 (1) (2) (3) (4) (5)

April after materials are consumed in production and paid. Tax deductible depreciation will start in June (the month paid). June (i.e. the month when payment took place). April (i.e. the month when payment took place). August (i.e. the month when payment took place).

Solution 6 Sales income Cash receipts Deductible expenses: Materials Wages paid Depreciation accrued:

RR 000

RR 000 120

55 25 15

____

95

____

Profits

25

____

SELF-TEST QUESTIONS (1)

Which of the following are excluded from taxable income? 

foreign exchange gains;



advances received by taxpayers using cash method of income recognition;



contributions received to charter capital;



commission income received by commissioner;



loan received;



property received by a Russian legal entity from a legal entity which owns 30% of the taxpayer;



property received by a Russian legal entity from a legal entity which is more than 50% owned by the taxpayer;



property received by a Russian legal entity from a physical person who owns more than 50% in the capital of the taxpayer;



penalties received for the breach of commercial contract.


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(2)

Which of the following is excluded from deductible expenses?          

(3)

advances for goods made by accruals basis taxpayers; dividend distributions; penalties and fees paid to budget and state bodies; contributions to charter capitals; cash transferred to a commissioner (excluding commission expense); gifts in cash or in-kind and related expenses payable to employees; financial aid to employees (“materialnaja pomosch”); price differences when selling goods to employees below market prices; free meals to employees that are not provided in the labour contracts; recreational and medical benefits provided to employees).

Which of the following expenses incurred by a production company are classified as direct?       

wage of a chief accountant; depreciation of production building; amortisation of a trademark; SIC assessed on wages of production employees; cost of materials used in production; fuel costs; depreciation of administrative building.

SELF-TEST SOLUTIONS (1)

Excluded items:    

contributions received to charter capital; loan received; property received by a Russian legal entity from a legal entity which is more than 50% owned by the taxpayer; property received by a Russian legal entity from a physical person who owns more than 50% in the capital of the taxpayer.

(2)

All the listed items are excluded from deductible expenses.

(3)

The following expenses are classified as direct:   

depreciation of production building; SIC assessed on wages of production employees; cost of materials used in production.


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CORPORATE PROFITS TAX – DEDUCTIBLE EXPENSES


To explain deductible expenses and allowances in deferring and minimising corporate profit tax liability.

DEDUCTIBLE EXPENSES

PARTIALLY DEDUCTIBLE EXPENSES         

FIXED (NONCURRENT) ASSETS



General Interest Business travel Advertising Business entertainment Business training/educational Insurance Compensation of interest expenses “Thin capitalisation” rules TAX DEPRECIATION       

0301

Depreciation Capital improvements

Depreciable property Tax cost of depreciable property Depreciation groups

GAINS AND LOSSES ON PROPERTY

LEASED ASSETS

General provisions  Straight-line method  Non-linear method Special depreciation coefficients Direct/indirect classification Amortisation of intangible assets Research and development expenditure


 

 

Fixed and intangible assets Materials and other property

version 1


1

PARTIALLY DEDUCTIBLE EXPENSES

1.1

General



Certain expenses may be partially deductible or totally disallowed for corporate profits tax (CPT) purposes.



The examination calls for the application of tax rules relating to certain nondeductible and partially deductible expenses. The deductibility norms will be provided in the tax tables in the examination.

1.2

Interest (art. 269, art. 328)

1.2.1

General



Treatment of interest does not depend on the loan purpose and the type of the loan provider. Interest may be deductible even if the debt is overdue.



Debt obligations of a taxpayer in particular include commercial credits, bank loans, loans received from enterprises and individuals, and debt securities issued by a taxpayer (i.e. notes and bonds).



For taxation purposes interest will be calculated for the period of actual usage of the borrowed funds (even if the obligation is overdue).



Interest calculation is based on the number of days of the loan (i.e. rounding up is not possible).



Interest starts accruing on the date following the loan receipt date and stops accruing on the loan payment date (including this date).

Illustration 1 If a loan is taken out on 1 January and paid back on 3 February (both principal and interest), the interest will be calculated for 33 days (30 days in January and 3 in February). 

For accruals basis taxpayers, accrued interest should be recognised on the earliest of:

 

the last day of each month of the reporting period (if the loan term exceeds the reporting period); or the date of agreement termination (or cancellation of liability).



If a loan is taken in foreign currency by an accruals basis taxpayer the interest is also calculated at the end of each month of the reporting (tax) period using the exchange rate on this date.

1.2.2

Interest deductibility limits



The Tax Code provides two methods of calculating interest deductibility limits. The first method should be applied first, however if there is insufficient data for its application, a taxpayer may apply the second method.


0302

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Method 1 This requires comparison of actual interest rate on each loan with the average interest rate on loans of similar types received on similar conditions in the same reporting (tax) period.



Loans are regarded as similar if ALL of the following conditions are met:

   

same currency; same loan term; close amounts; same quality of guarantees.

If the actual rate exceeds the average rate by more than 20% the deductible interest amount will be limited by the average rate + 20%; otherwise actual interest will be fully deductible.



Method 2 

This method is simpler. The limit for loans is based on:

 

1.1 times Central Bank refinancing rate for rouble loans; and 15% for loans in foreign currency.

Commentary – Exam advice This is the method you will usually use. The limits are provided in the examination. Different thresholds applied before 1 January 2013 but these are not examinable. 

The statutory rate is fixed on the loan receipt date unless the loan agreement contains a provision that the interest rate per agreement can be changed.



If, by agreement, the interest rate is changed, the Central Bank rate effective on the date of the recognition of interest expense is taken into consideration.



Interest on debt obligations is included in non-operational expenses of a taxpayer.



Special rules (so-called “thin capitalisation rules”) apply to interest on loans received from a foreign legal entity or from an affiliated company of a foreign legal entity (see section 1.9).



The Ministry of Finance has stated that the new transfer pricing legislation (see Session 2) can also be applied to loan interest.

Topic Summary Classification of interest expense

Non-operational expenses of the current month

Types of loans on which interest may be deductible

Debt obligations of any type, arising from business activities

Interest deductibility period

The term of actual usage of the borrowed funds (in days)

Limitations on the interest amount

The rules are uniform for all types of debt obligations; statutory limits are different for loans in roubles (CB rate × 1.1) and loans in foreign currency (15%).


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Illustration 2(a) – Rouble loan ZAO ABC took out a 1 million RR loan on 2 February 2013 to finance the construction of a new warehouse. The loan was paid back on 26 July 2013. The loan interest rate is 16%. 2013 Central Bank rates (notional): 1 January – 30 April – 15%; 1 May – 30 September – 8%. ABC pays corporate profits tax on a monthly basis. Option 1: Loan does not contain a provision for a possible change in the interest rate. Number of days: 26 + 31 + 30 + 31 + 30 + 26 = 174 days Deductible %: 1,000,000 × 174/365 × 16% × 1.1 = 76,274 RR Option 2: Loan contains a provision for a possible change in the interest rate. Number of days: 3 February – 30 April: 26 + 31 + 30 = 87 days 1 May – 26 July: 31 + 30 + 26 = 87 days Deductible %: (1,000,000 × 87/365 × 16) (1,000,000 × 87/365 × 8% × 1.1)

RR 38,137 20,975 ______ 59,112 ______

Illustration 2(b) – Currency loan ZAO ABC took a currency loan of USD 100,000 on 10 March 2013. The loan is paid back on 10 May 2013. Interest rate on the loan is 18%. ABC pays corporate profits tax on a monthly basis. Exchange rates USD/RR (notional): 31 March – 30.7; 30 April – 30.6, 10 May – 30.3 Deductible interest: 11 March – 31 March: 100,000 × 21/365 × 15% × 30.7 1 April – 30 April: 100,000 × 30/365 × 15% × 30.6 1 May – 10 May: 100,000 × 10/365 × 15% × 30.3

RR 26,495 37,726 12,452 ______

Total deductible interest

76,673 ______


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1.3

Business travel (art.264)

1.3.1

Types of expenses



Business travel expenses include:

    

travel expenses (including transfer); accommodation expenses including additional services provided by the hotel (except meals, laundry, sports and recreational facilities); per diem allowance; costs incurred on visas and passports preparation; consulate, transit and airport fees;



Accommodation expenses are deducted in full provided that they are confirmed by supporting documents. In the absence of such documents accommodation expenses are non-deductible.



Per diem allowance is fully deductible in any amounts as it is not limited for corporate profits tax purposes. However to meet the requirement of documentary proof the specific amount (internal norm) should be stipulated by the taxpayers themselves in the internal documents of the organisation (e.g. order of the general director).



Note, however, that for personal income tax purposes per diem allowance is limited (see Session 6).



Travel expenses (cost of bus/air/train tickets) are deductible in full where they are incurred to get to the place of business trip from the working place and back. Transfers by taxi from/to airports (railway station) to the hotel are also deductible for CPT. (Clarifications by the Ministry of Finance in this area are conflicting, but they should be considered to be deductible for examination purposes.)



Business phone expenses, incurred by an employee in the hotel are deductible. Cost of personal services (e.g. laundry) is non-deductible.



Business travel expenses are classified as “other expenses” (“prochie rashodi”) on production and sales. Consequently, such expenses are considered to be “indirect” under the accruals method.



The table below provides a short summary of the topic: Type of expense

Deductibility limits

Accommodation expenses

Deductible in full with supporting documents. No deduction without supporting documents.

Per diem allowance on business trips.

Deductible in full.


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Example 1 An employee of a Moscow-based company went on a business trip to St. Petersburg for 3 days. The train ticket cost was 950 RR (net of VAT). Per diem allowance is fixed in the amount of 2,000 RR per day in the company’s rules for business trips in Russia. The hotel bill included the following (net of VAT): Accommodation Restaurant Laundry services Cable TV in hotel room Taxi transfer from and to the train station Taxi for sightseeing Business phone charges

RR 1,500 6,500 100 1,500 500 3,000 180

Required: Calculate the deductible amount for profits tax purposes. Solution RR

_________

Total deductible amount

1.3.2

_________

Special case (travel outside Russia)

For business trips outside of Russia, the following special rules should be considered: 

Per diem allowance amounts (internal norms) should also be stipulated for business trips abroad in internal documents and in practise can vary from those in Russia and for different countries.



The internal norms for a specific foreign country will apply starting from the date of crossing the border to this country from Russia.



Russian internal norms will apply from the date when the border of a foreign country to Russia is crossed.



If an employee travels from one country to another within one day, the internal norms of the last country he visits that day apply (in case they are different).



If an employee travels to foreign country and back within one day, 50% of the internal norm of the foreign country apply.


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1.4

Advertising (art. 264 item 4)



The deductibility of advertising expenses depends on the type of advertising.



The following types of advertising expenses are deductible in full:

   

mass-media advertising (TV, radio, press, telecommunication networks); out-door advertising (street posters and lights); participation in exhibitions/fairs, maintenance of demonstration halls, printing of advertising catalogues and brochures.

Expenses on prizes used during mass advertising campaigns are deductible up to 1% of the sales revenue (net of VAT). Commentary – Exam advice This limit is provided in the examination.



VAT on advertising expenses, which are partially deductible, is recoverable only in the part relating to deductible expense portion.

Illustration 3 In 2013 ZAO Alfa spent 8.64 million RR (including VAT of 1.44 million RR) on the acquisition of prizes awarded to winners of prize draws during a mass advertising campaign. 2013 sales revenue of Alfa was 210 million RR (including VAT of 35 million RR). Calculation of deductible expense: 8.64 – 1.44 = 7.2 (expense net of VAT) (210 – 35) × 1% = 1.75 – maximum deductible limit Thus, only 1.75 million RR is deductible for corporate profits tax. Recoverable VAT is 1.75/7.2 × 1.44 = 0.35 Remaining portion of VAT is written off and is non-deductible for profits tax purposes. Topic summary Deductible limit on advertising expense

For general advertising expenses (art. 264) no limit is established. For expenses on prizes used during mass advertising campaigns – 1% of sales revenue (net of VAT).

Base for taxable limit calculation 

Sales revenue – for all types of entities including trading companies (net of VAT).

Advertising expenses are classified as “other expenses” (“prochie rashodi”) on production and sales. Consequently, such expenses are considered to be “indirect” under the accruals method.


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1.5

Business entertainment (art. 264 item 2)



Business entertainment expenses are connected with the reception and servicing the representatives of other organisations (including foreign), who conduct business negotiations with the taxpayer. They may also be incurred with relation to the meeting of the Board of Directors. Expenses incurred on cultural and entertaining events, recreation, sports or medical treatment of the above mentioned representatives are not tax deductible.



Business entertainment expenses include:

   

costs of official reception (breakfast, lunch, dinner); transportation costs; cost of buffet (meals) held during negotiations; cost of external translators.



There are some very strict rules on how the business entertainment expenses should be documented. Tax deduction (within the statutory limit) is allowed only if these rules are obeyed.



The deductibility of business entertainment expenses is restricted by statutory norms.



The deductible limit is set at 4% of deductible labour costs. Any excess amount is not counted for tax purposes. Labour costs include wages and salaries deductible for CPT purposes, contractual meals, deductible bonuses and deductible life, medical and pension insurance of workers (art. 255). They do not include SIC on wages and salaries; direct wages and salaries allocated to closing inventories in a production company are disallowable and should not be included (although the examiner has not always applied this restriction in published answers). Commentary – Exam advice This 4% limit is provided in the examination.



Composition of expense

Expenses incurred on cultural and entertaining events, recreation, sports or medical treatment are no longer tax deductible

The base for calculation of deductible amount

Labour costs

Statutory deductible norm

4% of labour costs (including insurance of employees).

Business entertainment expenses are classified as “other expenses” (“prochie rashodi”) on production and sales. Consequently, such expenses are considered to be “indirect” under the accruals method.


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1.6

Business training/educational (art. 264 item 1, item 3)



Business training/educational expenses are deductible in full only if ALL of the conditions listed below are met:



taxpayer concludes the agreement for education/training with a licensed Russian or foreign educational institution (which also has an educational status); and



taxpayer pays for education/training of:



(1)

employees who have a labour agreement with taxpayer (employer); or

(2)

persons who have concluded an agreement with a taxpayer to work in future for at least one year starting three months after finishing education; and

taxpayer stores all documents confirming educational expenses for the entire period of education plus one year of employee’s work but not less than four years.



If a labour agreement with the educated person was not concluded within three months of finishing education or the agreement was interrupted within one year of it coming into force, training/educational expenses should be added back to the non-operational income for CPT.



No deductibility limit is set, which means that such expenses are either deducted in full or completely disallowed.



Business training/educational expenses include basic and additional professional educational programmes, professional basic trainings and additional ones. Therefore there is no limitation on the level of educational programmes and can be higher, middle-special or special professional courses.



Expenses on entertaining, recreation or medical services are not tax deductible.



Training and education expenses are classified as “other expenses” (“prochie rashodi”) on production and sales. Consequently, such expenses are considered to be “indirect” under the accruals method.

1.7

Insurance (art.255 item 16, 263)

1.7.1

Mandatory insurance of property and some types of third party liability (art. 263)



Premiums paid on mandatory property insurance contracts are tax deductible within insurance tariffs set by the legislation.

1.7.2

Voluntary insurance of property and some types of third party liability



There is no deductibility limit on premiums for voluntary insurance of property and some types of third party liability. Although not all types of voluntary insurance contracts will generate deductible expenses this is not examinable.


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1.7.3

Voluntary insurance of employees (art. 255.16)



The following table provides a summary of deductibility rules on insurance premiums made under voluntary insurance contracts:

Type of insurance

Required conditions of insurance agreement for deductibility

Voluntary life insurance

(1) No payments during five-year term (except payments in case of incident or death)

Deductibility limit †

(2) Term of the agreement – not less than five years; the agreement should be concluded with Russian insurance companies with relevant licence. Voluntary pension insurance (“dobrovolnoje pensionnoje strahovanije”)

(1) Non-state pension fund has a license

Non-state pension security (“negosudarstvennogo pensionnogo obespechanija”)

(1) Fund has a license

Additional contributions by the employer to labour pension

(1) Documented by the internal order in the taxpayer’s organisation or in collective or personal labour contracts

(2) Pensions are paid up to death of employee (3) Payments start from the pension age established by the Law.

The limit is set for total amount of both life and pension insurance premiums as 12% of deductible labour costs*

(2) Pensions are accumulated on personal pension accounts of insured employees (3) Pensions are paid from personal account for not less than five years.

(2) Employer should inform pension Fund of RF within 3 days after the request of the employee (3) Employer can start payments not early than next month after the request is received. Voluntary medical insurance

Term of the agreement – not less than one year.

6% of deductible labour costs*

Voluntary insurance against incidents

Insurance covers incidents which caused injury or death (not only at work place).

15,000 RR per year per employee (calculated as total payments divided by total employees with insurance).

† The 6%, 12% and 15,000 RR limits are provide in the tax rates and allowances in the examination. * For the purpose of calculation of this limit labour costs are taken net of any employees’ related voluntary insurance expenses.


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

Expenses on other types of employee insurance are non-deductible.



If the terms of insurance agreements initially satisfy deductibility conditions but then are changed and those conditions are not met anymore, tax should be recovered.

Illustration 4 ZAO Addis has signed a one-year voluntary medical insurance contract for one of its employees in January. The contract provided for monthly payments of 10,000 RR. Addis made 7 payments and took a tax deduction of 70,000 RR (it is assumed that 70,000 RR is less than 6% of labour costs). However, in August the employee left the company and the insurance contract was terminated. Therefore, in August Addis will have to include 70,000 RR in its taxable income. 

Expenses on mandatory and voluntary insurance of employees are classified as labour costs. However, such expenses should not be considered direct even if they relate to main production workers and thus, should not be pro-rated. This is an exam approach.

Illustration 5 In 2013 ZAO Bella, a production company, signed a one-year voluntary medical insurance contract for its employees. The contract provided for an insurance premium of 900,000 RR. In 2013 Bella accrued 9 million RR of wages and salaries of personnel involved in production process and 4.5 million RR of wages and salaries of administrative staff. Only 80% of direct expenses for 2013 were deducted for CPT purposes. Deductible insurance is limited by 6% of deductible wages and salaries, i.e. (9 × 0.8 + 4.5) × 6% = 0.702 million RR Thus, only 702,000 RR qualifies for deduction, while 198,000 is paid out of after tax profits. 

Mandatory and voluntary insurance expenses recognition date is the date of payment. For payments which cover more than one reporting period, expense is allocated in equal portions over the agreement term according to the number of days. This means that there is an additional condition (i.e. they must be paid for) for such expenses to be recognised for CPT on accruals basis.

1.8

Compensation of interest expenses



A limited deduction is allowed for certain benefits provided by employers, including compensation of interest on loans used for the purchase or construction of residential premises.



The labour cost for CPT purposes includes such compensation of interest expense to employees (art. 255).


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

Compensation to employees for their interest expenses is deductible if the loan is obtained to finance the purchase of apartments or construction of houses. The deductible expense is limited to 3% of labour costs. (Again, this limit is provided in the examination.)

1.9

“Thin capitalisation” rules (art. 269)



“Thin capitalisation” rules relate to taxation of interest on loans provided to a taxpayer by a foreign legal entity (FLE) or by a Russian legal entity (RLE), which constitutes an affiliated company with regard to FLE.



Thin capitalisation rules apply in the following cases:



if a FLE-lender has more than 20% (directly or indirectly) in the share capital of RLE-borrower; or



if a loan is given by an affiliated company (RLE) of a FLE; or



if FLE or its affiliated company (RLE) pledges a guarantee on loan repayment; and



the loan amount (including any unpaid interest) exceeds net assets* of a RLE by 3 times on the last day of the reporting period*.

* Net assets are defined as the difference between total assets and liabilities of a RLE (liabilities should be taken excluding tax liabilities). Illustration 6 (1)

FLE has 25% in RLE. FLE gives a RLE a loan.

(2)

FLE has 50% in RLE-1. RLE-1 has 50% in RLE-2. FLE gives a loan to RLE-2.

(3)

FLE has 40% in RLE-1 and 60% in RLE-2. RLE-1 provides a loan to RLE-2.

(4)

FLE has more than 20% (directly or indirectly) in the capital of RLE. It pledges a guarantee for repayment of a loan taken by RLE from any source.

In all the above mentioned cases loans potentially can be considered as controlled if other conditions are met. In (2) indirect ownership share is 25% (50% × 50%). In (3) direct ownership of 60% is taken into consideration. 

If the above-mentioned conditions are met the loan from foreign legal entity (FLE) is considered as “controlled” and taxpayer must calculate “capitalisation coefficient” on the last day of reporting (tax) period. Capitalisation coefficient =

Amount of controlled loan (Net assets  % of FLE' s ownership)  3

(Controlled loan includes accrued interest on loan not paid on the due date). 

On the last of each reporting (tax) period a taxpayer must calculate the maximum amount of interest on controlled loan, which is recognised as expense for CPT purposes: Maximum amount of interest =

Actual interest accrued on controlled loan Capitalisation coefficient


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

Actual interest rate cannot exceed:

  

15% on foreign currency loans; or 1.1 × CB rate for rouble loans.

The difference between the actual interest accrued on a controlled loan and the maximum amount of interest constitutes “deemed” dividends for CPT purposes, which are taxable at the foreign shareholder rate of 15%.

Thin capitalisation rules summary: Step 1:

If a loan is received from a foreign legal entity – define whether it is controlled.

Step 2:

If the loan is not controlled – apply regular taxation rules. If the loan is controlled – calculate capitalisation coefficient.

Step 3:

Using the coefficient determine maximum deductible amount of interest on controlled loan, which is recognised as expense for CPT purposes.

Step 4:

Calculate tax at 15% rate on the “deemed dividends” (i.e. on the difference between actual accrued interest and maximum deductible amount calculated in Step 3).

Illustration 7 Russian company ZZZ owes 60% of shares in company AAA. A foreign company XYZ owes 50% of shares of ZZZ. AAA’s data at January 31: Assets Liabilities

RR million 300 292 (including loan from ZZZ and tax liabilities of 2)

On 1 January 2013 ZZZ gave a 60 million RR loan to AAA at 20% per annum. Interest is paid on a quarterly basis. AAA pays CPT monthly. CB rate (notional) is 15%. CB rate × 1.1 = 16.5%. Step 1: Define whether the loan is controlled. First condition (i.e. FLE has more than 20%) is met. FLE (XYZ) indirectly owns 50% × 60% = 30% and the loan is given by the affiliated company of a FLE. Second condition (i.e. the loan amount exceeds net assets of a RLE by 3 times) is also met. Accrued interest for January is 0.99 (60 × 20% × 30/365) as first day is not counted. Loan plus interest is 60.99. 60.99/(300 – 290) = 6.1 is > 3 (tax liabilities are not taken into consideration). Thus, the loan is considered to be controlled.


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Step 2: Calculate capitalisation coefficient Capitalisation coefficient = Amount of controlled loan/(Net assets × % of FLE’s ownership × 3) = 60.99/(10 × 30% × 3) = 60.99/9 = 6.1 Step 3: Calculate maximum deductible interest First calculate interest under statutory rate 60 × 15% × 1.1 × 30/365 = 0.814 Maximum deductible amount of interest = statutory deductible interest accrued on controlled loan/capitalisation coefficient = 0.814/6.1 = 0.133 Step 4: Calculate tax on “deemed dividends” i.e. on the difference between actual accrued interest and maximum deductible amount (0.99 – 0.133) × 15% = 0.13 2

FIXED (NON-CURRENT) ASSETS

2.1

Depreciable property (art. 256)



The Tax Code defines depreciable property as:

   

property; capital improvements made by lessee in leased property with consent of lessor; results of intellectual activities; other object of intellectual rights.

All of the above-mentioned property should be:

  

used for income generating activities; AND have a term of useful life of more than one year; AND have an original value of 40,000 RR or more.

Commentary – Exam advice This limit is provided in the examination. 

The following items are not depreciable property:

    

land and natural resources; inventory; unfinished capital construction; securities.

In certain cases even depreciable property cannot be depreciated for tax purposes. For example, tax depreciation is not accrued on:

  

fixed assets put in conservation with a conservation term exceeding three months; fixed assets being in the process of reconstruction and modernisation for more than 12 months; fixed asset given by the owner (taxpayer) to another company for temporary usage free of charge.

Note that fixed assets received as gifts can be depreciated for tax purposes.


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Illustration 8 Company A gave a fixed asset for free to company B. The original cost of the asset is 200,000 RR with accumulated depreciation of 100,000 RR. The fair market value of the asset is 80,000 RR. Tax consequences of this transfer are the following: Company A will realise non-deductible loss in the amount of net book value (NBV) 100,000 RR (200,000 – 100,000). It will also pay VAT on the NBV in the amount of 18,000 RR (100,000 × 18%) as VAT is assessed on free-transfers and is paid by the donor. VAT liability for A and taxable gain for B are based on the greater between the NBV (100,000) and the fair market value (80,000 RR). (Note that this is an exam approach for both CPT and VAT although the Tax Code uses it for CPT only and says that VAT on a free asset transfer should be assessed on the fair market value.) Company B will realise taxable gain of 100,000 RR for CPT purposes unless the transfer is exempt under art. 251 (see Session 2 section 2.4). There will be no VAT consequences for B as it does not incur any VAT. Tax depreciation for B will be based on the NBV of 100,000 RR. 

Leased property is depreciated by the taxpayer, which accounts for it on its balance sheet (see section 3).



Acquisition (creation) of certain type of depreciable property (e.g. cars) requires state registration. Depreciation on these property types can be calculated for tax purposes only after the proper documents are submitted to registration bodies.



Note that the following sections 2.2 – 2.4 cover tax depreciation of tangible (fixed) assets. (Tax amortisation rules for intangibles are covered in section 3.6.)

2.2

Tax cost of depreciable property (art. 257)



Original tax cost of a fixed asset purchased from third parties includes its purchase price and all costs incurred in transporting, installing and testing it.



The following items are not included in fixed asset cost and are instead treated as other expenses for CPT purposes:

  

interest on loans used to finance fixed asset acquisitions; registration fees and state duties; foreign exchange and “sum” differences (see Session 2) arising on fixed asset acquisitions.



Original tax cost of fixed assets does not include any taxes, which are reclaimed or included in taxpayer’s expenses.



Fixed assets received free of charge are valued based on their market value, but cannot be less than their tax net book value on the balance sheet of the donor.



The original cost can be changed in case of reconstruction, modernisation, or partial liquidation. Repairs (even capital) do not affect the original tax cost of fixed asset.


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2.2.1

Revaluations of fixed assets



Revaluations of fixed assets performed after 1 January 2002 are ignored for tax purposes.

Illustration 9 A fixed asset with a book value of 100,000 RR is revalued in the current year to 200,000 RR. Tax depreciation is still based on the “old” cost of 100,000 RR. Calculations of taxable gains and deductible losses on sale of this asset are also based on the “old” cost. 2.3

Depreciation groups (art. 258)



All depreciable fixed assets are distributed between 10 depreciation groups in accordance with the terms of their useful lives. Depreciation group



Term of fixed asset useful life

1

from 1 year up to 2 years

2

more than 2 years up to 3 years

3


4


5


6


7


8


9


10

more than 30 years

Although the term of an asset useful life is determined individually by each taxpayer on a case-to-case basis, this is done within the minimum and maximum terms of useful life provided for the asset’s group in the statutory classification approved by the Government of the Russian Federation. For example, suppose the statutory classification attributes an asset to the 6th group. This means that its term of useful life can be between 10 years and one month and 15 years, but not less or more. The choice of the term (within the limits) is made by the taxpayer. For fixed assets which are not indicated in the statutory classification taxpayer determines the useful life in accordance with the technical conditions or producer recommendations.


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

The term of a depreciable fixed asset’s useful life is determined by a taxpayer on the date when it is put into operation. A taxpayer cannot increase the already established term unless there is a modernisation or reconstruction of this asset. Even in these cases increased terms cannot exceed the maximum limit as per the statutory classification.



The Tax Code gives all taxpayers an option to write-off 10% of fixed assets cost (30% for fixed assets included in the 3rd – 7th depreciation groups). 10% (30%) write-off is also applicable to capital improvements and modernisation of fixed assets. 10% (30%) write-off is NOT applicable to fixed assets received for free.



If 10% (30%) write-off option is used then the depreciation is charged on the remaining asset value (i.e. on 90% (70%) of asset’s initial cost). 10% (30%) write-off takes place in the month in which depreciation starts accruing.



If a taxpayer purchased fixed assets, which already had been used they are included in the same group in which were included by the previous owner.



Fixed assets for which title of ownership should be registered according to the law are included into the depreciation group in the month when documents for registration are submitted. Examples include buildings, capital construction objects, vehicles, etc.

3

TAX DEPRECIATION (ART. 259)



There are two methods of depreciation calculation:

 

straight-line method; and non-linear method.

3.1

General provisions



Methods of depreciation are chosen by taxpayer and defined in Tax accounting policy. The taxpayers should inform tax authorities before 1 January of the chosen method of depreciation by Tax accounting policy submission.



It is possible to change from one method to another beginning in the next tax period. However it is allowed to change non-linear method to linear one no more than once in five years.



The chosen method of depreciation is applied to all fixed assets independent of the date of acquisition.



Non-linear method is not available for buildings and transportation mechanisms included into the classification groups № 8, 9 and 10 (but is available for some machinery and equipment included in these groups).



Depreciation is calculated starting the 1st day of the month following the month when the fixed asset was put in use.



Taxpayers rendering services in the area of IT technologies have the right not to follow the rules of depreciation for computers. The cost of computers is considered as material expenses of the current period (art. 254 item1.3).


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3.2

Straight-line method (art.259.1)



Depreciation is calculated for each asset.



Depreciation per month for each fixed asset is calculated as the original tax cost (after deduction of the 10% or 30% initial write-off if applicable) multiplied by the depreciation rate determined for the specific fixed asset.



Under straight-line method depreciation rate for each fixed asset is calculated using the formula: k = (1/n) × 100%, where k – depreciation rate in % to original tax cost; n – term of useful life, expressed in months.



Depreciation calculation ceases in the month following the month when full cost has been depreciated, or when the asset is written-off or sold.



If a taxpayer purchased fixed assets, which had already been used (including fixed assets transferred into share capital), then the term of useful life can be decreased by the number of years/months used during previous ownership (art. 258.7).



Depreciation accrues from the 1st day of the month following the month when the fixed asset was returned from free of charge usage or reconstruction (modernisation) and conservation stopped.

The usage of the straight-line method is illustrated below: Illustration 10 Company purchased and put into use a fixed asset in January 2013. The asset cost is 80,000 RR (net of VAT). Estimated useful life is three years (36 months). Company used the right to write-off 10% of the cost in February 2013. Depreciation will be calculated starting February 2013 based on 72,000. Under the straight-line method the depreciation expense is 2,000 RR per month (72,000 RR/36 months) or 22,000 for the whole year 2013. Example 2 The following information is available for company A’s fixed assets (net of VAT):

Production line

Initial value

Tax depreciation rate

Date put into use

500,000

10%

March 2011

In April 2013 the asset was modernised. The cost of modernisation consisted of: – services 200,000 (net of VAT); – materials 100,000 (net of VAT). The new tax life of the asset after the modernisation is 15 years. Required: Calculate the tax net book value of the production line as at 31 December 2013 and the total depreciation expense for 2013.


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Solution RR Tax depreciation to 31 December 2012 Tax depreciation for January – April 2013

Depreciation for May – December 2013 __________

Total depreciation expense for 2013

__________

Tax NBV as at 31 December 2013 __________

Example 3 A fixed asset was received for free and booked in August 2013. The net book value of this asset on donor’s books was 100,000 RR. Annual depreciation rate – 12%. Required: Calculate tax depreciation of the asset for 2013 using the straight-line method. Solution

3.3

Non-linear method (art. 259.2)



Under the non-linear method depreciation is calculated for each depreciation group (subgroup) based on its total net balance value. Fixed assets are included in particular depreciation group (subgroup) depending on the terms of useful life which was assigned on the date of input into use.



If the taxpayer uses special increasing/decreasing coefficients (see next section) for depreciation such fixed assets are included in subgroups within respective group. The rules about creation/liquidation for groups, increase/decrease of total balance value are applied for such subgroups separately (independent from group). Special coefficients are applied to the rates of depreciation for such fixed assets and consequently decrease/increase the terms of useful life. However fixed assets are included in the subgroups based upon the terms of useful life determined according to the classification without increase/decrease of useful life terms (without application of coefficients).


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3.3.1

Total net balance value (NBV) of the group (subgroup)



Total NBV for each depreciation group (subgroup) is determined as the sum of all values of fixed assets included in this group (subgroup) minus accumulated depreciation of the group (subgroup). This determination was introduced with effect from 1 January 2009. (Before 2009 the non-linear method was applied for each fixed asset separately.)



In case of change of tax depreciation policy, from linear to non-linear, total NBV of the group (subgroup) is determined by including NBV for each fixed assets on the 1st day of the month of the start of non-linear depreciation. Fixed assets should be included in the same groups in which they were included when put into use.



New fixed assets are included into total NBV and increase its value by the original cost starting the 1st day of the next month after the month they were put into use.



On the 1st day of the next month the total NBV of depreciation group (subgroup) is decreased at the amount of depreciation calculated for the current month.

3.3.2

Depreciation for each group (subgroup)

This is determined as follows: A = B × k/100 A – depreciation per month for specific depreciation group (subgroup); B – total NBV of corresponding depreciation group (subgroup); k – rate of depreciation of corresponding depreciation group (subgroup). 

Depreciation rates for the non-linear method (art. 259.2) will be given in the examination: Depreciation group

Depreciation rate (per month)

1

14.3

2

8.8

3

5.6

4

3.8

5

2.7

6

1.8

7

1.3

8

1.0

9

0.8

10

0.7

The total balance value of the group is decreased by the net balance value of the fixed assets written-off or sold. NBV of this fixed asset is determined on the 1st day of the month according to the formula below (art.257 item 1): Sn = S × (1 – (0.01 × k))n Sn – net balance value after n months of usage, S – original tax cost; n – number of months of usage; k – depreciation rate of corresponding depreciation group (taking into account special coefficient). ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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

If the total balance value is decreased to zero due to disposal of fixed asset then the depreciation group should be eliminated.



The depreciation group (subgroup) can be eliminated when the total balance value is less than 20,000 RR and no new fixed assets in the next month are added to this depreciation group (subgroup). The remaining value of the group is written-off as non-operational expenses of the current period.

Illustration 11 XYZ purchased and put into use a fixed asset A in December 2011. The asset cost 240,000 RR (net of VAT). Estimated useful life is three years and one month (37 months). XYZ did not use the right to write-off 30% of the cost. XYZ used the straight-line method in 2011 and 2012. Accumulated depreciation for asset A on 1 January 2013 was 77,838 RR. In January 2013 fixed asset B was purchased and put into use. The initial cost was 200,000 RR (net of VAT). The useful life of this asset is four years. XYZ did not use the right to write-off 30%. In March 2013 fixed asset A was sold. Starting 2013 XYZ decided to apply the non-linear method of depreciation. (1) (2) (3)

Total NBV on 1 January 2013 of the group (only asset A NBV: (240,000 – 77,838) Asset A is included in № 3 depreciation group. Depreciation rate is 5.6% Depreciation for January 2013: (162,162 × 5.6%)

RR 162,162 (9,081) ______ 153,081 ______

(4) (5)

Total NBV of the group on 1 February 2013: (includes asset B belonging to same depreciation group) Depreciation for February 2013: (353,081 × 5.6%)

(6)

Total NBV of the group on 1 March 2013

333,308

(7)

Depreciation for March 2013: (333,308 × 5.6%)

(18,665)

(8)

Next month after sale of asset A the total NBV of the group should be decreased by the NBV of the sold fixed asset calculated according to the formula. Attention! Use NBV on 1 January 2013 (not initial cost), when the non-linear method of depreciation started after change from straight-line method. NBV of fixed asset A: (162,162 × (1 – (0.01 × 5.6))3

(9)

353,081 (19,773) ______

(136,416) ______

Total NBV of the group on 1 April 2013

178,227

Depreciation for April 2013: (178,227 × 5.6%)

(9,981) ______

Total NBV on 1 May 2013

168,246 ______


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Example 4 The following information is available in respect of company A’s fixed assets (net of VAT): Fixed asset Initial value

Useful life

Date put into use

Date of sale

A B C

65 months 70 months 84 months

December 2012 January 2013 February 2013

February 2013

100,000 120,000 150,000

Required: Calculate the depreciation expense for March 2013 according to the non-linear method. The company did not use the right for 30% write-off. Solution RR Total NBV of the group on 1 January Depreciation for January Asset B brought into use in January

______

Total NBV of the group on 1 February Depreciation for February Asset C brought into use in February NBV of the sold asset A on 1 March

______

Total NBV of the group on 1 March Depreciation for March 3.4

Special depreciation coefficients (art. 259.3)



Depreciation rates in certain cases can be increased or decreased by special coefficients.



Increasing coefficient up to 2 (max) may be used at taxpayer’s choice for fixed assets functioning in “aggressive” environment and/or working nonstop. Under non-linear method of depreciation this coefficient cannot be used in respect to 1-3 depreciation groups.



Increasing coefficient up to 3 (max) may be used at taxpayer’s choice for: (1)

leased fixed assets under financial lease. The depreciation is calculated by the taxpayer, who accounts for the asset on its balance sheet. However, in this case this coefficient cannot be used for the assets in the 1-3 groups under any method of depreciation.

(2)

fixed assets used only for scientific-technical activities.


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

It is allowed to apply lower rates than those stipulated in the Tax Code according to the decision of the general director of the company (taxpayer). In this case net balance value is determined based upon actual rates.

3.5

Direct/indirect classification



Under the accruals method depreciation of fixed assets which are directly used in production will be classified as a direct expense for production companies.



Under the accruals method depreciation of fixed assets which are not directly used in production, will be classified as an indirect expense for both production and trading companies.

3.6

Amortisation of intangible assets (art. 257 item 3, art. 258 item 2)



For tax purposes intangible assets are classified as:

 

results of intellectual activities; rights to intellectual property

purchased or created by a taxpayer used for income generating activities, with a term of useful life of more than one year and with an original value of at least 40,000 RR. Therefore, for example, expenses on the purchases of exclusive rights for computer programs costing less than 40,000 RR can be deducted in the period immediately (art. 264 item 1.26). 

Original tax cost of an intangible asset includes purchase cost and related costs.



The term of useful life of intangible assets is established by a taxpayer based upon the terms of validity of patents, certificates and/or restrictions of agreements and legislation for intellectual property in Russia or foreign countries.



If the term of useful life is impossible to determine, the term is established as 10 years.



Intangible assets are included into corresponding amortisation group according to their terms of useful life.



Amortisation of intangible assets can be calculated either on straight-line or non-linear methods.



Non-linear method is not available for intangible assets included in classification groups № 8, 9 and 10.



Mechanism of calculation of amortisation of intangible assets is the same as that for tangible fixed assets.


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3.7

Research and development expenditure (“R&D”)

3.7.1

R&D generating exclusive rights to intellectual property



Where such exclusive rights are generated, the taxpayer has the option to treat the R&D expenditure either

 

as eligible for tax depreciation as above; or treated as a deductible expense over one or two years.



The company needs to disclose the chosen tax accounting procedure in its accounting policies.

3.7.2

Other R&D expenditure



The Russian Federation has established a definitive list of R&D expenses which can be recognised for tax purposes.



These expenses are deductible in the tax period in which the project is completed, or progress stage achieved.



Certain expenses or contributions to specialist funds for scientific or innovative activities are immediately deductible in the period when the expense is incurred.



Certain R&D expenses qualify for a 1.5 multiplier; this requires submission of a special R&D completion report to the tax authorities along with the final tax return, and may be challenged or investigated by the authorities. Commentary The 1.5 multiplier can apply to capitalised expenses for tax depreciation as well as to expense deductions.



Taxpayers may set up provisions for future R&D expenses for periods of up to two years. Expenditure in excess of the provision is allowed as a deductible expense, whereas unused provision amounts are included in taxable non-sale income.

4

LEASED ASSETS

4.1

Depreciation (art. 264.1.10, art. 272.8.1)

4.1.1

Operating lease



Under such an agreement the lessor (“arendodatel”) provides an asset to the lessee (“arendopoluchatel”), but this asset is still accounted for on the lessor’s books.



The lessor therefore depreciates an asset under general rules. The lessee claims deduction for the rental payments, not for depreciation.

4.1.2

Financial lease



Under such an agreement the lessor provides an asset to lessee, but this asset may be accounted for on the lessee’s books (subject to the terms of the actual lease agreement).


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

If a fixed asset is transferred to the lessee’s balance sheet the consequences are:



the lessor can no longer depreciate the fixed asset (as it is removed from its balance sheet), instead it deducts the cost of the fixed asset over the leasing period in proportion to leasing income accrued (i.e. not necessarily in equal amounts (art. 272.8.1));



the lessee depreciates the fixed asset which is now recorded on its balance sheet. Lease payments to the lessor are still deducted but not in the full amount. Deductible lease payment is the total payment less depreciation accrued on the leased asset.

Illustration 12 In January 2012 ZAO Able (lessor) purchased and leased a fixed asset with depreciable cost of 12 million RR to company Defi (lessee) under a lease agreement for three years. The fixed asset has a useful life of five years. Depreciation is accrued under a straightline method. Assume that no increased coefficient applies and 30% write-off option is not used. Defi pays to Able lease payments under the following scheme (all amounts are in RR, VAT net): 2012 – 8 million; 2013 – 5 million; 2014 – 3 million Option 1: An operating lease agreement was concluded. Leased fixed asset is still on Able’s balance sheet. Able calculates depreciation as: 2012: 12 × 11/12 × 20% = 2.2 million RR 2013: 12 × 12/12 × 20% = 2.4 million RR 2014: 12 × 12/12 × 20% = 2.4 milion RR Defi takes a deduction of 8 million in 2012, 5 million in 2013 and 3 million in 2014 for lease payment to Able. (On the other hand Able recognises these amounts as an income.) Option 2: A financial lease agreement was concluded. The parties agreed that fixed asset will be recorded on Defi’s balance sheet. Able deducts 12 million of fixed asset cost under the following scheme: In 2012: 12 × 8 (rent income for 2012)/16 (total rent income) = 6 million In 2013: 12 × 5/16 = 3.75 million In 2014: 12 × 3/16 = 2.25 million Defi calculates depreciation and deducts rental payments but not in the full amounts as shown below: Deductible depreciation for 2012: 12 × 11/12 × 20% = 2.2 million Deductible depreciation for 2013 and 2014: 12 × 20% = 2.4 million Deductible rental payment for 2012: 8 – 2.2 = 5.8 million Deductible rental payment for 2013: 5 – 2.4 = 2.6 million Deductible rental payment for 2014: 3 – 2.4 = 0.6 million


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4.2

Capital improvements (art. 258.1, art. 259.2)



If a lessee invests in capital improvements to a leased fixed asset two different scenarios are possible.

Scenario 1: Lessor agrees AND reimburses lessee for these improvements 

In this case the lessor depreciates these improvements starting the 1st day of the following month after they were put into usage.



The lessor has a right to perform 10% (30%) write-off on the improvements in the month when depreciation starts.

Scenario 2: Lessor agrees BUT does not reimburse lessee for these improvements 

The lessor does not have a right to depreciate the capital improvements in this second scenario.



The capital improvements should be subject to depreciation by the lessee within the period of lease agreement.



The useful life of the leased fixed assets would be based on the fixed assets classification approved by the Russian Government, which does not necessarily match the rent period.



Depreciation starts from the 1st day of the month following the month of putting the fixed asset into use.



The lessee has a right to apply the 10% or 30% write-off to the cost of capital improvements incurred by him.



Note that capital improvements on leased fixed assets have been examined frequently.


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Illustration 13 On 1 January 2013 a fixed asset was rented (not a financial lease) from Able (lessor) by Defi (lessee). In February 2013 Defi made some capital improvements to the fixed asset in the total value 300,000 (net of VAT). The improvements were put into usage in March 2013. The statutory tax useful life of these improvements is three years. The agreement term is two years. Scenario 1: Able agrees to the improvements and reimburses them in May 2013 In April 2013 Able can perform a write-off up to 10% of capital improvements (i.e. 30,000 RR). Able starts to depreciate capital improvements in April 2013. Depreciation for 2013 Depreciation for 2014 and 2015: Depreciation for 2016

(270,000 × 9/36) (270,000 × 12/36) (270,000 × 3/36)

67,500 RR 90,000 RR 22,500 RR

Scenario 2: Able agrees to the improvements but does not reimburse costs to Defi No depreciation for Able. Depreciation for Defi starts from April. Defi does not use right for 10% write off Depreciation for 2013 Depreciation for 2014

(300,000 × 9/36) (300,000 × 12/36)

75,000 RR 100,000 RR

NBV of the capital improvements on 31 December 2014 (125 000 RR) cannot decrease CPT tax base. 5

GAINS AND LOSSES ON PROPERTY DISPOSALS

5.1

Fixed and intangible assets (art. 268)



Income on sale of depreciable property is defined as the sales proceeds less indirect taxes (e.g. VAT) included in price.



Taxpayer can decrease income on sales of depreciable property by net book value of this property and sale related expenses (e.g. storage, transport costs)



Note: If a fixed asset is sold which has been used for less than five years since the date of putting it into use the amount of write-off (10% or 30%) should be included in the CPT base as non-operating income (without change to the fixed asset NBV). Selling price less: VAT less: tax net book value (NBV) = gain/loss



Net book value (also referred to as “residual” value) is defined as a difference between original values less accumulated depreciation for linear method of depreciation and according to the formula for non-linear method of depreciation (art. 257).


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

If a property is depreciated under decreased norms no recalculation of depreciation is performed at the moment of disposal.



If the sale of depreciable property results in a loss, such loss is to be spread evenly over the “remaining useful life” of the asset starting the month following the disposal (this is an exam approach). Remaining useful life is the difference between the total estimated useful life less the actual period of usage (including the month of disposal).

Illustration 14 In July 2013 Company Z sold a fixed asset with remaining useful life of 15 months. A loss of 1,500 RR was realised on the sale. Company Z will recognise monthly losses of 100 RR (1,500/15 = 100 RR) during the remaining useful life of the fixed asset sold each month starting August 2013. 

Taxation of operations with securities is not examinable.



Taxation of barter transactions (property exchanges) will also not be examined.



When calculating gain/loss on disposal it is important to keep in mind VAT rules on property disposals (see 2.1 Session 9):

 

if VAT on initial purchase of a fixed asset was recovered then all revenue from fixed asset sale is subject to VAT at 18/118 rate; if VAT on initial purchase of a fixed asset was capitalised (i.e. added to its cost) then VAT is assessed only on the margin between sales price and net book value of fixed asset at 18/118 rate. Note that net book value is calculated based on accounting rules.

Illustration 15 Company A sells fixed asset for 20,000 RR (including VAT). Tax net book value of the asset is 18,000 RR. Accounting net book value is 10,000 RR. Option 1: All VAT incurred on purchase of this asset was recovered. Revenue VAT (20,000 × 18/118) Tax net book value Loss on sale

20,000 (3,051) (18,000) (1,051)

Loss on sale is to be spread evenly over the remaining useful life of the asset. Option 2: All VAT incurred on purchase of this asset was capitalised. Revenue 20,000 VAT (20,000 – 10,000) × 18/118 (1,525) Tax net book value (18,000) Gain on sale 475 Gain on sale is included into the overall taxable profits.


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Example 5 On 4 December 2013 ZAO ABC sold a fixed asset for 20,500 RR (including VAT). ABC acquired this asset in June 2013 for 32,000 RR (including VAT) and depreciated it under the straight-line method under the same rules for tax and accounting. ABC used its right to 30% write-off. The fixed asset was used in activities subject to VAT. The useful life of the asset was determined by the company as seven years. ABC received payment for the asset disposed in February 2014. Required: (a)

Calculate the taxable gain/deductible loss on disposal. State the moment of gain/loss recognition for CPT purposes.

(b)

The same but assuming that the asset was used in VAT exempt activities and all VAT on purchase was capitalised (i.e. added to fixed asset cost).

Solution (a)

Activities subject to VAT Cost 30% write-off

_______

Depreciable value Depreciation

_______

Net book value

_______

Sales revenue VAT

_______

Net revenue Net book value

_______

Taxable gain/(deductible loss) on sale


_______

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(b)

VAT exempt activities Cost 30% write-off

_______

Depreciable value Depreciation

_______

Tax net book value

_______

Cost Depreciation

_______

Accounting net book value

_______

Sales revenue VAT on sales margin Tax net book value

_______


_______

5.2

Materials and other property (art. 268)



Income on sale of materials and other property is the sales proceeds less indirect taxes (e.g. VAT) included in price.



Taxpayer can decrease income on sales of non-depreciable property by this property purchase price and sale related expenses (e.g. storage, transport costs).



Taxpayer can decrease income on sales of the rights (shares, participation in other companies) by expenses related with its purchase and sales.



If the sale of non-depreciable property results in a loss, such loss decreases taxable profits of the reporting (tax) period.

Summary of taxation rules on property disposal Taxable gain/loss on fixed/intangible assets disposal

Sales proceeds (excluding VAT) less net book value less sale related expenses

Taxable gain/loss on materials and other property disposals

Sales proceeds (excluding VAT) less purchase price less sale related expenses

Treatment of loss on fixed/intangible assets disposals

Loss is included in “other” expenses of a taxpayer and is spread evenly over its remaining useful life.

Treatment of loss on materials and non-depreciable property disposals

Full amount of loss is decreasing taxable profits of the reporting (tax) period


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Example 6 In 2013 company A made the following property disposals: (1)

In February it sold a fixed asset for 47,200 RR (including 18% VAT). The net book value of the asset was 54,000 RR. The remaining term of the asset’s useful life was 16 months. The sale-related transportation costs were 2,360 RR (including VAT of 360 RR).

(2)

In March the company sold materials for 1,180 RR (including 18% VAT). These materials were purchased for 1,300 RR (excluding VAT).

Required: Calculate taxable gains/losses on the above transactions and explain their treatment. Solution (1)

Fixed asset RR Sales revenue VAT

______

Sales revenue Net book value Transportation costs

______


(2)

______

Materials RR Sales revenue VAT

_____

Sales revenue net of VAT Purchase price

_____

Profit/(loss) on sale


_____

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state the main types of partially deductible and non-deductible expenses;



define and apply the deductibility limits on bank loan interest including the sum differences on liabilities denominated in notional currency units and thin capitalisation rules (Art. 269);



calculate adjustments for other types of partially deductible expenses (statutory limits provided);



explain the treatment of expenses incurred on fixed asset acquisitions (including bank interest);



explain the differences in the rules for recognition of repair and capital improvement expenses;



explain and apply the rule for the initial 10% or 30% write-off available for new fixed assets;



define depreciable tangible and intangible assets;



explain and apply the allowable depreciation methods for tax purposes;



explain and apply the rules for capital improvements to leased assets (Art. 258;1, 259;2);



calculate the deductible expenses of both the lessor and the lessee under the different accounting treatments of leased assets;



compute the taxable income arising from leasing transactions;



compute the taxable gain or loss on fixed asset disposal (including the valuation of depreciable property);



apply the relevant tax rules for losses on fixed assets disposals (Art. 323);and



explain and apply the rules for research and development deductible expenses.


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EXAMPLE SOLUTIONS Solution 1 RR 950 500

Fully deductible Ticket cost Taxi transfer Deductible accommodation expenses: Accommodation Phone charges Per diem allowance (2,000 RR × 3 days)

1,500 180 6,000 _____

Total deductible amount

9,130 _____

All other expenses are non-deductible. Solution 2 Tax depreciation up to 31 December 2012: 500,000 × 10% × (9 + 12)/12

87,500

__________

Tax depreciation for January – April 2013: 500,000 × 10% × 4/12

16,667

Modernisation cost (200,000 + 100,000) 30% write-off Depreciation for May – December 2013: 710,000 (W) × 8/(12 × 15)

300,000 (90,000) 31,556

__________

Total depreciation expense for 2013

48,223

__________

Tax NBV as at 31 December 2013: 710,000 (W) – (87,500 + 16,667 + 31,556) (W)

574,277

__________

New depreciable value: 500,000 + 210,000 = 710,000 RR

Tutorial note: To some students it seems more logical to use net book value as at 1 May plus modernisation cost, however the solution above reflects the approach used in the June 2007 exam. Solution 3 Calculation of depreciation will start in September. Cost net of VAT is 100,000 RR. Accumulated depreciation under straight-line method for September – December 2013 is: 100,000 × 12% × 4/12 = 4,000 RR No 30% write-off option is available.


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Solution 4 All fixed assets (A, B, C) will be included in one depreciation group 4 as their corresponding useful life is within 5 – 7 years limits. Depreciation rate is 3.8% Total NBV of the group on 1 January (includes only one fixed asset A) Depreciation for January: (100,000 × 3.8%) Asset B brought into use in January

RR 100,000 (3,800) 120,000 ______

Total NBV of the group on 1 February: Depreciation for February: (216,200 × 3.8%) Asset C brought into use in February NBV of the sold asset A on 1 March: (100,000 × (1 – (0.01 × 3.8))2)

216,200 (8,216) 150,000 (92,544) ______

Total NBV of the group on 1 March: Depreciation for March: (265,440 × 3.8%)

265,440 (10,087)

Solution 5 (a)

VAT on purchase of fixed asset was recovered Cost of fixed assets (net of VAT)

27,119

30% write-off

(8,136) ______

Depreciable value Depreciation (18,983 × 1/(7×12) × 6 months)

18,983 (1,356) ______

Net book value

17,627 ______

Sales revenue VAT (20,500 × 18/118)

20,500 (3,127) ______

Tax net revenue Net book value

17,373 (17,627) _____


(254) _____

The loss will be spread evenly over the remaining life of the asset, i.e. 78 months (84 – 6), starting from January 2014, therefore the financial result from this disposal should not affect the 2013 CPT tax base.


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(b)

VAT on purchase of the fixed asset was capitalised

Cost of fixed assets (including VAT) 30% write-off

32,000 (9,600) _______

Depreciable value Depreciation (22,400 × 1/(7×12) × 6 months)

22,400 (1,600) _______

Tax net book value

20,800 _______

Cost of fixed asset (including VAT) Depreciation (32,000 × 1/7 × 6/12) (no 30% write-off is allowed in accounting) Accounting net book value

32,000 (2,286) _______ 29,714 _______

Sales revenue VAT on sales margin ((20,500 – 29,714) × 18/118) Tax net book value

20,500 0 (20,800) ______


(300) ______

The loss will be spread evenly over the remaining life of the asset, i.e. 78 months (84 – 6), starting from January 2014, therefore the financial result from this disposal should not affect the 2013 CPT tax base. Tutorial note: Remember that the 30% write-off should be included in non-operational income in 2013 in both cases. Solution 6 (1)

Fixed asset Sales revenue (including VAT) VAT

RR 47,200 (7,200) ______

Sales revenue (VAT net) Net book value Transportation costs (VAT net)

40,000 (54,000) (2,000) ______

Loss on sale:

(16,000) ______

Loss will decrease taxable base for 1,000 RR per month. (16,000 RR/16 months) (2)

Materials Sales revenue VAT

RR 1,180 (180) _____

Sales revenue net of VAT Purchase price

1,000 (1,300) _____

Loss on sale

(300) _____

Loss will decrease taxable base of the reporting period in which the sale took place.


0335

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0336

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CORPORATE PROFITS TAX – OTHER INCOME AND EXPENSES, BRANCHES AND PAYMENTS


To explain the taxation of special types of income and expense, including allowances and losses.



To describe the tax calculation for different types of entity and the allocation of taxable profits to branches.



To describe reporting and payment procedures for corporate profits tax.

OTHER INCOME & EXPENSE

DIVIDENDS   

NON-OPERATIONAL INCOME/EXPENSES      

 

LOSS CARRY FORWARD

ALLOWANCES

General Assets received for no consideration Profits and losses of previous years Forex and “notional” units gains/losses Commercial debt factoring Fines and penalties

  

Setting up  Limitations on amount Usage

TAX CALCULATION

 

TAX ACCOUNTING

Allocation of profits tax   Payment

General provisions (art.313)  Tax base calculation (art.315)  Analytical tax accounting  registers (art.314) Tax accounting policy as a tax optimisation instrument




0401

General rules

Production company Trading company

SEPARATE SUBDIVISIONS



CPT rates Payments Dividends

REPORTING AND PAYMENT PROCEDURES Monthly estimated profits Monthly actual profits Quarterly payment system

version 1


1

NON-OPERATIONAL INCOME/EXPENSES

1.1

General (art. 250 and art. 265)



Non-operational income items, which may be examined include in particular:

            

rental income; copyright income; interest income; fines and penalties for breach of commercial contracts; free property receipts including property from dismantling or liquidating fixed assets and surpluses identified from physical stocktakes; foreign currency exchange gains; gain from the transactions denominated in “notional” units (positive “sum” differences (“summovie raznitsi”)); income of past years discovered in the reporting period; income from participation (“dohodi ot dolevogo uchastija”) in other entities; income from simple partnership; income from “claw-back” of previously created allowances and provisions (e.g. bad debt allowances, repair provision); and income received as a result of accounts payable write-offs.

Timing of non-operational income/expense recognition depends on the method (cash or accruals) of income recognition (see Session 2).

Illustration 1 Company XX leased equipment to Company ZZ. According to the agreement ZZ pays XX monthly not later than the last day of the current month 11,800 RR (including VAT) for the rent invoiced. The agreement stipulates a late payment penalty of 1% of monthly payment per day. Leasing is not a main object of XX’s activities. XX is an accrual-basis taxpayer calculating and paying CPT on a quarterly basis. ZZ paid the January invoice on 10 February but only recognised the penalty for the breach of the agreement on 15 February. The date of rent income recognition is defined as the date of settlement or the taxpayer's submitting the documents in accordance with the terms of the concluded agreements or as the last day of the reporting period. Therefore XX recognises rental income at the end of each month (at the date of primary documents issue). So 10,000 RR on 31 January. The date of penalty income recognition is the date when the claim is accepted by the debtor or the date of entry of a court decision into legal force. So penalty income accrues on 15 February amounting to 1,500 RR (10,000 × 1% × 15 days). Both amounts increase XX’s CPT base as non-operational income. 1.2

Assets received or transferred for no consideration



Assets received for free are booked at fair market value but not less than NBV (art.250).



The value of assets received for free is subject to CPT, unless the assets are received from a parent (subsidiary) company with more than 50% ownership share (see Session 2).



A loss on a free transfer of fixed and other assets is disregarded for tax purposes.


0402

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

VAT is assessed on the asset fair market value and is paid by the donor.

Illustration 2 Company A gives a photocopy-machine valued at 100,000 RR to company B. Company A will pay VAT of 18,000 RR (100,000 × 18%). Loss on donation is disregarded for Company A. Company B will be potentially subject to CPT only as VAT is paid by A. 1.3

Profits and losses of previous years, discovered in the current year



There are often accounting mistakes discovered in the current period but relating to previous years. These mistakes can influence profits and losses of previous years.



These mistakes are corrected in the tax returns for the period(s) to which they relate (i.e. a taxpayer is required to file an amended tax return for the period to which the mistake relates).



Profits of previous years discovered in the current year result in late interest charge. Tax penalties may be applicable as well (see Session 12).



If it is not possible to identify the period in which the mistake was made, or where a mistake led to the overpayment of tax, the tax base is corrected for the period in which it is discovered (art.54). Any such income of past years discovered in the reporting period is classified as non-operational.

1.4

Foreign exchange (“forex”) and “notional” units gains/losses



Gains/losses arising on forex and “notional” units transactions are taxable/deductible.



Forex gains and losses are defined and calculated in accordance with accounting rules.

Example 1 On 31 January 2013 ZAO ABC received a three-year loan in the amount of 500,000 USD. Annual interest is fixed at 8%. The interest is paid semi-annually: the first payment was due on 1 August 2013 and the second payment was due on 1 February 2014. Under the terms of the contract the loan principal should be repaid on 1 February 2016. All funds received under the loan agreement were converted into roubles at the date of receipt of the loan. ABC calculates and pays CPT on a quarterly basis. Exchange rates (notional): 31 January – 29.2; 31 March – 29.4; 30 June – 29.5; 31 July – 29.8; 1 August – 29.9; 30 September – 30.2; 31 December – 31.4 Required: (a) (b) (c)

Calculate the interest expense recognised for 2013. Calculate the foreign exchange loss on the loan recognised in 2013. Calculate the foreign exchange loss in interest recognised in 2013.


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Solution (a)

Interest expense RR

st

1 quarter: 2nd quarter: 3rd quarter: July: Aug-Sept: 4th quarter: ________ Total

(b)

________ Foreign exchange differences on loan principal USD

Ex-rate

RR 000

Loan principal at 31 January At 31 December

_____

Exchange difference

(c)

_____

Foreign exchange differences on interest RR

Interest accrued as at 1 August Actual payment at 1 August

________

Exchange difference

________

Restatement of interest accrued for August – September: USD

Ex-rate

RR

Interest accrued at 30 September At 31 December

_____

Exchange difference

_____

Total foreign exchange difference on loan principal and interest:



Gain/loss from the transactions denominated in “notional” units arises from the operations when the liability is put into “notional” units but payment should be made in roubles.


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Illustration 3 Company A concluded an agreement with Company B for the delivery of materials. According to the agreement the cost of the materials is 1,000 “notional” units and payment should be made in RR within 30 days after delivery using CB rate. One “notional” unit is equal to one USD. Exchange rates (notional): 03/03 – 29.3; 02/04 – 29.4. Materials were supplied by Company B on 3 March and accounted for at 29,300 RR. Payment was made by Company A on 2 April amounting to 29,400 RR. The 100 RR difference is the loss on transactions denominated in “notional” units and is deductible for CPT purposes. 1.5

Gains and losses on commercial debt factoring (art. 279)



Calculation of gain/loss on commercial debt factoring depends on the timing of the factoring (i.e. before or after the payment term of the main agreement).

1.5.1

Before



If factoring took place before the payment term indicated in the main agreement, then any negative difference between income received and receivable transferred is considered a loss for the taxpayer. The amount of this loss for tax purposes is limited.



The limit on loss is calculated in the following way (RR contracts):



revenue received on factoring is multiplied by Central Bank refinancing rate (valid on the factoring date) increased by 10% (i.e. × 1.1); also



multiplied by the number of days left up to the payment date of the main agreement and then divided by 365.

If factoring takes place in a foreign currency 15% is used in calculations. This is the exam approach although Tax Code (art. 279) requires calculation of the loss limit in accordance with interest deductibility rules set in art. 269 (see Session 3), i.e. 1.1 of CB rate and 15% apply only if there is no data on interest on comparable loans. Example 2 In January 2013 ZAO Armada made a shipment to ZAO Bella. The invoice amount is 170,000 RR. Payment date under the agreement is 15 July 2013. On 5 February 2013 Armada sold the receivable to ZAO Gemma for 130,000 RR under a factoring arrangement. Central Bank rate for January – April 2013 is 15%, for May – September 2013 – 8% (notional). Required: Calculate deductible loss on factoring (ignore VAT).


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Solution RR Income from factoring Receivable value

_______

Actual loss on factoring

_______

Deductible loss:

1.5.2

After



If factoring took place after the payment term indicated in the main agreement, than the resulting loss will be accounted for tax purposes as follows:

  

50% will be recognised as non-operational expense at the factoring date; 50% will be included in non-operational expense within 45 days after the factoring date.

If the debt which was sold to a third party is further sold, gains/loss on such sale is treated as profits/loss from financial services (i.e. fully taxable/deductible).

Example 3 On 22 January 2013 ZAO Armada made a shipment to ZAO Bella. The invoice amount is 70,000 RR. Payment date under the agreement is 23 January 2013. On 22 February 2013 Armada sold a receivable to ZAO Gemma for 61,000 RR under factoring arrangement. Required: Calculate the deductible loss on factoring, indicate its timing (ignore VAT). Solution RR Income from factoring Receivable value ______ Loss on factoring


______

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1.6

Fines and penalties for the breach of commercial contracts



There are two possible treatments:



(1)

Include in non-operational income only if they are recognised by the debtor or confirmed by the court (art.250). Amounts are included in income on the date of debtor’s acceptance of the claims or effective date of court decision (art. 271);

(2)

Record in accordance with the terms of the contracts (art. 317) independently of the debtor confirmation. If a measure of the penalties is not specified in the contract, no income should be recognised.

For exam purposes, the first approach (art. 271) should be used (i.e. only confirmed amounts should be booked as income/expense).

Example 4 In accordance with the terms of the contract between ZAO Almond and one of its debtors, Almond is entitled to charge late payment interest in the amount of 0.2% per day for late payment of invoiced amounts. The outstanding debtor’s liability as at 31 December 2013 was 48,000 RR, of which 20,000 was due for payment on 1 November 2013 and the remaining part was due on 14 December 2013. As at 31 December 2013 the debtor accepted the late payment interest claim. The principal debt and the late payment interest for the whole period of delay were paid to the company on 10 January 2014. Required: Calculate ZAO Almond’s income for 2013 resulting from the above transactions assuming that it is an accruals basis taxpayer. Ignore VAT. Solution


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2

ALLOWANCES Commentary – Exam advice The only examinable topic here relates to allowances for receivables (“bad debt provisions”).

2.1

Setting up an allowance for receivables (art. 266)



The Tax Code defines a bad debt as any debt which is:

 

not paid in the term provided by the agreement; and not covered by guarantees.



An allowance for bad debts is created based on the examination of outstanding accounts receivable as at the last day of the reporting (or tax) period.



The main criterion (provided in the examination) is the age of the debt: Age of debt

Amount of allowance

More than 90 days

100%

45 to 90 days

50%

Less than 45 days

0%



Amounts posted to receivables allowance tax account are included in the nonoperational expenses at the last day of the reporting period.



The allowance for bad debts for tax purposes is available to accrual basis taxpayers only.



Specific rules for banks and insurance companies are not examinable.

2.2

Limitations on amount of allowance



The maximum amount of the allowance cannot exceed 10% of sales revenue of the reporting period excluding VAT (art. 249).



The term “sales revenue” is understood here as the revenue from sales of goods produced or purchased by the taxpayer including sales of fixed and other assets.

2.3

Usage of allowance



The allowance is used for the write-off of the following types of debts:

 

debts with expired statute of limitation (generally three years for trade receivables); debts, which were cancelled due to the decision of the state body, or liquidation of the debtor.



If the amount of actual debts to be written off exceeds the allowance, the difference is included in non-operational expenses for tax purposes.



If the allowance exceeds the actual bad debt write-offs, then the difference can be carried forward to the following the reporting period. Carry forward rules are illustrated below.


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Illustration 4 ZAO Apple is an accrual-basis taxpayer. Apple reports profits tax on a quarterly basis (i.e. quarter is a reporting period for CPT). It commenced operations in January. At the end of the first quarter an allowance for bad debts amounting to 2 million RR was created. No bad debt write-offs took place in this quarter. In the second quarter, bad debts amounting to 500,000 RR were written off. The examination of bad debts at the last day of the reporting quarter indicated that the new amount of allowance is: (a) (b)

3 million RR; or 1 million RR.

Sales revenue of Apple (not including taxes) is 100 million and 10 million RR in the 1st and 2nd quarters respectively. Tax consequences of these transactions are as follows: First quarter: In both cases Apple will have a tax-deductible non-operational expense of 2 million RR. 10% limitation does not apply (100 million × 10% > 2 million). Second quarter: (a)

The allowance will be decreased by 500,000 RR (actual write-offs) and increased by 1.5 million RR to reach the new level of 3 million RR. The result is a taxdeductible non-operational expense of 1.5 million RR (10% limitation does not apply, 110 million × 10% > 3 million).

(b)

The allowance will be decreased by 500,000 RR (actual write-offs) and further decreased by 500,000 to reach the new level of 1 million . This 500,000 RR is included in the taxable non-operational income of the six months.

Example 5 Company Y had a bad debt allowance of 10 million RR as at 1 January 2013. According to the accounts receivable evaluation as at 31 December 2013 this allowance should be 25 million RR. The company’s sales (including VAT) for 2013 are 236 million. In 2013 one account receivable of 1.18 (including VAT) was writtenoff. Required: Calculate the bad debt expense for 2013. Solution


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Example 6 OOO Elm is an accrual basis taxpayer. Elm’s policy in 2012 was not to create debt allowances. The company’s tax accounting register shows the following information about the company’s debts in 2013 (in million RR and including VAT at 18%): Age of bad debt More than 90 days From 45 to 90 days Less than 45 days

As at 1 January 2013 72 28.8 48

As at 31 December 2013 40.8 108 88

The statute of limitation in respect of one debt amounting to 14 million RR (including 2.33 million RR of VAT) expired in August 2013, and this debt was then written off from the tax accounting register. Elm decided to create an allowance for receivables. Sales revenue for 2013was 495.6 million RR (including VAT at 18%). Required: Calculate the bad expense for the year 2013. Solution RR Sales revenue (net of VAT) Bad debt allowance limitation Closing bad debt allowance

Write-off Total bad debt expense


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3

LOSS CARRY FORWARD (ART. 283)

3.1

General rules



If calculation of a taxable base has resulted in a loss, such loss can be carried forward and utilised over 10 subsequent years.



There is no limit on the proportion of losses that may reduce future reporting profits (i.e. 100% can be used).



If a taxpayer incurred losses over several tax periods, they are utilised under first-in first-out (FIFO) principle.

Illustration 5 OOO Ash had a 100 million RR tax loss in 2011. In 2012 Ash had a taxable income 40 million RR before loss carried forward. In 2013 Ash had also a taxable income 100 million before loss carried forward. Tax loss of 100 million RR can be carried forward and utilised in 10 subsequent years to decrease taxable profits without any limitations. Therefore, in 2012, 40 million RR of tax loss can be utilised and 60 million RR will be carried forward to 2013 and potentially further on. In 2013 the remaining 60 million RR of tax loss will be fully utilised.

Example 7 On 1 January 2012, the balance of allowable unused losses brought forward consists of the following: Tax loss from 2010 Tax loss from 2011

24 million RR 28 million RR

Taxable profits before loss utilisation were 25 million RR in 2012; 60 million in 2013. Required: Calculate the losses utilised in 2012 and 2013 and losses (if any) to be carried forward to future years. Solution


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4

DIVIDENDS

4.1

CPT rates on dividends (art. 284, 275)



The Tax Code provides for special tax rates on dividends receipts and distributions.



If an entity pays dividends it must withhold CPT at source at:

 

9% if dividends are paid to a Russian legal entity (unless entitled to 0% rate – see below); 15% if dividends are paid to a foreign legal entity.



The tax should be remitted to budget not later than the day following the payment date.

4.2

Payments to Russian legal entity



Dividends paid by one Russian legal entity to another Russian legal entity are subject to 0% CPT rate if the following conditions are all met on the dividend announcement date:



a Russian legal entity, which receives dividends (i.e. the recipient) owns at least 50% shares in the capital of another legal entity which pays the dividends (i.e. the payer);



the above mentioned ownership must be constant during at least 365 calendar days before the date of the decision to pay dividends;



the dividends received constitute at least 50% of all dividends accrued by the dividend payer;

Note that Russian legal entities dividend-recipients should prove their right for 0% rate by submitting to tax authorities the relevant documents listed in Tax Code (art. 284 item 3). 4.3

Dividends received



If an entity receives dividends it pays CPT at:

 

0% if dividends are received from a Russian legal entity; 9% if dividends are received from a foreign legal entity.



CPT rates applicable to dividends will be provided in the exam.



When making calculation of dividend amount subject to withholding tax at 9%, tax agent takes all dividends subject to distribution and deducts the amount of dividends received (except the dividends taxed at 0% rate) by the tax agent itself in the same or preceding reporting tax period. The remaining portion is subject to tax withholding. The same rules apply to personal income tax withholding on dividends payable to individuals (see Session 6).


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Gross dividends for distribution in the reporting period Less:

dividends received by the company itself in the same or preceding reporting period

Equals: Taxable dividends Taxable dividends Multiply: Tax rate Multiply: Recipient’s shareholding (%) Equals: Tax which should be withheld

Illustration 6 ZAO Lime holds 800 shares out of 4,000 shares of AO Yew placed with shareholders. Yew acquired 70% of shares of another Russian company OOO Nut in November 2011. The total value of investment equals 550 million RR. In December 2013 Lime received dividends from Yew. Yew distributed all of its after-tax profits for 2013. Its taxable profits amounted to 40,000,000 RR and it paid profits tax at 20% rate. In July 2013 Yew received interim dividends for 2013 from its daughter company OOO Tree in the amount of 7,000,000 RR (CPT on these dividends was withheld at 9% rate at the source of payment). In December Nut’s shareholders decided to pay dividends to Yew amounting to 10,500,000 RR which is more than 50% of all dividends to be paid. The dividends were transferred on 15 December 2013 The calculation of CPT withheld by Yew on dividends paid to Lime is as follows: Yew profits tax for 2013: 40 million RR × 20% = 8 million RR After-tax profits for distribution: (40 – 8) Less: dividends received by Yew itself: Received from Tree (tax withheld at 9%) Received from Nut (tax not withheld as all conditions are met for 0% rate) Dividends subject to withholding tax

(7) 0 ___ 25 ___

CPT to be withheld (25 × 9%) Lime’s share in total dividends: 800 shares/4,000 shares CPT on Lime’s dividends: (2.25 × 20%) 

RR mln 32

2.25 20% 450,000 RR

The above procedure does not apply to dividends paid to foreign legal entities, where 15% should be multiplied by the total amount of dividend income accrued to such entities.


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5

TAX CALCULATION

5.1

Production company



The suggested format of the answer presentation for a production company is shown below: Amounts X Income from sales of produced goods (works, services) Expenses incurred in the production and sale of goods (work, services), including: Direct expenses (note 1): Materials Wages/salaries and related SIC of direct production Workers Depreciation on production fixed assets

(X) (X) (X) (X)

Indirect expenses Wages and salaries of other personnel and related SIC Depreciation of other fixed assets Services rendered by third parties Amortisation of intangible assets Repair expenses Property insurance Business travel expenses Business entertainment expenses Business training expenses Advertising expenses

(X) (X) (X) (X) (X) (X) (X) (X) (X) (X) (X)

Total expenses: Profits/loss on sale of produced goods (works, services)

X/(X)

Income from sale of fixed, intangible assets and other property Tax net book value of fixed/intangible assets or purchase price of other property plus related expenses

X (X)

Profit/loss on sale of fixed/intangible assets/other property

X/X

Non-operational income Non-operational expenses

X

Interest expense Bad debt expense Loss on factoring Other non-operational expenses

(X) (X) (X) (X)

Profits or loss from non-operational activities

X/(X)

Less loss carried forward from previous periods if any Tax base for the reporting/tax period


(X) X/(X)

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Tax rate Tax accrued Tax already paid

@X% X (X)

Tax payable

X

Dividends Tax on dividends

X X

Sample note 1: “Direct expenses”: Direct expenses were prorated between cost of goods sold and closing inventory based on the given percentages. Cost of goods sold (X%)

Closing inventory (X%)

Direct materials

X

X

Direct wages and SIC

X

X

Direct depreciation

X

X

Total

X

X


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5.2

Trading company



The suggested format for the answer presentation for a trading company is shown below: Amounts X Income from sales of merchandise inventory

Expenses incurred in sale of goods, including: Direct expenses: Purchase cost of merchandise inventory Transportation expenses

(X) (X)

Indirect expenses: Depreciation of fixed assets Wages and salaries Depreciation of other fixed assets Amortisation of intangible assets Repair expenses Property insurance Business travel expenses Business entertainment expenses Business training expenses Advertising expenses

(X) (X) (X) (X) (X) (X) (X) (X) (X) (X)

Total expenses:

(X)

Income from sale of fixed, intangible assets and other property Tax net book value of fixed/intangible assets or purchase price of other property plus related expenses

X (X)

Profit/loss on sale of fixed/intangible assets

X/X

Non-operational income Non-operational expenses

X

Interest expense Bad debt expense Loss on factoring Other non-operational expenses

(X) (X) (X) (X)

Profits or loss from non-operational activities

X/(X)

Less loss carried forward from previous periods if any

(X)

Tax base for the reporting/tax period

X/(X)

Tax rate Tax accrued Tax already paid

@X% X (X)

Tax payable

X

Dividends Tax on dividends

X X


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6

SEPARATE SUBDIVISIONS (ART. 288)

6.1

Allocation of profits tax



A taxpayer with separate subdivisions (“branches”) must allocate profits tax to these subdivisions.



Where subdivisions are all located within one subject of the Russian Federation it is permitted not to do the allocation between them. The taxpayer can choose the subdivision which will pay tax for all subdivisions in this territory and inform the respective tax inspectorate about this.



CPT allocation is based on the following formula: Total CPT of organisation × (A (or B) + C)/2



A – % calculated by dividing the average number of employees of a branch to the total average number of employees for the reporting period;



B – % calculated by dividing wages and salaries expenses of a branch to the total wages and salaries of the company for the reporting period;



C – % calculated by dividing tax net book value of fixed assets of the branch to the total value of fixed assets of the company for the reporting period.



If the taxpayer uses the non-linear method of depreciation it is allowed to determine NBV of fixed assets according to the data from accounting registers.



The head office must select between A and B for calculation purposes and inform the tax inspectorate about the method chosen. The formula must be used consistently throughout a tax period (calendar year).

6.2

Payment



The head office pays the federal portion of profit tax relating to branches to its tax inspectorate.



The head office should make advance and final payments of regional and local share of CPT to regional and local budgets.



The above payments are made to the budgets at branches’ locations at regular deadlines (see later). Branches can also make the payments themselves on behalf of head office based on the information received from the head office. This is usually the case when a branch has a separate balance sheet and bank account, although the Tax Code does not distinguish between branches based on these criteria.



CPT on profits allocated to a branch is paid at the rates existing in the place of branch location.


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Example 8 Moscow based company has branches in St Petersburg, Samara and Omsk. The following data is available for the reporting period: Moscow Average employees’ number for the reporting period

St Petersburg

Samara

Omsk

750

330

300

120

Tax net book value of fixed assets for reporting period (RR million)

16

12

8

4

Federal CPT rate Regional CPT rate

2% 18%

2% 18%

2% 13.5%

2% 14%

Company’s taxable profits are 370,000 RR. Required: (a)

Calculate profits tax liability of head office and branches.

(b)

Explain how the tax is paid (do not state the deadlines). Assume that branches in St Petersburg and Samara have balance sheets and separate bank accounts, while branch in Omsk does not.

Solution (a)

Head office and branches Moscow

St Petersburg

Samara

Omsk

Total

(1) % of average employees (2) % of fixed assets (3) Average of (1) and (2) (4) Taxable profits allocated (5) Federal portion of CPT (6) Regional portion of CPT (b)

How paid


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7

TAX ACCOUNTING

7.1

General provisions (art.313)



Tax accounting is defined as “a system for summing up information for defining the tax base on the basis of the data from the basic documents grouped in accordance with the procedure stipulated by the Tax Code”.



The tax accounting system should be organised by the taxpayer and in accordance with established tax accounting policy.



Any changes in the tax accounting policy can be effected from:

 

the beginning of a new tax period; or the moment that changed legislation comes into force.

7.2

Tax base calculation (art.315)



Taxpayers calculate the tax base on the results of every reporting period based on the data in the tax records.



The tax base for the reporting period is calculated cumulatively in conformity with the norms established by the Tax Code, from the start of the year.



The tax base calculation should contain the following data: (1) (2)

+

–

Period of calculation; and The sum of income, expenses, profit or loss, as shown below:

Sales income, including income from: 

sales of goods (works performed, services rendered);



trading operations (sales of purchased goods (“merchandise inventory”));



sales of fixed assets

Sales expenses, including expenses incurred on:   

production and sales of goods (works, services); sales of merchandise inventory;

sales of fixed assets;

=

Operational profit

+

Non-operational income

–

Non-operational expenses

=

Non-operational profit/loss

=

Tax base (before loss carry forward)

–

Loss carried forward from previous years (Section 3)

=

Tax base (after loss carry forward)


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7.3

Analytical tax accounting registers (art.314)

7.3.1

General provisions



The sum making up the tax base must be confirmed by the underlying accounting documents and analytical tax registers.



Analytical tax accounting registers are consolidated forms for the systematisation of the tax accounting data, grouped in accordance with the Tax Code requirements (i.e. in the “baskets”). Therefore, each tax register should display a list of operations providing the specific income or expenses “basket” (or a part thereof).



Taxpayers can use statutory accounting registers with necessary corrections/additions or independent registers.



The primary analytical tax register form should contain the following details: Tax register name Period The operation’s measuring indices in volume terms (if possible)

The operation’s measuring indices in RR

Transaction description

Signature of the responsible person Date 

The forms of the tax accounting registers and the way of reflecting in them the analytical data should be established in the Appendices of the organisation’s tax accounting policy.



These registers may be kept on paper or in electronic form.

7.3.2

Depreciable property (art.323)



The profit/(loss) from the disposal (sale or retirement) of depreciated property is determined on analytical accounting of all objects.



Analytical accounting should contain information on the following:

       

date of acquisition, putting into operation and original cost of depreciated property disposed of in the reporting period; changes in original cost of such fixed assets; period of beneficial use accepted by the organisation; cumulative amount of depreciation and net book value of the disposed fixed assets depreciated using straight-line method only; cumulative amount of depreciation and summary balance of each depreciation group and sub-group (for non-linear method); date and proceeds (if any) of disposal; related expenses (e.g. storage, dismantling, transportation); profit/(loss) from the operation.


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

A profit on disposal increases the CPT tax base on the date of recognition of the sale proceeds.



A loss is spread evenly over the “remaining useful life” of the asset starting the month after the disposal (see Session 3).



Such losses and their allocation over the remaining period should be shown in special analytical tax accounting registers.

7.4

Tax accounting policy as a tax optimisation instrument



Tax accounting policy is a document in which an organisation selects and ratifies the methods and variants of tax accounting. It can be a prime instrument for tax planning and optimisation.



Each organisation can choose the best variant of tax accounting (where there are alternatives) according to the specifics of its business.



The most significant variants are as follow:



Depending on the payment terms applied it make sense to consider the accrual or cash method for income/expense recognition;



As a list of the direct expenses is fixed in the tax accounting policy these can be defined to maximise available tax reductions and reduce administration issues;



Method of material valuation (e.g. weighted average) should be clearly defined, especially in conditions of instability;



Using 10% (30%) write-off and non-linear depreciation method to maximise expenses in the first years after acquiring fixed assets and so defer CPT;



Set up of allowance (e.g. for receivables) facilitates planning of expenses and defers tax payments.


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8

PROFITS TAX REPORTING AND PAYMENT PROCEDURES

8.1

Payment bases



The payments of profits tax can be made in any of three ways: (1) (2) (3)

on a monthly basis based on estimated profits; on a monthly basis based on actual profits; on a quarterly basis (available to certain types of taxpayers only).



The declarations are prepared on a cumulative basis.

8.2

Monthly payment system based on estimated profits



Under this payment system, there are monthly advance payments of CPT, which are made by the 28th day of each month in the amount of 1/3 of the estimated total CPT liability for the quarter.



On the 28th day following the end of each quarter so-called “quarterly” advance payment is made. Its amount is calculated as the difference between actual profits tax for the reporting period less monthly advance payments made.



For example in July taxpayer must calculate actual profits for the six months of the year and the amount of CPT. On July 28 it must pay the difference between total CPT liability for 6 months and the total monthly and quarterly advance payments of CPT already made. On the same date monthly advance payment for July is also due.



The tax returns are submitted under the following deadlines:





within 28 days following the last day of the reporting quarter for quarterly returns (in a simplified form);



by 28 March of the following year for annual return.

Final tax payment is due:



by 28 March of the following year for annual return.


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

A summary of payment and reporting rules under this system is presented in the following table :

Type of payment

Payment amount

Monthly advance payment in 1st quarter*

Payment is equal to monthly advance payment in the 4th quarter of the preceding tax period

Monthly advance payments in 2nd quarter

Monthly payment is equal to 1/3 of the total advance payment of 1st quarter**

Payment deadlines

The term of tax declaration submission

Not later than on the 28th day of every month in the reporting period

Not later than 28 days after the end of the reporting period. Declarations are submitted in simplified form

Monthly advance payments in 3rd quarter

Monthly payment is equal to 1/3 of the total advance payment of the 1st half of the year less the advance payment of the 1st quarter**

Monthly advance payments in 4th quarter

Monthly payment is equal to 1/3 of the total advance payment of the 9 months of the year less the advance payment of the 1st half of the year**

Quarterly advance payment after the end of each reporting period

(Tax rate) × (Actual cumulative profits received starting the beginning of reporting period) less advance payments made

Not later than on the 28th day following the end of the reporting period

Payment after the end of tax period

(Tax rate) × (Actual cumulative profits received starting the beginning of tax period) less advance payments made

Not later than on the 28th of March of the year following the tax period

Not later than on the 28th of March of the year following the tax period

** if the resulting amount is equal to zero or negative, the monthly advance payments are not made in this quarter. 8.3

Monthly payment system based on actual profits



Monthly payment system based on actual profits is also available to taxpayers. However if this system is chosen, taxpayer must inform its tax body not later than on 31st December of the year preceding the reporting one. Once chosen the system should apply consistently over the whole tax period.


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

Summary of payment and reporting rules under this system is presented in the following table:

Type of payment

Payment amount

Payment deadlines

The term of tax declaration submission

Monthly advance payment, calculated based on actual profits

(Tax rate) × (Actual cumulative profits received starting the beginning of the year) less advance payments made

Not later than on the 28th day of the following month

Not later than on the 28th day of the following month (in a simplified form)

Annual balancing payment

(Tax rate) × (Actual cumulative profits received for the year) less advance payments made

Not later than on the 28th March of the year following the tax period


8.4

Quarterly payment system

The quarterly payment system applies to the following types of legal entities: 

organisations with an average quarterly revenue for the preceding four quarters not exceeding 10 million RR per quarter (if average quarterly revenue exceeds this the taxpayer must switch to a monthly payment system based on estimated profits);



budget entities;



foreign legal entities operating in Russia through permanent establishments;



members of simple partnerships;



newly-created entities with sales not exceeding 10 million RR per quarter.

Summary of payment and reporting rules under this system is presented in the following table: Type of payment

Payment amount

Payment deadlines

Term of tax declaration submission

Quarterly advance payment after the end of reporting period

(Tax rate) × (Actual cumulative profits received from the beginning of the year) less advance payments made

Not later than on the 28th day after the end of the reporting period

Not later than on the 28th day of the following quarter (in a simplified form)

Annual balancing payment

(Tax rate) × (Actual cumulative profits received for the year) less advance payments made




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explain taxpayer’s right for the adjustments of tax base and tax in tax period when the mistakes have been found out related to previous tax periods (art. 54);



calculate the taxable income on foreign currency transactions and on transactions denominated in “notional” units;



explain the timing of income recognition for factoring operations and calculate the taxable income from trade debt factoring for both parties;



calculate the taxable income on penalty income, rent income, interest income and other nonsale sources (art. 250);



explain and apply the rules for the creation and usage of an allowance for bad debts (art. 266);



explain and apply the rules for bad debts write-offs;



define allowable net operating losses and calculate the amount of losses qualifying for the carry forward tax concession;



explain the rules for calculating the maximum amount of losses allowable in each year and calculate the loss carry forward concession;



explain and apply the rules for the taxation of dividends and calculate profits tax on dividends paid and received by Russian legal entities;



prepare a computation of total taxable income based on the format of the profits tax return;



compute the corporate profits tax liability, applying the correct rates of tax;



explain the concept of separate sub-division as it applies to corporate profits;



explain the procedure for the allocation of profits between head-office and branches;



prepare calculations of the profits tax payable by branches;



define and apply basic tax accounting rules (art. 313-320, art. 322-323);



explain how the maximisation of available tax reductions and concessions can defer or minimise corporate profits tax liabilities;



identify, compute and apply the right concession/reduction in given circumstances;



explain the filing requirements and payment deadlines for corporate profits tax.


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EXAMPLE SOLUTIONS Solution 1 (a)

Interest expense

Strictly, the interest expense on the loan should be recognised on the last day of each month taking into account the date of actual payment of interest. . USD Ex-rate RR 6,466 29.4 190,100 1st quarter: 59/365 days × 500,000 USD × 8% 2nd quarter: 91/365 days × 500,000 USD × 8% 9,973 29.5 294,204 3rd quarter: July 31/365 days × 500,000 USD × 8% 3,397 29.8 101,231 61 Aug-Sept /365 days × 500,000 USD × 8% 6,685 30.2 201,887 4th quarter: 92/365 days × 500,000 USD × 8% 10,082 31.4 316,575 ________ Total

1,103,997 ________

Tutorial note: For exam purposes, when dealing with a taxpayer who reports on a quarterly basis, interest calculations should be made at the end of the reporting/tax period (i.e. at the end of each quarter). Using the strict monthly approach will only make a difference if the exchange rate changes within a quarter (as in 3rd quarter in this example). Also, it is not necessary to present the USD amounts (which are rounded here) as an intermediate calculation; they are included here to show how the interest amounts referred to in (c), below, arise. (b)

Foreign exchange differences on loan principal

Since the loan principal amount was not repaid at the end of the reporting period ZAO ABC must restate the company’s foreign currency liability: Loan principal at 31 January At 31 December

USD 500,000 500,000

Ex-rate 29.2 31.4

Exchange difference (loss)

(c)

RR000 14,600 15,700 _____ 1,100 _____

Foreign exchange differences on interest

The difference in exchange rate on the date of accrual of interest expense and at the end of the reporting period/actual payment of interest will be recognised as a foreign exchange loss: Interest accrued as at 1 August: Actual payment at 1 August:

(190,100 + 294,204 + 101,231) (500,000 × 181/365 × 8% × 29.9)



RR 585,535 593,085 _______ 7,550 _______

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Restatement of interest accrued for August – September: Interest accrued at 30 September must be revalued at the year end. Note that interest for the 4th quarter of 2013 will be accrued on 31 December, so no exchange difference arises in respect of this. Interest accrued at 30 September At 31 December

USD 6,685 6,685

Ex-rate 30.2 31.4


RR 201,887 209,909 _______ 8,022 _______

Total foreign exchange difference on loan principal and interest: 1,100,000 + 7,550 + 8,022 = 1,115,572 RR Commentary – Exam advice It is unlikely that calculations for interest will merit many marks in the examination. If you are under time pressure it is recommended that you deal just with the loan principal. Solution 2 Income from factoring Receivable value

RR 130,000 (170,000) _______

Actual loss on factoring

(40,000) _______

Because the receivable is factored before the payment date provided in the main agreement, the loss deductible limit is calculated as follows: Statutory interest for the period from 6 February to 15 July is 160 days: 130,000 × 15% × 1.1 × 160/365 = 9,403 RR Allowable loss is 9,403 RR; remaining amount of 30,597 RR (40,000 – 9,403) is ignored for taxation purposes. Solution 3 Income from factoring Receivable value

RR 61,000 (70,000) ______

Loss on factoring

(9,000) ______

Because the receivable is factored after the payment date provided in the main agreement, the loss deductible limit is calculated as follows: 4,500 RR (9,000 × 50%) – decrease the taxable base as “non-operational expense” in February 2013; 4,500 RR (9,000 × 50%) – decrease the taxable base as “non-operational” in April 2013 (45 days after 22 February 2013).


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Solution 4 Late payment interest accrued in 2013: 60 days (29 in November and 31 in December) × 20,000 × 0.2% + 17 days × 28,000 × 0.2% = 2400 + 952 = 3,352 Accrued late payment interest should be recognised at the date of debtor’s acceptance of the claims (i.e. on 31 December 2013). Solution 5 The balance on the allowance account as at 31 December 2013 is limited by 10% of sales net of VAT; i.e. by 20 million. Bad debt expense for 2013 is: 20 (allowance recognised as at 31 December) – 10 (opening allowance) + 1.18 (bad debt write-off) = 11.8 million. Solution 6 Sales revenue (net of VAT) (495.6 × 18/118) Bad debt allowance limitation (10% of revenue net of VAT)

420 42

Bad debt allowance as at 31 December 2013: (40.8 + (108 × 50%))

94.8

Write-off

14

Since 94.8 > 42, allowance created in 2013 may be deducted only up to the limitation. Total bad debt expense (42 + 14)

56

Solution 7 Tax loss available for carry forward: 24 + 28 = 52 million RR Maximum amount for loss utilisation in 2012 is limited by the amount of taxable profits 25 million RR. Remaining portion of loss (52 – 25 = 27 million RR) is carried forward to 2013. Therefore taxable profit for 2012 is 0. The remaining amount of 27 million RR loss is utilised in 2013. Taxable profits in 2013 are 33 million RR. Solution 8 (a)

Head office and branches

(1) % of average employees (2) % of fixed assets (3) Average of (1) and (2) (4) Taxable profits allocated (5) Federal portion of CPT (6) Regional portion of CPT

Moscow St Petersburg Samara Omsk Total 50% 22% 20% 8% 100% 40% 30% 20% 10% 100% 45% 26% 20% 9% 100% 166,500 96,200 74,000 33,300 370,000 7,400 7,400 29,970 17,316 9,990 4,662 61,938


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(b)

How paid

The head office pays the federal portion of profits tax relating to branches to its tax inspectorate. Branches in St Petersburg and Samara probably make advance and final payments of regional and local share of CPT to regional and local budgets on behalf of head office as they have balance sheet and bank account. The above payments are made to the budgets at branches’ locations at regular deadlines. The payments are made based on information received from head office in Moscow. With regard to a branch in Omsk, all CPT payments are made by head office. The federal portion of CPT is paid to the tax inspectorate of head office (Moscow). The regional and local portions of CPT allocated to a branch are paid to tax inspectorate at branch location (Omsk).


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0430

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PERSONAL INCOME TAX – SCOPE, COMPUTATION AND DEDUCTIONS


To explain the scope of personal income tax.



To compute taxable income from employment and business income of an individual entrepreneur.



To recognise deductible expenses.

SCOPE

  

CALCULATION AT BASE RATE

  

DEDUCTIONS


   

Personal income tax Payments of personal income tax to budget PIT rates

PIT calculation scheme Gross income of individuals Types of income exempt from tax

Standard deductions Social deductions Property deductions Professional deductions

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1

SCOPE

1.1

Personal income tax



Personal income tax (“PIT”) is applied to the income received by individuals, i.e. by private citizens (art. 207). Usually PIT is deducted from income by the party which makes the payment to an individual. Procedure of tax deduction from the income paid is called income tax withholding. The entity (a company or an individual entrepreneur) which makes the withholding is called a tax agent (see Session 7).

Illustration 1 Andrei’s gross salary for December is 20,000 RR. PIT rate is 13%. Gross salary Less: PIT at 13% Salary net of PIT (or simply “net salary”)

20,000 (2,600) 17,400

PIT is calculated, withheld and paid to the budget by the company-employer, which acts as tax agent for PIT purposes. 

Tax period for PIT purposes is a calendar year (art. 216). This means that income subject to PIT and the tax itself are calculated on a cumulative basis from the beginning of the calendar year and up to December 31.



An individual who is physically present in the Russian Federation for at least 183 days in a calendar year is resident for income tax purposes and subject to tax on their worldwide income.



If an individual stays for less than 183 days he is considered to be nonresident for this year and taxed only on Russian-source income.



Periods abroad of less than six months for educational purposes or medical treatments count as present in Russia. Commentary – Exam advice Taxation of non-residents as well as the provisions of art. 208 are not examinable.

1.2

Payments of personal income tax to budget



In the majority of cases PIT is paid to budget by tax agents, i.e. by the entities which make the payments to individuals.



However, in some cases PIT withholding at source is not provided for by the Tax Code (e.g. PIT is not withheld at source on lottery/casino winnings).



If a tax agent does not withhold PIT, it is an individual’s responsibility to calculate and pay the tax. Generally this is done through filing a tax declaration on PIT with a tax inspectorate.


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Illustration 2 Andrei’s gross salary for December is 20,000 RR. In this month Andrei also won 500,000 RR in a lottery. He also sold his apartment and received 800,000 RR as a taxable gain. As was shown in Illustration 1, PIT on Andrei’s salary will be calculated, withheld and paid to the budget by his employer which acts as Andrei’s tax agent on PIT. Andrei will have to calculate and pay PIT on the lottery winnings and on property sale gain personally through submitting a tax declaration on PIT to his local tax inspectorate. 1.3

PIT rates (art. 224)



The majority of income types are taxed at 13% rate. For convenience and simplicity this is called the “main” or “base” rate of PIT.



Increased rate of 35% is applied to the following types of income: – – –

taxable portion of interest on bank deposits; imputed interest on loans (except for certain type of mortgage loans and unpaid liability on credit cards); taxable portion of advertising prizes and awards.



The taxation rules on the above income are further explained in Session 6.



Decreased rate of 9% is applied to dividend income (see Session 6).



All other income of residents is taxed at 13%. Commentary – Exam advice Special rates of 15% and 30% which are applied to income received by nontax residents of Russian Federation are not examinable.

Example 1 State the relevant PIT rates for each of the following types of income: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Salary; Birthday gift; Casino winning; Gain on property sale; Imputed interest on a bank loan to buy a car; Dividends received; Taxable interest on bank deposit; Advertising prize; Imputed interest on corporate loan to buy an apartment; Taxable property insurance income.


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2

CALCULATION AT BASE RATE

2.1

PIT calculation scheme



The PIT calculation scheme for the income taxed at the main (base) rate of 13% is as follows: Tax base on ordinary income

Main rate of 13%

×

PIT on ordinary income

=



“Tax base on the ordinary income” means the total amount of income that is subject to 13% rate of PIT.



Tax base on the ordinary income is calculated as the total income received in a calendar year less exempt income, less income subject to special rates, less PIT deductions. Tax base on ordinary income

=

Gross income from all sources

–

Exempt income & income taxed at special rates

–

PIT deductions standard property

social

professional 2.1.1

Meaning of terms



“Gross income” means all income received by a taxpayer from all sources in a calendar year;



“Exempt income” means income which is excluded from taxation (e.g. state pensions, alimonies, etc).



“Income subject to special rates” means types of income taxed at 9%, 30% and 35% rates.



“PIT deductions” means expenses incurred by taxpayer in a calendar year, which decrease his taxable income (e.g. medical and educational expenses). The Tax Code strictly regulates the types and maximum amounts of expenses allowable for deduction (see later).

2.2

Gross income of individuals

2.2.1

Forms of income receipt



Income can be received in cash or in-kind (i.e. in non-monetary form). Payments in-kind in particular include: – – – –

wages and salaries paid in-kind; partial or full payments for goods (works, services) for employees (including meals, accommodation); provision of free goods, works or services to individuals; gifts in-kind, etc.


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

Payments in-kind are taxed at their fair market value following the rules of the Tax Code (art. 40). These rules are not examinable and the fair market value of any relevant items will be given.



Tax on payments in-kind is calculated and withheld by the tax agent from any cash payments made to employees. The amount of withholding tax cannot exceed 50% of cash payment amounts. If tax withholding is not possible a tax agent must report to its local tax authority about such payment in-kind within one month from the date of payment (art. 226.4, 226.5).

Illustration 3 Andrei received a TV set valued at 7,000 RR as a birthday gift from his companyemployer. He also received a DVD recorder valued 14,000 RR from a company-client. This client company made no other gifts or cash payments to Andrei. PIT on TV set will be calculated and withheld from Andrei’s monthly salary by his employer. The company-client is not able to withhold PIT on the DVD recorder, as it does not make any cash payments to Andrei. Thus, the client must report to its tax inspectorate about the gift within one month from the date when the recorder was given to Andrei. Andrei will pay PIT on the DVD recorder himself. 2.2.2

Income recognition date (art. 223)



For PIT purposes income is generally recognised when paid. For example, when:



–

remuneration is paid under civil law contracts, copyright agreements, performance contracts, etc;

–

cash payment is made (including wire-transfer to taxpayer’s bank account);

–

income in-kind is received;

–

interest is credited to a bank deposit account;

–

interest on loan is paid (see imputed interest in Session 6).

The major exception to the above rule relates to employment income (wages, salaries, performance bonuses, etc), which is recognised for PIT purposes on the last date of the month of the accrual. For example, December 2013 salary paid in January 2014 is taxed in December 2013. Commentary – Exam advice The June 2012 examination featured a bonus accrued in one year and paid in the next which the examiner treated as taxable on receipt. However, full marks were awarded if candidates stated that they were using the more usual basis of treating the bonus as taxable in the period of accrual.


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2.3

Types of income exempt from tax (art. 217)

2.3.1

Payments and compensations established by Law



The major exemptions from personal income tax listed in the Tax Code (art. 217) are: – – – – –

government support payments (“posobija”); state pensions; state compensations and financial aid; official sports awards and prizes (see Session 6); alimonies, etc.



Note that all income types above are required by and produced under Russian Laws.

2.3.2

Gifts from individuals



Gifts (except real estate property, transport vehicles, shares and securities) received by individuals from physical persons are PIT exempt.



Gifts received from “close relatives” are PIT exempt. For gift taxation purposes the following family members are understood to be close relatives: – – – – –

spouse; children; parents (including step-parents); brothers/sisters; and grandparents.



Inheritance is generally exempt (special cases are not examinable).

2.3.3

Payments by companies to employees

Note the following exempt items related to employment: 

financial assistance (“materialnaja pomosch”) up to 4,000 RR per year per employee;



gifts to employees up to 4,000 RR per year;



compensation of travel expenses up to the statutory norms;



reimbursement of business expenses paid by an employee on his employer’s behalf;



compensation of relocation expenses to the Far North regions of Russia;



cost of business training and education provided to employee;



payments by employers to Russian recreation and resort facilities (including children camps) for the benefit of employees and/or members of their families (spouse, children under 16). These payments are made out of after-tax-profits;



medical treatment payments made by employers for the benefit of their employees and their spouses, children, parents (i.e. direct payments for medical services). These payments are made out of after-tax-profits;



cost of medicine purchased (reimbursed) by employer for employees and their spouses, parents and children up to 4,000 RR per year;



financial aid paid by the employer to employees (parents) in case of the birth of a child up to 50,000 RR for each child;



additional pension payments made by company to “cumulative” part of employee’s pension up to 12,000 RR per year per employee;



compensation to employees of interest paid on mortgage loans within the limits deducted for CPT purposes (3% of labour cost).


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If provision of goods (works, services) for employees is required by law, their value is not subject to PIT. 

Sick leave payments are subject to PIT in the full amount.

2.3.4

Property sales income



Gains arising on the sale of personal property including residential houses, apartments, summerhouses, plots of land and motor vehicles (if owned by the taxpayer for three years or more) are exempt from PIT (see 3.3). This exemption is not applicable to securities.



Income exempt from PIT under art.217 can be excluded from the tax declaration by taxpayer and tax agent.

2.4

Insurance and pension funds contributions (art. 213)



Insurance contributions made by an employer for the benefit of an employee are not taxable if: – –



insurance of employees is required by Law; it is a voluntary medical or life insurance of employees or any other person.

Contributions, which are made by a company on behalf of its employee under voluntary pension agreements (“dobrovolnogo pensionnogo strahovanija”) and under “non-state pension security” (negosudarstvennogo pensionnogo obespechenija”) are non-taxable (but pension income will generally be taxed later when received).

Example 2 Kiril received the following benefits from his employer in addition to his salary: – – – – – –

medical insurance coverage (non-mandatory); pension contributions on his behalf to a non-state pension fund under nonstate pension security; meal tickets for free meals in the company’s cafeteria; paid for vacation in Turkey; company mobile phone; company car.

Required: Briefly explain which of the above amounts are taxable.


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Example 3 In 2013 a company made the following payments to its employee (in RR) (gross amounts): (1) (2) (3 (4) (5) (6) (7)

Salary 180,000 Annual performance bonus for 2013 (accrued in 2013, paid in 2014) – 30,000 Financial assistance (“materialnaja pomosch”) – 10,000* Birthday gift – 7,000* Payment for business training – 8,000 Payment for secondary education in Moscow State University – 50,000 Reimbursement of business travel expense: – within the norms – 6,500 – above the norms – 3,500 (8) Free lunches – 60,000 (9) Payment for vacation in Egypt – 45,000 (10) Payment for convalescence in a sanatorium in Moscow resort area – 25,000 (11) Payment for medical operation on employee’s son – 12,000 (12) Payment under “non-state pension security” agreement – 15,000 (13) Compensation payment required under Russian Law – 14,000 (14) The cost of working uniform (the uniform is not required by law) – 20,000 * Financial assistance and gifts are taxed in excess of 4,000 RR per year. Required: Calculate the taxable income of the employee.


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Solution RR (1)

Salary

(2)

Annual performance bonus

(3)

Financial assistance

(4)

Birthday gift

(5)

Payment for business training

(6)

Payment for secondary education at Moscow State University

(7)

Reimbursement of business travel expense: – within the norms – above the norms

(8)

Free lunches

(9)

Payment for vacation in Egypt

(10) Payment for convalescence in a sanatorium in Moscow area resort (11) Payment for medical operation on employee’s son (12) Payment under non-state pension security (13) Compensation payment required under Russian Law (14) Cost of working uniform not required by law ______ Total taxable income ______


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3

DEDUCTIONS

3.1

Standard deductions (art. 218)

3.1.1

Standard personal and children deductions



The standard personal deduction of 400 RR per month has been withdrawn from 1 January 2013.



Monthly amounts of children deductions for 2013 are: Deduction for first dependent child Deduction for second dependent child Deduction for third and subsequent dependent child

1,400 RR per month 1,400 RR per month 3,000 RR per month



Children’s deduction is allowed to both parents for each child under 18 years (under 24 years for “ochnyie” students).



Children deduction is allowed up to the month at which the gross income taxed at 13% rate paid by the employer giving this deduction exceeds 280,000 RR.



Standard deductions are allowed to an employee at his written request at only one place of work. If the place of work is changed during the year the new employer should be presented with the employee’s previous income data in order to grant standard deductions.



If no standard deductions were provided to an individual, he may claim them through the tax declaration (taking into account the 280,000 RR limitation).



Standard deductions are allowed to individual entrepreneurs based on their cumulative income through tax declaration submission.



A single (widowed or divorced) parent can claim a double amount of children deduction for each child (however the limit of 280,000 RR remains the same). Similarly, a couple may elect for only one of them to receive the deduction, in which case it is given in double amount

Illustration 4 Anna’s monthly salary is 35,000 RR. She has a 12 year-old son. Anna is entitled to a dependent child deduction of 1,400 RR up to and including August. Her taxable income is: (35,000 × 12) – (1,400 × 8) = 408,800 RR Her PIT liability for the year is 408,800 × 13% = 53,144 RR Example 4 Andrei’s gross monthly salary in 2013 is 30,000 RR. Andrei has three children who qualify for the children deduction. Andrei is a Russian tax resident. Required: Calculate Andrei’s personal income tax for 2013.


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Solution RR

RR

Gross income Children deductions ______ ______ Net taxable income ______ Tax ______ 3.2

Social deductions (art. 219)

3.2.1

General



All social deductions are applied only to the ordinary income taxed at 13% rate.



Social deductions are allowed to an individual at his written request upon submission of the annual tax declaration.



Any “unused” social deductions cannot be carried forward to future years. The maximum amount of the three main social deductions (educational, medical, pension deduction) is restricted to 120,000 RR (with some exceptions explained for each specific deduction). This does not relate to charity deduction, which is restricted to 25% of gross taxable income.

3.2.2

Charity contributions



The following charity donations qualify for tax deduction purposes: – – –

charity donations made in cash to cultural, educational, scientific, health and social security organisations wholly or partially financed from the budget; charity donations made in cash to religious organisations; charity donations made in cash to sports and educational organisations for sports purposes only (there is no budget financing requirement).



The deduction is limited to 25% of the gross income taxed at 13% rate. The gross income is understood as ordinary taxable income before all deductions.

3.2.3

Education expenses



Deduction is allowed amounting to the expenses incurred by an individual: –

on his own education up to 120,000 RR (aggregated with the two other deductions detailed below); and

–

on the education of his children, his sisters and/or brothers (up to 50,000 RR per child in addition to his own educational deduction).


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

The tax deduction on a child’s education may not exceed 50,000 RR for both parents for each child. A child must be under 24 years of age.



The tax deduction on a child’s education is not allowed if the education was paid for from the mother’s capital (“materinskiy capital”). (This state support is PIT exempt so no social deductions can be used against it.)



Since 2010 a taxpayer also has the right to the tax deduction when they pay study costs for a brother/sister who is an “ochnyi” student under 24 years old.



No deduction is granted for children studying according to programmes with correspondence education (“zaochnoe obuchenie”).



All documents confirming the expenses incurred and the status of the educational institution (a copy of the education license) must be attached to the annual tax declaration.

3.2.4

Medical expenses



Deduction is allowed amounting to the expenses incurred by an individual: – –

on his own medical treatment in medical institutions of the Russian Federation; on medical treatment paid for the benefit of the individual’s spouse, parents and/or children under 18 or spouse in medical institutions of the Russian Federation only.



The total deduction is limited to 120,000 RR (again aggregated with the two other deductions) except for certain types of expensive medical treatment (as per a special list approved by the Russian Federation Government). In the case of expensive medical treatment, the deduction given is the full amount of the actual medical expenses in addition to the general medical deduction.



Tax qualifying types of medical treatment are defined in the list approved by the Russian Federation Government.



The cost of medication purchased by a taxpayer in accordance with relevant prescriptions also qualifies for the deduction.



Medical insurance purchased by a taxpayer for his own benefit or the benefit of close relatives also qualifies for deduction.



The documents confirming the actual expenses and the status of the medical institution (a copy of the medical license) must be attached to the annual tax declaration.

3.2.5

Pension deduction

This section concerns personal expenses on non-state pension security and/or voluntary pension insurance and additional payments to “nakopitelnay” part of the state labour pension. 

This deduction is applied to pension payments made under agreements with non-state pension security funds (“dogovora negosudarstvennogo pensionnogo obespechenija”) for the benefit of taxpayer or his spouse, parents and/or children-invalids.



The deduction is also applicable to insurance payments under voluntary pension insurance agreements (“dogovora dobrovolnoje pensionnoe strahovanija”) for the same beneficiaries.


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

Additional pension payments (made by taxpayer) to cumulative (“nakopitelnay”) part of labour pension also qualify for this deduction.



The documents confirming the actual expenses and the status of the pension institution (a copy of the license) must be attached to the annual tax declaration.



The total deduction allowed is again limited to 120,000 RR, in aggregate with the two deductions explained above.

Summary Type of deduction

Maximum amount

Charity deduction

25% of gross income taxed at 13% rate

Educational deduction for taxpayer Medical deduction (except expensive medical treatment)

120,000 RR in total for all 3 types of deductions

Deduction on non-state pension security and voluntary pension insurance payments, additional payments to “nakopitelnay” part of labour pension



Educational deduction for children, sisters and brothers of the taxpayer

50,000 RR per each child under 24 years (in total amount for both parents)

Medical deduction for expensive medical treatment

In full actual amount per taxpayer, his parents, spouse and his children below 18 years.

Where the taxpayer has educational, medical and pension expenses in the same year and their total amount exceeds 120,000 RR, then the taxpayer must choose himself what social deductions he would claim.


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Illustration 5 Karina’s income (before social deductions) in 2013 is 700,000 RR out of which 140,000 RR is subject to 13% rate and the remaining amount is taxed at 35%. In 2013 Karina spent: – – – –

70,000 on charitable contributions 42,000 on her own education 48,000 on contribution to non-state pension security ; 10,000 on her son’s education.

Karina’s husband did not claim any social deductions in 2013 and all amounts listed qualify for social deductions. Ignoring standard deductions Karina’s tax in 2013 is determined based on the following deductions: The deductible charitable contribution is limited to 25% of gross income subject to 13% rate, i.e. (140,000 × 25% = 35,000 RR). The total social deduction (42,000 RR + 48,000 RR) is less than the 120,000 RR limit therefore 90,000 RR can be deducted. 10,000 RR spent on the child’s education may be deducted in full. Karina’s total deductions are: 35,000 + 90,000 + 10,000 = 135,000 RR Her PIT liability is calculated as: (560,000 RR × 35%) + ((140,000 – 135,000) × 13%) = Total 196,650 RR Example 5 Sergei has incurred the following expenses in 2013: (1)

(2) (3) (4) (5) (6)

Payment of 12,000 RR for his mother’s medical treatment in Kiev Medical Academy and payment for expensive surgery in Moscow state clinic amounting to 55,000 RR. Assume that this type of surgery is included the list of expensive treatment approved by the Government of RF. Payment of 14,000 RR for his wife’s plastic surgery in Moscow Institute of Beauty; Payment of 40,000 RR for his son’s education in a university (Sergei’s wife has contributed another 20,000 and claimed it in her PIT declaration); Payment of 68,000 for his own training at evening accounting courses at the Moscow State University; Payment of 55,000 RR to non-state pension security fund for his father’s pension insurance. Charitable contribution of 30,000 RR in cash to Moscow children music school.

Sergei is a Russian tax resident. His gross taxable income in 2013 was 250,000 RR. Required: Calculate social deductions potentially available to Sergei in the given circumstances. Explain how the deductions should be claimed.


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Solution RR (1) (2) (3) (4) & (5) (6)

3.3

Property deductions (art.220)

3.3.1

Sale of personal property



Gains arising on the sale of personal property are treated as taxable income and included in the PIT calculation.



Property deductions are allowed to taxpayers on the sale of personal property. The amount of the deduction depends on property type and length of ownership.



If a taxpayer sells the property which he owns for 3 years or more then the property deduction is given in the amount equal to the selling price (i.e. no taxable gain arises).



A maximum 1,000,000 RR deduction is allowed for the following property if it stayed in the taxpayer’s ownership for less than 3 years: – – – –

residential houses; apartments; summerhouses; plots of land.



Income from sale of other property, if it stayed in the taxpayer’s ownership for less than 3 years, may be decreased by up to 250,000 RR.



If several individuals jointly own property, the property deduction is allocated between the owners according to their ownership share percentages (or in accordance with the relevant agreement between the individuals, if the shares are not defined).



No property deduction is given to individual entrepreneurs upon sale of property used for business purposes. The taxable amount on such disposals is calculated as the difference between the selling price and net book value of the property in question.


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

The taxpayer may substitute the property deduction for the actual expenses related to this income (including property acquisition cost). In accordance with art. 228.2, no tax is withheld by the entity acquiring an individual’s property, however, such an entity (or a registrar of the sale) must submit to tax authorities the data on the income paid. The tax obligations are determined upon submission of the tax declaration.



Income on property disposals is taxed at 13%.



In the event of sale of any taxpayer’s property he must submit tax return to the tax authority. The exception to the rule is the sale of property which was in the taxpayer’s ownership for not less than three years (see 2.3.4 above).

Example 6 Artem, a Russian tax resident, sold the following property in 2013: (1)

A summerhouse and plot of land that was in his and his wife’s joint ownership (with equal 50% share of each spouse) from 2011, with an acquisition price of 1,200,000 RR. The spouses bore the costs of acquisition in equal amounts. The selling price was 2,500,000 RR.

(2)

A car purchased in 2012 for 300,000 RR. The car was in his individual ownership (no joint ownership with his wife). The selling price was 200,000 RR.

(3)

A garage (his individual property) purchased in 2009 for 60,000 RR. The selling price was 150,000 RR.

Required: (a)

Calculate the taxable gain arising from these transactions. If several options are available, choose the one which minimises tax liabilities.

(b)

Explain the tax payment procedure.

Solution (a)(i)

Sale of summerhouse

(a)(ii)

Sale of other property

Commentary Special rates apply to the sale of securities (see next session). ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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3.3.2

Housing incentive on purchase of residential property



An individual may decrease his taxable income subject to 13% rate by the amount invested in qualifying property but not more than 2,000,000 RR. The qualifying property includes: – – –

residential houses (or share therein) in RF territory; apartments (rooms or share therein) in RF territory. plots of land for individual residential house construction (“individual’noe zhilishcnoe stroitelstvo”) and plots of land with the purchased residential houses (or share therein).



If the acquisition of qualifying property is financed through bank or corporate loans, taken especially for this purpose the interest paid on such loans is also taken into account for the purposes of this tax incentive. Such interest is tax deductible in addition to the deduction allowed in relation to the amounts paid in acquisition of the relevant property (i.e. the maximum of the incentive is 2,000,000 RR plus interest on loans taken to finance the acquisition from Russian entities but not from foreign banks and companies).



Allowable costs in respect of new construction or acquisition of residential house (or share therein) include expenses incurred for: – – – – –



development of project documentation; construction and decoration materials; construction works and services including decoration; access to electricity, gas, water, canalisation networks; creating independent sources for water, gas, electricity, etc.

In respect to acquisition of apartment (or shares) allowable costs include: – – –

expenses incurred for acquisition of apartment or rights for apartment in house under construction; decoration materials; decoration works.

In the above cases the contract must contain provision that the apartment (residential house) is acquired as incomplete residential house or apartment without specified decoration materials and construction works. 

The housing tax incentive is allowed to a taxpayer under two options: (1)

at taxpayer’s written request supported by appropriate documents confirming property acquisition and related payments. This request and supporting documents are submitted to the tax authorities along with the annual tax declaration.

(2)

if a taxpayer does not want to wait until the declaration submission date he can ask his employer to give him this incentive. However before this request is submitted to employer, the taxpayer should obtain a written consent from tax authorities. That is, a taxpayer should first provide all documents to his tax inspectorate, which makes a decision on the incentive within 30 days and then issues a written confirmation (or decline) to the taxpayer. Only when this confirmation is presented by the taxpayer to his employer can the latter grant an incentive to the taxpayer.


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

If a taxpayer claims an incentive with his employer (i.e. Option 2) he can still submit an annual tax declaration and request for incentive to tax authorities if he has income taxed at 13% other than employment income and he wishes to obtain a tax refund on this other income.



If several individuals purchase qualifying property, the incentive is prorated between them according to their ownership shares.



No incentive is allowed if the purchase deal took place between related parties (e.g. close relatives).



Any unused incentive amount is carried forward to future years until it is fully utilised.



The housing incentive is allowed for one acquisition of qualifying property only. Any property acquisitions in subsequent years will not be subject to the housing incentive (i.e. this tax benefit is available once in a lifetime).

Illustration 6 In 2013 Stanislav had a taxable income (before housing incentive after allowable deductions) of 800,000 RR out of which 500,000 RR were subject to 13% rate and 300,000 RR to 35% rate. In 2013 he bought an apartment in his own name for 2,200,000 RR. He has never claimed the housing incentive before. The property deduction for 2013 will be limited to 500,000 RR (i.e. amount of income taxed at 13%) with the remaining 1,500,000 to be carried forward to subsequent years. Ignoring standard deductions Stanislav’s PIT liability for 2013 is 105,000 RR (300,000 × 35%).

Example 7 Pavel and Elena, who are both Russian tax residents, have purchased an apartment in 2013 for 900,000 RR. They have equal ownership shares in this property (i.e. 50% each). Pavel has paid 450,000 RR out of his savings, while Elena’s share was wholly paid with a bank loan. In 2013 Elena repaid 50,000 RR of the loan principal and 36,000 RR of interest on the loan. Pavel’s income subject to tax at 13% rate was 240,000 RR; he also had income of 60,000 taxed at 35% rate. Elena’s income in 2013 subject to 13% rate was 120,000 RR. She had no other income in 2013. Required: (a)

Calculate housing tax incentive available to Pavel and Elena in 2013 and amounts to be carried forward to future years.

(b)

Explain the tax refund procedure.

Assume that neither Pavel nor Elena applied for housing incentive in the past. Ignore standard deductions.


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Solution (a)

Housing incentive:

Pavel: Available for 2013 –

Carry forward:

Elena: Available for 2013 –

Carry forward:

(b)

3.4

Professional deductions

3.4.1

On business income (art. 221 item 1)



Business income includes the business income of: – –



registered individual entrepreneurs; private notaries and of other individuals engaged in private practice in accordance with the law.

The taxable base in relation to business income may be decreased by: – –

allowable expenses; or professional business deduction.

Business losses cannot be carried forward and utilised in future years. 

Allowable deductions from business income include: –

expenses incurred in generating this income and documentary proven (only expenses deductible for profits tax purposes are taken into account, including depreciation allowances); or

–

a fixed professional deduction amounting to 20% of the gross business revenue (this deduction is not available to unregistered entrepreneurs).

If the total amount of tax deductions is more than income in a tax period, the tax base is zero. The difference between income and expenses (i.e. loss) is not carried forward to later years (art. 210). 

These two types of allowable deductions cannot be used simultaneously.



Social insurance contributions (SIC) accrued by an individual entrepreneur cannot decrease his taxable income if a fixed professional deduction is chosen.



Professional deduction is applicable only to the ordinary income taxed at 13%.


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Example 8 Igor is a licensed auditor, registered as an individual entrepreneur. Igor’s gross business income for the year is 480,000 RR. Igor’s business expenses (supported by necessary documents) were 34,000 RR. In addition to these expenses Igor paid SIC in the amount of 95,865 RR. Igor is a Russian tax resident. Required: Calculate Igor’s individual income tax obligations based on: (a) (b)

actual expenses; standard professional deduction.

Ignore VAT. Solution (a)

Income tax based on actual expenses RR Gross business income Business expenses (supported by documents) _______

SIC _______ Taxable income _______ Tax at 13% _______ (b)

Tax based on standard professional deduction RR Gross business income Standard deduction _______ Taxable income _______ Tax at 13% _______


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3.4.2

On income from intellectual property (art. 221 item 3)



Income from intellectual property includes: – – –



copyright fees; income from creation, performance and other usage of works of art, literature and science; income from inventions, etc.

Allowable professional deductions are: (1) (2)

actually incurred expenses (confirmed by appropriate documentation); or fixed professional deductions (from 20% to 40% of the amount of income depending on the nature of income). Deduction rates will be provided in the examination. These two options cannot be used simultaneously.



Professional deductions are allowed to a taxpayer under his written request by the tax agent (i.e. the entity that makes the payment).



In case when a taxpayer is not able to get the professional deduction from his tax agent (e.g. income is received from source abroad) then the deduction is given to a taxpayer by tax authorities (in this case the request for deductions is submitted along with the tax declaration).

Example 9 A pop star Anna has concluded a CD recording contract with “IBF records”. At Anna’s written request “IBF Records” has allowed Anna a 20% professional deduction on the income from CD recordings. Anna is Russian tax resident. The net amount received by Anna from “IBF Records” for work in the year was 120,000 RR. Required: Calculate the professional deduction allowed to Anna and the tax withheld by “IBF Records”. Solution RR Gross income Taxable income Tax at 13% Anna’s net income

120,000

Solving for: Gross income Professional deduction Tax withheld


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describe the scope of individual income tax;



define residents and non-residents for individual income tax purposes;



recognise the income that is exempt from individual income tax;



compute the taxable income from employment;



explain how income in kind and material benefits are valued and calculate relevant amounts;



explain the timing of income recognition on salaries accrued, but not paid in a calendar year;



compute the exempt and taxable amounts of medical expenses paid by an employer;



compute the business income of an individual entrepreneur;



recognise the expenditure that is deductible (including depreciation allowances);



compute the amount of professional deductions available (norms will be provided);



explain the treatment of losses incurred by an individual entrepreneur;



prepare a basic individual income tax computation;



apply the correct rates of tax to the different types of income;



compute the child deductions;



explain and apply the principal social deductions, charity, education and medical (norms will be provided);



explain and apply the principal rules of deduction on the sale of residential property;



explain and apply the principal rules of deduction on the purchase of residential property, land, including for mortgage interest and other acquisition related confirmed expenses (housing incentive);



explain how the maximisation of available tax reductions and concessions can defer or minimise individual tax liabilities;



identify, compute and apply the right concession/deduction in given circumstances.


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EXAMPLE SOLUTIONS Solution 1 13%

35%

Salary Birthday gift (this is not an advertising gift) Casino winning Gain on property sale Taxable property insurance income (this is not a life insurance)

Taxable interest on bank deposit Advertising prize Imputed interest on loans (with the exception of mortgage loan used to buy residential property qualified for property incentive) Imputed interest on loan to buy a car

9% – Dividends Solution 2 Medical insurance contributions made on behalf of Kiril are not subject to PIT. Pension contributions on Kiril’s behalf to the non-state pension fund on this type of agreement are non-taxable. However pension payments received later will be taxable. The value of meal tickets for free meals at the company’s cafeteria is fully taxable. Paid vacation in Turkey is fully taxable. Company’s mobile phone is not taxable if used for business purposes. Company’s car is not taxable if used for business purposes. Solution 3 Taxable income includes: 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13. 14.

RR Salary 180,000 Annual performance bonus (which is recognised when accrued, i.e. in 2013) 30,000 Financial assistance (taxed in excess of 4,000) (10,000 – 4,000) 6,000 Birthday gift (taxed in excess of 4,000) (7,000 – 4,000) 3,000 Payment for business training (exempt) 0 Payment for secondary education at Moscow State University (exempt) 0 Reimbursement of business travel expense: – within the norms (all exempt) 0 – above the norms 3,500 Free lunches (fully taxed as it is not listed among exempt items) 60,000 Payment for vacation in Egypt (fully taxed as it is not listed among exempt items) 45,000 Payment for convalescence in a sanatorium in Moscow area resort (all exempt) 0 Payment for medical operation on employee’s son (all exempt) 0 Payment under non- state pension security 0 Compensation payment required under Russian Law (all exempt) 0 Cost of working uniform (uniform is not required by law) 20,000 ______

Total taxable income


347,500 ______

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Solution 4 In October Andrei’s income exceeds 280,000 RR and he loses the right to use children deduction. RR RR Gross income (30,000 × 12) 360,000 Children deductions for January – September (1,400 × 9) × 2 25,200 (3,000 × 9) 27,000 ______ (52,200) ______ Net taxable income

307,800 ______

Tax at 13%

40,014 ______

Solution 5 RR (1)

The cost of medical treatment outside Russia (in Kiev) is not deductible. But the payment of expensive surgery for his mother in Moscow is wholly deductible.

(2)

Plastic surgery is not included in the list of qualifying treatment.

(3)

Sergei may claim 40,000 RR on his son’s education. However, because his wife has claimed 20,000, his share in his son’s educational deduction is limited to 30,000 (50,000 – 20,000).

30,000

(4)

In addition to (3) Sergei may claim his own educational deduction and deduction on payments to non-state pension security funding up to 120,000 RR in aggregate. As his educational and pension deductions exceed this amount (68,000 + 55,000 > 120,000) Sergei should choose what deduction and in what amount he would claim.

120,000

Charitable deduction is limited to 25% of gross income taxed at 13% (62,500 RR), so Sergei can claim his charitable deduction in full.

30,000

& (5) (6)

55,000

0

All social deductions will apply to Sergei’s income taxed at 13% rate. Social deductions will be allowed to Sergei at his written request upon submission of the annual tax declaration. Any “unused” social deductions cannot be carried forward to future years.


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Solution 6 (a)(i)

Sale of summerhouse

Artem should not use a standard amount of property deduction (i.e. 500,000 RR or 50% of 1,000,000 RR). He should use actual acquisition costs instead, i.e. 600,000 RR (50% of 1,200,000 RR). The taxable gain on the sale is 650,000 RR (2,500,000/2 – 600,000) (a)(ii)

Sale of other property

No tax arises from the sale of the garage, which was owned by Artem for more than 3 years. There is also no tax on car sale if Artem proves the purchase price of 300,000 RR. (b)

Tax payment procedure

The tax on the sale of the summerhouse will be calculated by Artem himself and reported in his annual tax declaration for 2013 submitted by 30 April next year. The tax due should be paid by 15 July 2014. Solution 7 (a)

The maximum incentive amount is 2,000,000 RR. However the actual purchase cost is only 900,000 RR and this amount is taken as available incentive. It is split evenly between Pavel and Elena (i.e. 450,000 RR is available to each person). Pavel’s housing incentive for 2013 is restricted to 240,000 RR. 210,000 RR of the unused incentive is carried forward to be utilised in future years. Maximum available housing incentive for Elena in 2013 is 486,000 RR (450,000 + 36,000). The Tax Code does not specify that for applying the incentive, the loan principle must be repaid. Because Elena’s income taxable at 13% is only 120,000 RR she will have an unused portion of incentive (486,000 – 120,000 = 366,000 RR) to be carried forward to future years.

(b)

The tax incentive will be allowed to Pavel and Elena at their written request supported by appropriate documents confirming property acquisition and related payments. This request and documents are to be submitted along with the annual tax declaration for 2013. Alternatively they can ask their employers to provide this incentive to them. However a written permission for this should be obtained from tax authorities first.

Solution 8 (a)

Income tax based on actual expenses Gross business income Business expenses (supported by documents)

RR 480,000 (33,400) ______

SIC

446,000 (95,865) ______

Taxable income

350,135 ______

Tax at 13%

45,518 ______


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(b)

Tax based on standard professional deduction Gross business income Standard deduction (480,000 × 20%)

RR 480,000 (96,000) ______

Taxable income

384,000 ______

Tax at 13%

49,920 ______

Solution 9 RR x

Gross income Taxable income (x – 0.2x)

0.8x

Tax at 13%

(0.8x × 0.13)

Anna’s net income (x – (0.8x  0.13))

120,000

Solving for: 120,000 = x – 0.104x = 0.896x Gross income, x = 120,000/0.896

133,929

Professional deduction (0.2 × 133,929)

26,786

Tax (0.8 × 133,929 × 0.13)

13,929


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PERSONAL INCOME TAX – SPECIAL RATES AND RULES


To calculate the exempt and taxable amounts of dividends and other income and re-imbursements.



INTEREST  

SPECIAL RATES AND RULES

GIFTS, PRIZES AND AWARDS    

BUSINESS EXPENSES REIMBURSEMENT

Gifts from individuals to individuals Sports prizes and awards Lottery, totalizator and other games based on risk Other gifts

 

INSURANCE INCOME    

Interest on bank deposits “Imputed” interest Comparison

INCOME FROM INVESTMENTS

General Life insurance Property insurance Pension insurance


General rules Business trips outside Russia

 

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Dividend income Sale of securities

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1

INTEREST

1.1

Interest on bank deposits (art. 214.2, 217 item 27)



Interest on bank deposits is not taxable unless it exceeds Central Bank refinancing (CBR) rate plus 5% effective during the deposit term (for rouble deposits), or 9% for deposits in foreign currency.



The interest on rouble bank deposits exceeding the CBR rate plus 5% could be exempt under the following three conditions:



(1)

the interest rate on rouble deposits did not exceed CBR rate plus 5% on the date of conclusion (or prolongation) of the agreement; and

(2)

the initial interest rate was not increased during the period of deposit agreement; and

(3)

not more than three years have passed since the rate on deposit exceeded the CBR rate plus 5%.

All interest calculations must be based on precise (not rounded) numbers of days in the deposit period, which then should be divided by the number of days in the calendar year. The first day is not counted the last one is.

Illustration 1 A deposit is opened on 1 January 2013 and paid back on 1 March 2013. The deposit period is 2 January – 1 March inclusive. Interest calculation must be based on 59 days (30 + 28 + 1) divided by 365. 

Changes in the CBR rate, which may happen during the deposit term, are taken into account when calculating the taxable portion of interest.



The excess amount is taxable at the 35% rate (for Russian Federation residents).



Interest is recognised when paid, i.e. if no interest is paid in the calendar year – no taxable income is recognised.



The bank making the payment should withhold the tax at the moment of interest payment and remit it to the budget not later than on the next day.



Interest on so called “pension” deposits with a term of less than 6 months are not examinable.

Example 1 Olga made a 100,000 RR bank deposit on 1 February 2013 at 25% per annum. Both the deposit and interest on it were paid in cash on 30 September 2013. CBR rates (assumed): 1 January – 30 April 2013 1 May – 30 September 2013

15% 8%

Required: Calculate the amount of tax withheld by the bank on the interest income.


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Solution RR

RR

Gross interest accrued Exempt interest amounts ______ Total exempt

______

Taxable amount ______ Tax at 35% ______ 1.2

“Imputed” interest (art. 212)



If an individual receives a corporate loan at a zero rate (or at a very low interest rate) there is a benefit. The benefit is assessed on “imputed” interest and is subject to PIT.



Taxable imputed interest income is calculated as follows: Step 1:

Interest is calculated using 2/3 of the CBR on the interest payment date for rouble loans and 9% for foreign currency loans. The calculation is based on the number of days of the loan (any rounding is incorrect).

Step 2:

The difference between interest calculated in Step 1 and the actual interest paid under the loan agreement is calculated. If this amount is positive, it is subject to tax at 35% for imputed interest on loans taken for any purposes (for Russian residents). The source of a loan (bank or a company) is irrelevant for tax purposes. However no imputed interest arises if the loan is taken to finance residential property acquisition (or construction) which qualifies for property incentive (art. 220) and the right for the tax relief is confirmed by tax authority.



Imputed interest on loans is calculated on the date when the actual interest payment is made. If no interest is actually paid in a calendar year, there is no calculation of imputed interest. If an individual receives a loan at zero rate imputed interest is calculated on the date of loan repayment.



All interest calculations must be based on precise (not on rounded) number of days in the loan period, which then should be divided by 365. As before, the first day is not counted while the last one is.



If a loan is given in several instalments, each instalment is treated as a separate loan.



No imputed interest arises in the following two cases: (1)

During the grace period for payment on credit cards (art. 212 item 1.1). For example, if a card agreement provides for 30-day interest free period after the end of each month, then no imputed interest arises on the debt during these “grace” days.

(2)

If the loan is taken to finance or refinance expenditure which qualifies for property incentive (art. 220) and the right for the tax relief is confirmed by tax authority.


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Commentary Remember expenditure qualifying for property incentive includes not only the purchase of residential houses or apartments, but also costs of plots of land and construction thereon, or a participating share in any such expenditure (see Session 5, section 3.3). 

The loan provider is responsible for calculating and withholding tax on imputed interest from any cash income paid to the taxpayer (art. 212, art. 226). The tax must be paid on the next day after withholding. If no cash income is paid to the taxpayer (i.e. loan is provided not by employer but by a bank) then the taxpayer is responsible for paying tax on the imputed interest through submission of a tax declaration.



Imputed income could arise due to securities and derivatives holdings but this topic is not examinable.

Example 2 An employee who is a Russian tax resident received a one-year rouble loan of 30,000 RR from his employer on 5 May 2013. The loan was taken to purchase a car. The interest rate is 1% per annum. Interest is paid on 5 September 2013 and 5 January 2014. CBR rates (assumed): 1 May – 30 September 2013 1 October – 31 December 2013

8% 20%

Required: (a) (b)

Calculate imputed interest on the loan for 2013 and the tax amount. Explain how and when the tax will be paid.

Solution (a) RR Imputed interest Actual interest paid ______ Imputed interest income ______ Tax at 35%

(b)

______

Payment mechanism:


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1.3

Comparison



The following table compares taxation rules for interest on deposits with imputed interest on loans: Imputed interest on loans

Interest on bank deposits

Statutory limits

2

/3 CBR rate 9% – currency loans

CBR rate + 5% 9% – currency deposits

Changes in CBR rates

Such changes are taken into consideration. (Rates are taken on the dates of each interest payment or on the date of loan return in case of 0% interest rate.)

Such changes are taken into consideration. (Rates effective during are the period of interest accrual are used for calculations.)

Calculation

First day is NOT counted

First day is NOT counted

Tax rate

35% – for all loans except mortgage loans to buy residential property qualified for housing incentive

35%


When interest is paid by individual

When interest is paid to individual

Withholding

Loan provider acts as a tax agent if there is cash income payable to individual from which PIT can be withheld (e.g. loan is received at work).

Bank must withhold on the interest payment date and pay tax to the budget on the next day.

2

GIFTS, PRIZES AND AWARDS



Taxation of prizes and gifts depends on their types.

2.1

Gifts from individuals to individuals (art. 217 item 18.1)



Gifts (as well as inheritance) from close relatives are not subject to PIT.

2.2

Sports prizes and awards (art. 217 item 20)



Sports prizes and awards in cash or in-kind are exempt from taxation if they are received at the following events only: – – –



Olympic games; official World and European championships; official Russian Federation championships.

Otherwise, prizes and awards are taxable taking into account the exemption limit that applies to certain categories of prizes as explained below.


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2.3

Lottery, totalizator and other games based on risk



There is no exemption limit for winnings on lotteries, totalizator and other games based on risk.



It is important to distinguish the aim of a lottery between games based on the risk and advertising purposes because of different PIT rates. Commentary A totalizator is an automated system which runs betting, calculates pay-out odds, displays them, and produces tickets based on incoming bets.

2.4

Other gifts (art. 217 item 28)



Items such as the following are exempt in the amount not exceeding 4,000 RR in a tax period (calendar year) for each group (type) of gifts listed: –

gifts (prizes, awards) from corporations and individual entrepreneurs;

–

assistance payments (“materialnaja pomosch”) to employees;

–

cost of prescribed medication (prescribed by doctor) purchased for employees (or their spouses, children and parents);

–

any prizes and awards, received from competitions, lotteries, games and other events conducted for advertising purposes.



All types of gifts, prizes and awards listed above (except the last type) are taxed at the standard rate of 13%. Prizes and awards, received on competitions, games and other events conducted for advertising purposes are taxed at 35%.



Tax agents generally should withhold tax on the taxable portion of gifts and awards. If the tax withholding is not possible (no payments in cash) the tax agent must report this to its local tax authority within one month. This tax authority sends this information to the tax inspectorate of the taxpayer, which issues a tax notification directly to the taxpayer.



If a taxpayer received several gifts (prizes, awards) of similar type from different entities, the 4,000 RR exemption is applied for all gifts in each group.

Example 3 Irina Gromova received the following prizes and gifts in the year: 

a TV set valued at 14,000 RR from her employer as a birthday gift (income tax was withheld from her cash salaries);



a kitchen processor valued at 5,000 RR from a company-client on the occasion of 8 March holiday;



a 1,000 RR winning from a local radio station for answering correctly three questions during a quiz on the air;



a car valued at 152,000 RR from a TV company for participation in an advertising TV show.

Required: (a) (b)

Calculate Irina’s total income tax amount. Calculate the portion of tax to be paid by Irina herself.


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Solution (a) Gifts subject to

13% rate RR

35% rate RR

Total RR

TV set Kitchen processor Winning from radio station Car ______

_______

______

_______

______

_______

______

_______

Less: Exempt amount Taxable Tax _______

(b)

3

BUSINESS EXPENSES RE-IMBURSEMENT (art. 217 item 3)

3.1

General rules



The following business travel expenses reimbursed to employee are not subject to personal income tax: – – – – –



per diem allowance (within statutory norms – 700 RR in Russia, 2,500 RR for outside Russia business trips); travel costs (including taxi to and from airport/railway station); airport fees and commission charges; accommodation expenses (hotel); business communication expenses.

All costs (except per diem allowances) must be supported by appropriate documents. In the absence of such documents the amounts will be fully taxable with the exception of accommodation expenses, which will be taxable in the part exceeding statutory limits.


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3.2

Business trips outside Russia



For business trips outside of Russia, the following special rules should be considered: –

the statutory norm for travel in a foreign country applies from the date of crossing the border to this country from Russia;

–

Russian statutory norms apply from the date when the border of a foreign country to Russia is crossed;

–

if an employee travels from one country to another within one day, the statutory norms of the last country visited on that day apply.

Example 4 Mikhail went on a business trip to Germany and France in June. He flew to Berlin on 5 June. Two days later on 7 June he flew to Paris where he stayed until 11 June. He arrived in Moscow on 11 June in the evening. Statutory per diem rates are: Outside Russia: 2,500 per day; Russia: 700 RR per day. Required: Calculate Mikhail’s total statutory per diem allowance. Solution RR Allowance for outside Russia Allowance for Russia ______ Total statutory allowance ______ 4

INSURANCE INCOME (art. 213)

4.1

General



Insurance pay-outs are not taxable if they are received by individuals in relation to: – –

obligatory insurance effected in accordance with the law; insurance against harm to life and health (e.g. reimbursement of medical costs).



In particular, receipts under long-term (more than five years) life insurance policies are not taxable.

4.2

Life insurance (art. 213 item 1.2)



For receipts under short-term life insurance agreements the taxable amount is the difference between: – –



total insurance pay-out received; and total contributions made by an individual increased by the average CBR rate as at the date of the conclusion of the agreement.

The tax is withheld at source at 13% rate.


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4.3

Property insurance (art. 213 item 4)



The tax rules depend on whether property was fully destroyed or damaged.

4.3.1

Destruction of property



The taxable amount is the difference between the insurance compensation received and the destroyed property market value increased by the amount of insurance contributions.

4.3.2

Property damage



The taxable amount is the difference between insurance compensation received and expenses required for the property repair (actual repair expenses) increased by the insurance contributions.



The actual or estimated amount of repair expenses must be confirmed by appropriate documentation. The estimated expense amount is confirmed either by the insurance company or by an independent appraiser.

Example 5 Andrei’s car was damaged in a street accident. Andrei had an insurance protection up to 50,000 RR (fair market value of the car at the date of signing the insurance contract). Andrei’s insurance contributions were 7,000 RR. Actual repair expenses were 35,000 RR. Insurance company paid 45,000 RR to Andrei. Required: (a)

Calculate tax (if any) on this transaction.

(b)

Explain how the taxable base would be calculated if the car were completely destroyed.

Solution (a)

RR Received from insurance company Insurance contributions paid ______

Repair cost ______ Taxable amount ______ (b)


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4.4

Non-state pension security and obligatory pension insurance (art. 213.1)



The amounts of pension insurance contributions paid to RF licensed nonstate pension funds generally are not taxable, and are subject to: – –

social deduction (if made by an individual); or CPT reduction (if made by employer).



Amounts of pension benefits are included in the PIT base at the time of their receipt according to the agreements concluded with the RF licensed non-state pension fund and the individual or employer.



Pension income can be PIT exempt only if an individual paid contributions to the non-state pension fund himself (for himself).



Redemption amounts (surrender values) received in case of early termination of agreement are also subject to PIT. Such sums are exempt only to the extent of contributions by the individual for himself if he did not receive relevant social deduction. (The tax authority must submit a confirmation to the non-state pension fund.)



The tax is withheld at source at 13% rate.

5

INCOME FROM INVESTMENTS

5.1

Dividend income (art. 214)



Dividends are taxed at the rate of 9%.



Taxation of dividends from Russian sources only is examinable.



A Russian legal entity– a dividend payer, acts as a tax agent (i.e. withholds and remits PIT to the budget).

When making calculation of dividend amount subject to withholding tax, tax agent takes all dividends subject to distribution and deducts the amount of dividends received by the tax agent itself in the reporting tax period or preceding period (if they were not counted for in the preceding period). The remaining portion is subject to tax withholding. The same rules apply to CPT withholding on dividends payable to Russian legal entities (see Session 4 section 4). Example 6 In December 2013 Pavel received dividends from AO XYZ. He holds 400 shares out of 2,000 shares placed with shareholders. XYZ distributed all after tax profits for 2013. Its taxable profits amounted to 20 million RR and it paid profits tax at 20% rate. In July 2013 XYZ received dividends for 2012 from its daughter company amounting to 4 million RR. Required: Calculate personal income tax on Pavel’s dividend income.


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Solution RR 000 Taxable profits Company profits tax @ 20% _______ Profits for distribution (= total dividends) Less: Dividends received by XYZ _______ Dividends subject to withholding tax _______ Pavel’s share in total dividends Personal income tax on Pavel’s dividends: 5.2

Sale of securities (art. 214.1, 220.1)

5.2.1

Rules for calculation of taxable amount



In general, taxable income on sale of securities arises as a difference between their selling price (or the market price for exchange, conversion or redemption) and purchase cost (including purchase price and all purchase-related expenses).



Standard property deduction of 250,000 RR per year is not applicable to securities sales from 2007, nor does the three-year holding period on property sales apply.



The following items are specifically mentioned by Tax Code (art. 214.1) as deductions on sales of securities (they should be actually incurred and have documentary support): – – – – – – –

purchase price of securities (using FIFO method only); payments for services provided by depositary management companies; commissions paid to security brokers and mutual funds; registration fees and stock exchange fees; bonuses and rebates paid to the investment fund’s management company; taxes paid by taxpayer in relation to securities received as a gift or inheritance and their costs which were paid by grantor; other expenses directly related to purchases of securities.



In addition to the above mentioned deductions, the taxpayer has a right to deduct the interest actually paid on loans taken to finance securities’ acquisitions. Deductible interest may not exceed the interest calculated using the CBR rate effective through the loan period multiplied by 1.1 for rouble loans and 9% rate on currency loans.



The loss from sale of listed securities is determined by considering the limitation of the market price of the security (for 2013 year limited deviation is 20%) The market price is defined as a “weighted average price of the security traded on the stock exchange”.


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Illustration 2 In March 2013 Andrei, a Russian tax resident, purchased 100 shares of a bank “VTB 24” for 3,000 RR each. The agent’s commission on purchase was 20,000 RR. To finance the purchase Andrei raised a 5-year loan from the bank of 100,000 RR, which was received on 1 March 2013. Interest rate is fixed at 20% per annum. Interest was paid on a monthly basis on the last day of each month. The CBR rate was 15% during January-April 2013, 8% during May-September 2013 and 20% during October-December 2013. As at 15 December 2013 these shares were traded on the stock exchange at an average price of 3,600 RR each. Option 1: Andrei keeps the securities and does not sell them. No taxable income and PIT arise in this case. Option 2: As at 15 December 2013 Andrei sells 100% of the securities: (1) (2)

for their market price; for 2,500 RR.

The agent’s commission on sale is 8,000 RR in each case. The taxable gain is calculated as follows (in RR): (1)

(2)

Selling price (100 shares × 3,600) Purchase cost (100 shares × 3,000) Agent’s commission on purchase Agent’s commission on sale Bank interest (6,401 + 4,164)

360,000 (300,000) (20,000) (8,000) (10,565) (Note 1) ______

Taxable gain

21,435 ______

PIT (at 13%)

2,787 ______

Selling price (100 shares × 2,880) Purchase cost (100 shares × 3,000) Agent’s commission on purchase Agent’s commission on sale Bank interest

288,000 (Note 2) (300,000) (20,000) (8,000) (10,565) (Note 1) ______

Taxable loss

(50,565) ______

PIT

0 ______

Note 1 Interest is calculated for the period 2 March – 15 December. Interest for December is deductible up to 15 December. Interest within period March – September exceeds 1.1 × CBR rate therefore 1.1 × CBR rate is used: (100,000 × 16.5% × 60/365) + (100,000 × 8.8% × 153/365) = 6,401 Bank interest in October – 15 December is within 1.1 × CBR rate so the actual bank loan interest is used: 100,000 × 20% ×60/365 = 4,109 Note 2 20% limit of deviation from market price (3,600 RR) is 20% × 3,600 RR = 720 RR. The lowest price that can be taken into consideration for PIT calculation is 2,880RR (2,500 < 2,880)


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

Taxable gains for the following groups of securities are examinable: (1) (2) (3)

shares listed on the securities market (listed securities); shares not listed on the securities market (unlisted securities); investments (equity participation) in mutual (unit) investment funds (“PIFs”).

Note that a loss received from one of these groups cannot decrease taxable profit in another (i.e. no netting of results between the different groups is allowed). However, offset is permitted within a single group. 

Losses arising from the disposal of listed securities only can be carried forward and utilised over 10 subsequent years. They can decrease taxable profit within the listed securities group only.

Illustration 3 If listed securities were sold at a loss of 50,000 RR and unlisted with a gain of 30,000, the overall result for tax will be taxable income of 30,000 RR. Loss on sale of listed securities cannot be netted off against a gain on unlisted, but it can be carried forward to the next years. 5.2.2

Rules for tax withholdings and payments



Withholding and payment mechanism depends on the way the operation with securities is structured: (1)

If a taxpayer sells securities on his own name (e.g. a taxpayer sold his own securities to a company with a taxable gain). He should calculate taxable income himself and declare it in his tax declaration.

(2)

If a taxpayer conducts his operations through an agent (or mutual fund) the agent acts as a tax agent and calculates and withholds tax on the taxpayer’s income. The withheld tax should be paid to the budget during the month following the date of tax period end or the date of the payment to the taxpayer.

Timing of tax withholding depends on the circumstances as shown in Illustration 4:


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Illustration 4 Situation 1 In January Gosha contributed 100,000 RR to a mutual fund. The mutual fund invested this amount into the purchase of listed securities with 1,000 RR commission. These securities were then sold for 122,000 RR with 1,500 RR commission. The mutual fund fee for investment management is 3,000 RR. As at 31 December Gosha still keeps all his money in the mutual fund. Mutual fund should calculate Gosha’s income and withheld PIT on it (in RR): Revenue Commission on purchase Cost of securities Commission on sale Management fee

122,000 (1,000) (99,000) (1,500) (3,000) ______

Taxable income

17,500 ______

PIT at 13%

2,275

Situation 2 Gosha takes back 50,000 RR (gross) in October and continues to keep the remaining amount. (Assume that the income of 17,500 was already realised by October.) Taxable income is determined as: Gross income received × investment taken back/total investment as on withholding date. In this case (in RR): Gross income before tax Gross investment taken back (before PIT withholding) Total investment as at withholding date (current market value of investment) Taxable income is (17,500 × 50,000/117,500)

17,500 50,000 117,500 7,447

PIT to be withheld at 13%

968

On December 31 mutual fund will also calculate PIT on any other income which may be received on the remaining amount in November and December.


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FOCUS You should now be able to compute: 

the exempt and taxable amounts of interest on bank deposits;



the imputed income arising from low interest loans;



the imputed income arising from interest savings on (1) mortgage loans received and (2) new bank loans provided for acquisition or new construction of residential property, acquisition of plots of land or acquisition of shares in the above property; **



the exempt and taxable amounts of gifts prizes and awards, distinguishing between different types of gifts and prizes;



the tax on income from lotteries and advertising campaigns;



the taxable amounts of business trip expenses (statutory limits will be provided);



the exempt and taxable amounts of life insurance payments;



the taxable amounts of property insurance reimbursements;



the exempt and taxable amounts under agreements for non-state pension security or obligatory pension insurance concluded with non-state pension funds (Article 213.1);



the tax payable on dividend income, considering the provisions of item 2 of Article 214;



other property deductions, including deductions on transactions in securities;



the tax payable on income from the sale of listed and unlisted securities based on the provisions of Article 214 (1);



the tax payable on income from investment funds (PIFs). Commentary ** The examiner’s use of the verb “compute” is a little strange here. Note in section 1.2 that no imputed interest arises in these cases (but only if there is a tax authority confirmation).


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EXAMPLE SOLUTIONS Solution 1 RR Gross interest accrued (100,000 × 25% × Exempt interest amount: 100,000 × (15% + 5%) × 88/365 100,000 × (8% + 5%) × 153/365

241

/365)

RR 16,507

4,822 5,449 _____

Total exempt

10,271 _____

Taxable amount

6,236 _____

Tax at 35%

2,183 _____

On the same date the tax is calculated and withheld by the tax agent (i.e. bank). This tax should be paid to the budget on the day following the withholding date. Solution 2 (a)

Imputed interest on loan and tax amount

Calculation of interest using 2/3 of CBR rate is taken on the date of interest payment: Imputed interest* (30,000 × 2/3 × 8% × 123/365) Actual interest paid (30,000 × 1% × 123/365)

RR 539 101 _____

Imputed interest income

438 _____

Tax at 35%

153 _____

* The CBR rate is taken on the date of interest payment. The total number of days of the loan is calculated from the day after the loan receipt and up to (and including) the payment day. There is no need to calculate imputed interest for the period 6 September – 31 December as this is done only on the date when interest is paid during the year. (b)

Payment mechanism

The company acts as a tax agent and calculates and withholds the tax in accordance with the established procedure from any cash income paid to employee. If no cash income is paid the company must report to tax inspectorate about its inability to withhold the tax within one month from the date when imputed interest income is recognised.


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Solution 3 (a)

Total income tax amount Gifts subject to

13% rate RR 14,000 5,000 1,000

TV set Kitchen processor Winning from radio station Car

(b)

35% rate RR

_____

152,000 ______

Less: Exempt amount

20,000 (4,000) _____

152,000 (4,000) ______

Taxable

16,000 _____

148,000 ______

Tax

2,080 _____

51,800 ______

Total RR

53,880 ______

Portion of tax to be paid by Irina

Income tax was not withheld on gifts in kind (kitchen processor and car). However both companies must report the gifts made within 1 month after the gift date. No tax was withheld by the radio station due to the 4,000 RR exemption. Tax of 1,300 RR was withheld on TV set (14,000 – 4,000) × 13% Therefore, Irina is liable to tax of 52,580 RR (53,880 – 1,300) Solution 4 Allowance for outside Russia (2,500× 6 days) Allowance for Russia (700 RR × 1 day)

RR 15,000 700 _____

Total statutory allowance

15,700 _____

The day of departure and arrival are each considered as 1 day.


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Solution 5 (a)

Andrei’s car was partially damaged. The tax consequences are as follows: RR 45,000 (7,000) _____

Received from insurance company Insurance contributions paid

38,000 (35,000) _____

Repair cost Taxable amount (b)

3,000 _____

In case of complete destruction no tax obligation arises as the fair market value at the date of signing of the agreement (50,000 RR) exceeds the amount received.

Solution 6 RR 000 20,000 (4,000) _____

Taxable profits Company profits tax @ 20% Profits for distribution (= total dividends) Less: Dividends received by XYZ

16,000 (4,000) _____

Dividends subject to withholding tax

12,000 _____

Pavel’s share in total dividends (400/2,000) Personal income tax on Pavel’s dividends: (12 million × 20% × 9%)


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PERSONAL INCOME TAX – OBLIGATIONS


To explain the obligations of taxpayers and their agents for individual income tax.



To set out the comprehensive computation of taxable income and income tax liability.

TAX WITHHOLDING AND PAYMENT

  

FILING REQUIREMENTS  

Tax declaration Reporting by tax agents


Tax agents’ obligations Taxpayer’s payment obligations Individual entrepreneurs – special payment rules

INCOME TAX PROFORMA   

0701

Key points Presentation in the examination Tax proforma

version 1


1

TAX WITHHOLDING AND PAYMENT



The tax must be calculated and paid either by: – –

a tax agent (from the amounts withheld); or a taxpayer.

1.1

Tax agents’ obligations (art. 226)



Tax agents are companies or individual entrepreneurs paying income to individuals; or as a result of relations with whom the taxpayer has received income.



No tax is withheld in relation to income paid to individual entrepreneurs and in cases explained later in this session.



Tax agents are required to calculate the tax on a monthly basis cumulatively from the beginning of the tax period in relation to income taxed at 13% and separately for each amount taxed at different rates.



The withholding is made from the amount payable at the moment of payment.



If the payment is made in-kind, then: – –

either the withholding is performed from any cash payments to the individual (up to 50% of the amount paid in cash); or the withholding is not performed (if no cash is paid to individual).



The limit of 50% of the total payment amount is NOT applied for the tax withholding for imputed interests received by bank clients.



If the tax withholding is not possible within the next 12 months the tax agent must report on this in writing to the tax authorities within one month from the day the relevant obligations arose.



The tax withheld by the tax agent should be paid to the budget not later than: – – –

the date of the actual receipt of cash in the bank of the taxpayer; or the date of a wire transfer of income to the individual’s bank account (or to a third party’s account at the individual’s request); the day following the actual receipt of cash by the taxpayer in other cases.

Note that although the timing of the payment is related to the receipt of income by the taxpayer this is inextricably linked to the actions of the tax agent. 

If the tax is withheld on income in-kind and on imputed income, this tax shall be paid on the date following the date of actual tax withholding.



Payment of the PIT out of a tax agent’s own funds is not permitted. Commentary The only exception to this is in the case of an agent repaying an overpayment to the taxpayer, which can now be done in advance of recovery from the budget.


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

Payments of PIT are made to the budget at the tax agent’s location. Tax agents with employees working in branches also make payment of PIT at the locations of these branches.

Example 1 Wages and salaries accrued by XYZ Company to its employee for December 2013 were actually paid to his bank account in February 2014. Required: (a) (b)

Explain the impact of the above on the employee’s income for 2013. Explain the obligations of XYZ in its capacity as a tax agent.

1.2

Taxpayer’s payment obligations (art. 228)



An obligation to calculate and pay tax stays with an individual taxpayer in the cases of income received from: – – – – –

individuals who are not tax agents (e.g. from rent of apartments to individuals); sales of personal property (excluding PIT exempt property, see Session 5 section 2.3); sources outside Russia (not examinable); income in-kind (i.e. no tax withheld); gambling activities and lottery prizes.



Taxpayer has to pay PIT himself in any case if the tax was not withheld by tax agent.



The tax due in the above cases is calculated based on the tax declaration and must be paid by 15 July of the year following the reporting calendar year. In case of PIT overpayment, tax is refunded by the tax authorities within one month following the date of submission the request for such a refund.



Taxpayers receiving a gross amount of income (i.e. without tax withholding) may be required to make tax payments before submitting the tax declaration.

Illustration 1 A company making a taxable gift in-kind to a taxpayer did not withhold the tax on this gift but reported the gift to its tax inspectorate. The relevant data was then sent to the taxpayer’s inspectorate, which issued a payment order directly to the taxpayer. This tax is to be paid in two equal instalments: (1) (2)

within 30 days after the payment order was handed over to a taxpayer; within 30 days after the first payment.

1.3

Individual entrepreneurs – special payment rules (art. 227)



Individual entrepreneurs as well as private notaries and other persons engaged in private practice must make advance payments of the tax. These payments are made based on estimated income per a preliminary tax declaration. Advance payments are made based on payment orders issued by the tax inspectorate.


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1.3.1

Amounts and deadlines

(1) (2) (3) (4)

50% of the estimated annual tax liability by 15 July of the current year; 25% of the estimated annual tax liability by 15 October of the current year; 25% of the estimated annual tax liability by 15 January of the next year. The final PIT liability is paid by 15 July of the year following the reporting one.

2

FILING REQUIREMENTS (ART. 227 ITEMS 7-10, 229)

2.1

Tax declaration



The tax declaration must be submitted by: (1)

individual entrepreneurs, conducting business activities;

(2)

private notaries and other persons engaged in private practice;

(3)

individuals receiving income from non-tax agents or income free of tax withholdings;

(4)

individuals receiving income from abroad.



Taxpayers included in (1) and (2) above must submit a tax declaration on their estimated business income. This declaration must be submitted within 1 month and 5 days after the day when such income was first received. The tax inspectorate issues payment orders based on the preliminary declaration taking into account all available deductions.



Where there is a large increase/decrease of income compared to the amount estimated in the first preliminary tax declaration (more than 50%) the taxpayer must submit a new declaration on estimated income, on the basis of which the tax inspectorate will recalculate the advance tax payments.



If business activities of an individual entrepreneur terminate before the yearend he has to submit the final tax declaration within 5 days after the date of the termination of the activities.



The tax declaration may be submitted by individuals to obtain: (1)

social, property and professional deductions;

(2)

standard deductions and exemptions which were not allowed (and cannot be provided) by a tax agent at source (e.g. for a one-time payment).

The individual’s rights to the deductions should be confirmed by tax authority based on the tax declaration and documents supporting the related expenses. 

Generally the tax declaration on actual income received must be submitted not later than 30 April of the year following the reporting one.



Any overpaid amount should be transferred from the budget to the individual’s bank account within one month from the date of his written application being received by the tax authority.



Housing/land tax incentive can also be claimed by the employer (see Session 5 section 3.3).


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2.2

Reporting by tax agents (art. 230)



Tax agents must keep track of all income paid to individuals in a special tax card (“nalogovaja kartochka”).



Tax agents must present to their tax inspectorate cumulative data on income paid to individuals in a reporting year by April 1 of the next year. The data is generally presented in an electronic form (unless the number of individuals who received the payments is less than 10).



No cumulative data is prepared on payments to individual entrepreneurs, who have presented the documents confirming their status and tax registration.

3

INCOME TAX PROFORMA

3.1

Key points (art. 210)

 The tax base is determined separately for income taxed at different rates.  Deductions and allowances listed in articles 218 – 221 of the Tax Code apply only to income taxed at the basic 13% rate.

 If the cumulative amount of such deductions exceeds income taxed at 13%, the excess amount cannot be applied to income taxed at higher rates or carried forward to future years.

 The exception to this rule is that housing incentive on purchase of residential property can be carried forward to future years. 3.2

Presentation in the examination

3.2.1

Rules

(1)

Show income taxed at different rates separately.

(2)

Show all deductions and allowances separately, do not net them with income items.

(3)

Always show the details and steps of calculations accurately and neatly.

(4)

It is recommended to start with calculation of different types of income and related expenses (allowances, deductions) and then to complete the final tax proforma.

(5)

Do not forget to show the PIT withheld by each tax agent to arrive at the final amount of PIT liability or refund.


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3.3

Tax proforma Income taxed at 13% Employment income Less: Standard personal deduction Standard children deduction

X (X) (X)

Income from business activities Less: Business expenses or Standard business deduction of 20%

X

(X)

Income from sale of property Less: Property deductions

X (X)

Other income taxed at 13% Less: Professional deductions

X (X)

Total income taxed at 13% before social deductions and housing allowances

X

Social deductions: Medical deduction Educational deduction Charitable deduction

(X) (X) (X)

Housing incentive

(X) ______

Taxable income subject to 13%

X ______

(I) Tax at 13%

X

Dividend income

X

(II) Tax on dividends at 9%

X

Income taxed at 35%

X

(III) Tax at 35%

X ______

Total tax liability (I) + (II) + (III) Less: Tax withheld (including tax on dividends)

X (X) ______

Additional tax payment/(refund) required

X ______


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explain the rights and obligations of both taxpayers and their agents;



explain the filing requirements and payment deadlines for employees, employers (as tax agents), individual entrepreneurs and self-employed persons; and



explain the procedure for obtaining deductions and exemptions at source and upon the year-end tax declaration.


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EXAMPLE SOLUTION Solution 1 (a)

Impact on employee’s income

The income date for wages and salaries is the last day of the month when wages and salaries are accrued. Therefore, regardless of the fact that the payment was made in February 2014 the employee’s income for 2013 will include his December salary. (b)

Obligations as tax agent

As a tax agent, XYZ Company will calculate tax on the December salary in December 2013. At the moment of the salary payment in February 2014 this amount will be withheld from the salary payment. The tax withheld must be submitted to the budget on the day XYZ pays the salary into the employee’s bank account. (If the employee had been paid in cash the tax withheld would be submitted to budget the following day.)


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VALUE ADDED TAX – COMMON RULES


To explain the scope of value added tax (VAT) and the computation of VAT liabilities.

    

INTRODUCTION

OUTPUT VAT ON DOMESTIC SALES    

Object of taxation Exempt activities Tax point VAT tax base


Principle Payers Tax object Tax rates Tax period

INPUT VAT RECOVERY RULES   

0801

General deduction criteria Additional requirements Restriction of input VAT

version 1


1

INTRODUCTION

1.1

Principle



The principles of value added tax (or VAT) can be illustrated as follows:

Illustration 1 Company A grows trees, which it sells to Company B for 1,000 RR plus VAT. Company B cuts the trees and sells the wood to a furniture factory for 3,000 RR plus VAT. The furniture is sold by the factory to an individual for 8,000 RR plus VAT. VAT rate on all the above operations is 18%. The added values for each activity are: 1,000 RR for Company A 2,000 RR for Company B (3,000 – 1,000) 5,000 RR for the factory (8,000 – 3,000) Value added tax = added value × VAT rate (18%): 180 RR (1,000 × 18%) for Company A 360 RR (2,000 × 18%) for Company B 900 RR (5,000 × 18%) for the factory To calculate VAT in such a direct way in practice is very difficult, as the added value component is not easy to determine. To simplify things, there are three steps of VAT calculation: First step. Output VAT is calculated on gross sales: Output VAT for Company A = 180 (1,000 × 18%) Output VAT for Company B = 540 (3,000 × 18%) Output VAT for the factory = 1,440 (8,000 × 18%) Second step. Input VAT paid to the suppliers of resources is calculated: Input VAT for Company A = 0 (assuming that trees were free) Input VAT for Company B = 180 (VAT shown in the invoice from A) Input VAT for the factory = 540 (VAT shown in the invoice from B) Third step. Determine the difference between output and input VAT, which is VAT payable/recoverable. VAT payable for Company A = 180 (180 output VAT – 0 input VAT) VAT payable for Company B = 360 (540 - 180) VAT payable for the factory = 900 (1,440 – 540) Note that in the end all VAT will be incurred by the individual, who buys the furniture.


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



From the above illustration several points arise: –

there is a successive value increase chain and the tax paid to the budget is paid in different stages of this chain;

–

a taxpayer will almost always have to pay VAT, since it usually charges its customers more than it pays to its suppliers;

–

the last consumer of the chain will generally incur the whole burden of VAT.

VAT formula is presented below:

VAT payable/recoverable

=

Output VAT on sales

-

Input VAT on purchases

Example 1 Company A produces and sells goods to company B for 100,000 RR (including VAT). Company C buys these goods from B for 160,000 RR (including VAT). VAT is assessed on these activities at the standard rate of 18%. Required: Calculate the net VAT liability of B. 

This formula looks quite simple; however VAT is not a simple tax at all. There are quite a lot of rules regulating both output and input VAT calculations. And, in many cases, there is no or little correlation between output and input VAT (i.e. quite often these elements do not depend on each other).

1.2

Payers (art. 143)



VAT is paid to budget by: – – –

legal entities; individual entrepreneurs; importers of goods (who pay VAT at customs).

Individual entrepreneurs and legal entities are liable to VAT unless their sales for 3 preceding months do not exceed 2 million RR (net of VAT). In this case, a VAT relief is available (art. 145). However, this waiver is excluded from the syllabus. Branches and independent subdivisions are not separate VAT payers (i.e. all VAT is paid by the head office without allocation to branches). Although VAT registration (art. 144) takes place together with the general tax registration (see Session 12) the topic is excluded from the syllabus.


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1.3

Tax object (art.146)

Tax object of VAT is sale of goods and services (including free provision of goods or services). VAT is also assessed on:   

self-supply of goods (works, services)*; self-supplied capital construction (see Session 9); goods imported to the Russian Federation (see Session 9).

1.4

Tax rates (art.164)

There are three VAT rates: 0%, 10% and 18%. 

18% is considered to be the base rate or “standard rate”.



10% (“reduced rate”) applies to a limited list of products (mostly to food and children’s items). The composition of items included in this list is not examinable.



0% (“zero rate”) applies to export of goods, works, services, etc (see Session 9).

Article 164 (item 4) introduces the notion of “raschetniye stavki” for VAT purposes. These rates are 18/118 (for supplies taxable at standard rate) and 10/110 (for supplies taxable at 10% rate). These rates apply, in particular, to: 

sales-related items (section 2.4.3); and



sales of assets which were used in VAT exempt activities (i.e. when input VAT paid on their acquisitions was capitalised) (see Session 9).



If a taxpayer has VATable sales subject to VAT at different rates, the tax base is determined separately for each type of sale (i.e. for all sales subject to zero rate, all sales subject to 10% rate and all sales subject to 18% rate).



Some types of operations are VAT exempt.

1.5

Tax period (art. 163)



VAT is calculated on a quarterly basis; the VAT tax period is a quarter. This tax is not cumulative. The calculation of VAT for the 2nd quarter is based on VAT on transactions from April to June (not on the period from January to June). This is very different to and CPT and PIT, which are both calculated on a cumulative basis. Thus, to compute VAT for the tax period (quarter) it is necessary to: (1)

define the tax objects (i.e. all VATable transactions, including free supplies) and the dates of their realisation;

(2)

determine a tax base for each tax object;

(3)

apply a correct tax rate for each tax base (18%; 10% or 0%)

(4)

establish input VAT;

(5)

find the difference between output and input VAT (VAT to pay to the budget or to reimburse from the budget)


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2

OUTPUT VAT ON DOMESTIC SALES

2.1

Object of taxation (art. 146)



As was mentioned earlier the principal object of VAT (“taxable supply”) is the sale (“realizatsija”) of goods (works, services).



A free transfer of goods, free works or services also constitutes a supply from a VAT viewpoint . VAT is paid by the donor. When a company gives away assets for free it will generally pay VAT on their net book value.

Example 2 Company A made a free transfer to company B of a fixed asset (other than capital construction object) with a net book value of 10,000 RR. Company B sold this asset for 6,000 RR (net of VAT). Required: Assuming the standard VAT rate calculate VAT liabilities of both companies. Solution VAT liability of A: VAT liability of B: 

An exception to this is the promotional gift of free advertising materials with a cost per item of not more than 100 RR, which is exempt. Commentary – Exam advice This limit is given in the examination.



The other main exception to the free transfer rule is the transfer of fixed assets (intangible assets and other property) to non-commercial organisations for their main charter activity. Such a transfer is not regarded as a supply for VAT purposes and thus is not subject to this tax.



VAT is also assessed on: – – –



self-supply of goods (works, services)*; self-supplied capital construction (see Session 9); goods imported to the Russian Federation (see Session 9).

Self-supplied goods (work, services) are the goods (work, services) that were produced and consumed by the company. VAT applies to such self-supplies if they are not included in deductible expenses (for CPT purposes). For example, VAT would be assessed on a car manufacturer using its own cars for nonproduction purposes.


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

The Tax Code contains a list of activities, which are not regarded as supplies. Many of them relate to the funding activities of the company. For example: – – –

contributions to the charter capital; withdrawals from the charter capital in the amount not exceeding the amount of the original contribution; transfer of assets to the successor of a reorganised company, etc.

2.2

Exempt activities (art. 149)



Certain types of income are VAT exempt such as most medical goods and services, banking and insurance, certain aspects of childcare, education and transportation, and also cultural and entertainment provisions.

Commentary – Exam advice You are not required to memorise these income types. Whether an activity is exempt or not will be stated in the examination. 

Generally input VAT on resources used for exempt activities is added to the cost of resources and is not recovered.

Commentary Note the difference to zero-rated supplies (mainly exports), where input VAT is generally recoverable (Session 9) and normal VAT regulations of invoicing, reporting, etc are more fully applicable. 

If a taxpayer has both VATable and VAT exempt supplies, it must maintain separate accounting of these activities.



A taxpayer may decline its right to use the exemption in relation to certain VAT exempt supplies by submitting a special request to its tax inspectorate. In this case output and input VAT are calculated according to general rules.



If a licence is required for an activity, which is listed as exempt, then the exemption is granted only if such a licence has been obtained.



If a taxpayer sells exempt goods or provides works (services) through an agent or a commissioner, usually the agent pays VAT on its commission unless otherwise provided in the Tax Code.

2.3

Tax point (art. 167) (recognition date)



Only the accruals method is available for VAT calculations.



The meaning of the accruals method for VAT purposes is almost the same as for CPT. The principal difference is that all advances received are immediately VATable. (CPT applies to advances received only under the cash method.)



Output VAT is recognised on the earlier of: – –

shipment date; payment date.


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

Special rules apply to timing of VAT recognition on certain transactions (see Session 9) such as: – – – –

export; debt-factoring; self-supplied construction; import of goods (excluded from the syllabus).

2.4

VAT tax base (art. 153, 154, 162)

2.4.1

General



All taxpayer’s income in cash or in-kind, connected with the sale, is subject to VAT (i.e. included into the VAT base).



The tax base for VAT purposes is determined using the market prices in accordance with the Tax Code (art. 40).

2.4.2

Sales performed in foreign currency



When a purchaser is invoiced in a foreign currency payable in RR at the Central Bank rate on the day of payment, a “sum” difference may arise due to exchange rate differences (between the day of receiving the invoice and the payment date).



Income is increased or decreased to take account of the sum difference. The sum difference is regarded as income for the seller on the date of settlement of the receivable for sold goods (works, services), property rights, etc.



An equivalent adjustment arises for the buyer on the date of settlement of the liability for goods, etc acquired.



Although these sum differences are recognised for accounting and CPT purposes, they do not give rise to any VAT adjustment. Output VAT (and recoverable input VAT for the purchaser) is calculated based on the exchange rate at the date of shipment (supply/acceptance by purchaser) with no corrections or adjustments in respect of subsequent payment at a different exchange rate.

Illustration 2 Company A dispatched goods to Company B on the 7 March for 11,800 USD (including VAT 1,800 USD). Payment was received on the 20 March. USD rates: 07/03 – 24.28 RR; 20/03 – 24.88 RR 07/03 – VAT liability of Company A is 43,704 RR (1800 × 24.28) 20/03 – “Sum” difference definition at the moment of payment receipt: 11,800 × (24.88 – 24.28) = 7,080 RR 20/03 – No additional output VAT liability.


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2.4.3

Sales-related items



VAT applies not only to sales revenue but also to the related amounts such as:   

advance payments; interest (discounts) on bonds and promissory notes, received in payment for goods sold; interest on commercial credits.

Other types of sales-related payments are not examinable. 

VAT applies to the above payments at the rates of 18/118 or 10/110%.



If the main sale is VAT exempt, no VAT is charged on the sales-related amounts.

2.4.4

Advance payments on domestic sales



Advance payments received for goods (works, services) are subject to VAT immediately. An exception applies to advances for goods with a production cycle exceeding 6 months. (Note that for CPT purposes advances received under accruals method are not taxable.)



When the delivery is made to customer (i.e. a sale takes place) the VAT which was previously charged on advance is available for recovery.

Illustration 3 In January Company A received an advance of 118,000 RR (including 18,000 RR of VAT) from Company B. The goods were shipped to B in April. A will show the following: 1st quarter Output VAT on advance VAT payable 2nd quarter Output VAT on sale Recovery of VAT on advance VAT payable

18,000 18,000

18,000 (18,000) 0

2.4.5

Advances for export sales



Advances received for goods, etc to be exported are not subject to VAT.

2.4.6

Interest on commercial loans, promissory notes, bonds



Interest received on commercial loans (i.e. extension of payment terms provided in the sales agreement) as well as interest on promissory notes and bonds received in payment for VATable supplies are subject to VAT in the amount exceeding the interest calculated, using the CBR rate.



The CBR rate for the purposes of calculation of VAT on trade interest is taken for relevant periods of the commercial credit (promissory note, bond).


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Example 3 On 5 April 2013 AO R-trade has received a promissory note (“veksel”) from ZAO Max with a nominal value of 1,000,000 bearing interest of 18% per annum. The note’s principal and related interest were paid on 19 September 2013. The note was received as a consideration for goods sold. The goods were subject to VAT at a standard rate. Required: Calculate VAT on interest, assuming that the CBR rates for 2013 were 15% up to 30 April and 8% to 30 September. Solution RR 6 April – 30 April: 1 May – 19 September: ______ Taxable base ______ VAT ______ 

Calculation of the VAT tax base on certain transactions is explained in Session 9:   

sale of assets on which VAT was not reclaimed when purchased; debt-factoring; and self-supplied construction;



VAT related to imported goods is excluded from the syllabus.

3

INPUT VAT RECOVERY RULES

3.1

General deduction criteria (art. 171, 172)



Input VAT is available for recovery on goods, etc if they are used for activities subject to VAT. No recovery is possible if the company’s sales are VAT exempt.



Input VAT incurred on partially deductible expenses (for CPT purposes) is recovered within statutory norms. Non-recoverable input VAT on such expenses is charged out of after-tax profits.


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Illustration 4 Total expense equals 112,100 RR (including 17,100 of VAT). Deductible portion of the expense for CPT is 30,000 RR (net of VAT). VAT is calculated as follows: 30,000/(112,100 – 17,100) = 31.6% (i.e. 31.6% of the total expense net of VAT is deductible for CPT). 17,100 × 31.6% = 5,404 RR – VAT available for recovery Alternatively: (30,000/(112,100 – 17,100)) × 17,100 = 5,400 RR. The difference of 4 RR is not material. 

The following conditions have to be met to ensure VAT recovery:   

goods, etc must be received and booked (reflected) in accounting records or prepayments made for them; VAT invoice (original) must be in place; for prepayment agreements, the terms of prepayment must be included and the payment order and VAT invoice put in place.



Apart from prepayments and payments at customs (import) there is no requirement for input VAT to have been paid for the recovery of input VAT.

3.2

Additional requirements



Recovering input VAT paid to the suppliers on fixed or intangible asset acquisitions is possible only when the assets are booked in the accounts.

3.3

Restriction of input VAT (art. 170)

3.3.1

Major cases for the inclusion of input VAT in expenses



Input VAT is not recoverable but instead should be included in the cost of purchased goods (materials, services) when such goods (materials, services) are used for the following operations:



–

production and sales of exempt goods (work, services);

–

sales not recognised as on the territory of the Russian Federation;

–

sales which are not recognised in accordance with art. 146;

–

acquisition of goods, etc (in particular, fixed assets and intangible assets) by persons who are not VAT taxpayers or VAT exempt.

In summary, input VAT incurred on the sale of exempt items (art.149) or on transactions which are not recognised as sales (art.146) must be added to related expenses/cost of materials (or cost of a capital asset).


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3.3.2

VAT clawback



Input VAT which was recovered by a tax payer is clawed back in the following circumstance:



–

contribution of the property to charter capital (input VAT can be used by the receiving company);

–

further use of the purchases in operations which are not subject to VAT, are VAT exempt, or subject to zero rate VAT; amount of VAT should be added to the other expenses.

VAT should be clawed back in full amount or in proportion to the net book value (for fixed and intangible assets) but disregarding any revaluation.

Illustration 5 (1)

In 2010 Company A acquired equipment for use in production for 1,180,000 RR (including VAT – 180,000 RR). In January 2013 the company decided to pass the equipment free of charge to the State authority. The accounting net book value of the equipment at the moment of the delivery is 400,000 RR Company A should clawback VAT and pay it to the budget i.e. 72,000 RR: (180,000/1,000,000 × 400,000) 72,000 RR will be included in other expenses by Company A and decrease the CPT tax base.

(2)

In January 2013 ZAO RIF purchased some materials for 118,000 RR which it intended to use in production. VAT was recovered in the full amount in 1st quarter of 2013. However in April 2013 RIF contributed 50% of the materials to the charter capital of its subsidiary. VAT of 9,000 RR is subject to claw back in the 2nd quarter of 2013. This VAT is included in the amount of the charter contribution.

(3)

Last year (2012) ZAO Star was a regular VAT payer. From January 2013 Star began to produce VAT exempt products. Last year Star bought a fixed asset for 118,000 RR and recovered 18,000 RR of VAT. The net book value of this asset as at 1 January this year is 80,000. There will be a claw back of 80,000 × 18% = 14,400 RR in the 1st quarter of this year. This VAT is deductible for CPT.

3.3.3

Clawback on immovable property (art. 171)



Claw back on immovable property is based on a 10 year period starting from the commencement of depreciation.


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Illustration 6 In December 2010 ZAO Mulan purchased a building for 23.6 million RR (including VAT of 3.6 million RR). In January 2013 Mulan started to use simplified system of taxation under which no VAT is paid. Before this Mulan was a regular VAT payer on all its operations. Total VAT is first split as 3.6 million/10 years = 360,000 per year. No clawback arises in the 2010-2012 as all operations were VATable. Starting 2013 Mulan will perform 360,000 VAT clawback annually in the 4th quarter (in the last tax period of each year). This VAT is deductible for CPT (indirect expenses). If in 2014 Mulan were to become a regular VAT payer again, then there would be no need for further clawback for 2014 and thereafter. 3.3.4

Partially exempt activities



If purchased goods (services, assets) are used both for production and/or sale of VATable and VAT exempt goods, the input VAT on such goods is partially recoverable and partially deductible for CPT purposes.



The split between recoverable and irrecoverable VAT is defined based on the percentage of the sales of exempt goods, etc (net of VAT) in the total sales of goods, etc shipped (or rendered) in the reporting period (net of VAT).

If the share of goods, etc used for production of exempt goods does not exceed 5% of the total production costs for the given tax periods 100% of input VAT incurred on goods, etc used for both VATable and exempt operations is available for recovery in these periods. However, VAT directly related to exempt goods, etc is still not recoverable. 3.3.5

Allocation principles



In order to calculate recoverable input VAT on a mix of VATable and exempt sales the following allocation principles should be applied: Step 1:

Determine the proportion of exempt sales to total sales in the reporting period. Sales are taken net of VAT.

Step 2:

Based on proportion found in Step 1 allocate the cost of goods (works, services) used for both VATable and exempt operations.

Step 3:

Determine the proportion between cost of goods, etc used for exempt supplies and total production expenses for the period. If the ratio is: – –

Step 4: 

equal or less than 5%, all input VAT on is recoverable; greater than 5%, go to Step 4.

Using the percentage in Step 1 determine input VAT available for recovery.

A taxpayer must maintain separate accounting for input VAT on goods, etc used for both VATable and VAT exempt operations. In the absence of such accounting all input VAT mentioned above will be non-recoverable and non-deductible for CPT purposes.


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Example 4 AO Eltron produces VATable and VAT exempt goods. Eltron started its operations in January 2013. In January it purchased 1,180,000 RR worth of materials (including 180,000 VAT). All materials were paid and consumed for production by 31 March. 10% of these materials were used for exempt operations. 5% were used for both VATable and exempt operations. 85% were used only for VATable operations. Wages and salaries for the 1st quarter totalled 755,000 RR; related SIC was 195,000 RR. 2% of wages and salaries accrued related to exempt operations; 8% – to both VATable and exempt operations; 90% – only to VATable operations. Sales for the 1st quarter totalled 3 million RR (net of VAT) of which 200,000 RR were sales of VAT exempt goods. Required: Calculate the amount of VAT available for recovery and the VAT to be added to the cost of materials for the 1st quarter of 2013. Solution Step 1:

Step 2:

Step 3:


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Step 4:


describe the scope of VAT;



identify the VAT rates applicable to different types of activities (detailed knowledge of the application of the 10% rate is not required);



explain the difference between zero rated and exempt items;



explain how the tax point is determined under the accruals method;



apply VAT exemptions to transactions which are not the object of taxation (art. 146);



compute the VAT on sales performed in a foreign currency;



explain the rules of non-recognition “sum” difference for VAT purposes for both the seller and the customer;



explain the general deduction criteria for input VAT;



explain and apply specific rules in respect to taxpayer’s right for early VAT recovery related to advances paid to suppliers;



state the major cases for the inclusion of input VAT in expenses;



explain the allocation principles for taxable and non-taxable activities;



compute the allocation of input VAT between taxable and non-taxable activities;



compute the claw-back of recovered VAT on property where it is subsequently used for non-VATable transactions; and



state the situations where VAT should be included in the cost of an asset.


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EXAMPLE SOLUTIONS Solution 1 (160,000 – 100,000) ×18/118 = 9,153 RR or using the standard method of VAT liability calculation: Output VAT (160,000 × 18/118) Input VAT (100,000 × 18/118)

24,407 (15,254) ______

VAT to be paid to the budget

9,153 ______

Solution 2 VAT liability of A: 10,000 × 18% = 1,800 RR VAT liability of B: 6,000 × 18% = 1,080 RR Solution 3 Due to the fluctuations of the CBR rate over the note term, the VATable amount is determined for two periods: RR 6 – 30 April (25 days): (1,000,000 × 25/365 × (18% – 15%)) 1 May – 19 September (142 days) (1,000,000 × 142/365 × (18% – 8%))

2,055 38,904 ______

Taxable base

40,959 ______

VAT (× 18/118%)

6,248 ______


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Solution 4 Step 1: Determine the proportion between sales of exempt goods (works, services) in the total sales of goods (works, services) shipped (rendered) in the reporting period. 200,000/3 million = 6.7% (rounded up) Step 2: Allocate resources used for both VATable and exempt operations based on proportion calculated in Step 1. Materials used for both VATable and exempt operations: (1,000,000 × 5%) Allocated to exempt activities: (50,000 × 6.7%)

RR 50,000 (3,350) ______

Allocated to VATable activities: (50,000 × 93.3%)

46,650 ______

Wages and salaries & SIC used for both VATable and exempt operations: (950,000 RR × 8%) Allocated to exempt activities: (76,000 × 6.7%) Allocated to VATable activities: (76,000 × 93.3%)

76,000 (5,092) ______ 70,908 ______

Step 3: Determine the proportion between cost of goods (works, services) used for exempt supplies and total production expenses for the period. RR Total costs: (1,000,000 + 755,000 + 195,000) 1,950,000 Materials used for exempt operations: (1,000,000 × 10%) + 3,350 103,350 Wages and SIC related to exempt operations: ((755,000 + 195,000) × 2%) + 5,092 24,092 ______ Total exempt operations

127,442 ______

Proportion (127,442/1,950,000)

6.5% ______

The ratio is more than 5%. Prorating of input VAT is therefore necessary. Step 4: Using the percentage found in Step 1 – determine input VAT available for recovery. VAT on materials to be expensed (i.e. added to the cost of materials): VAT incurred on materials used for both VATable and exempt goods (180,000 × 5%) VAT to be added to the cost of materials (9,000 × 6.7%) First quarter total ((180,000 × 10%) + 603)

603 RR 18,603 RR

VAT recoverable (180,000 – 18,603)


9,000 RR

161,397 RR

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VALUE ADDED TAX – SPECIAL CASES, PAYMENT AND REPORTING


To explain the computation of VAT liabilities in special cases.



To explain the procedures for VAT payment and reporting.

SPECIAL CASES

OTHER ACTIVITIES

EXPORT SALES      



VAT zero rate Output VAT Export confirmation package Confirmation deadline Timing of input VAT recovery Advances for future export

  

Sales of assets with capitalised VAT Factoring operations Commission income Self-supplied construction

VAT PAYMENT AND REPORTING      

VAT invoice (“schet-factura”) VAT journal Commission operations VAT declaration forms Due dates Recovery procedure


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1

EXPORT SALES

1.1

VAT zero rate (art. 164, 165, 167, 176)



Goods (works, services), that are subject to 0% VAT rate, include:





goods exported outside of the Russian Federation territory. (These goods must leave Russian Federation territory and a set of documents (prescribed by art. 165) presented to a tax inspectorate);



works (services) related to production and sales of exported goods, such as transportation and loading of exported goods. (A list of the works is given in art.164.)

Supplies of goods (works, services) to foreign diplomatic missions or their staff or family within the Russian Federation are similarly zero-rated, but apart from exports other items subject to zero-rated VAT are not examinable.

Key point

 0% rate VAT sets its own rules for output and input VAT recognition which are quite different from general VAT rules: 

no output VAT can be recognised on exported goods until export is confirmed or unconfirmed;



no input VAT related to exported goods can be recovered until export is confirmed or unconfirmed.

1.2

Output VAT



Recognition of output VAT on export occurs neither on the shipment date nor on the payment date. In fact, there is a special set of VAT rules applicable to export only.



The sales of exported goods (works, services) subject to zero rate are recognised as having occurred on:  



the last day of the quarter in which the full package of the documents proving export was collected (“confirmed export”); the shipment date if the full package of documents was not collected within 181 days from the date of shipment (“unconfirmed export”).

This means that: 

an export is confirmed and subject to zero-rate VAT (i.e. output VAT equals zero) on the last day of the quarter, in which the full package of the documents proving export was collected. However this must happen within 180 days starting from the export day;



an export is not confirmed if no documents are submitted by the 181st day starting the export date. Export is unconfirmed on the 181st day. VAT must be assessed on unconfirmed export at 18% rate. Note, that taxable base is determined not on the 181st day but retrospectively using the exchange rate on the export date. The standard declaration for the quarter of delivery is amended and re-submitted.


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Illustration 1 A Russian company exports wood abroad. Shipment of wood took place on 3 March 2013 (export date). Shipment value is 220,000 USD. Exchange rates (notional) 3 March –30.3; 30 June – 31.0, 30 August –31.3 Option 1: Export confirmation package was submitted on 6 June 2013. Export is regarded as confirmed on 30 June – the last day of the quarter, in which the full package of the documents proving export was collected. VAT base: 220,000 × 31 RR = 6,820,000 Output VAT at zero rate: 6,820,000 × 0% = 0 Option 2: Export confirmation package was not submitted in 2013 On the 181st day starting from the export day (i.e. on August 30) export is regarded as unconfirmed. Standard VAT declaration for 1st quarter is amended and re-submitted. VAT base: 220,000 × 30.3 (the exchange rate on the export date) = 6,666,000 VAT at 18/118%: 1,016,847 RR Example 1 Company Intrade exported some goods on 1 March. Required: State when the VAT liability is recognised assuming that the package of export confirmation documents was collected on: (a) (b)

20 November; 10 June.

1.3

Export confirmation package (art. 165)



In order to enjoy the VAT zero rate, a number of documents confirming exports must be presented to the tax authorities, along with the relevant zero rate declaration.



For goods exported outside of the Russian Federation territory directly by the taxpayer, the following documents are required for export confirmation: 

the contract (or its copy) with a foreign entity for export of goods from the Russian Federation territory;



the customs declaration (or its copy) with the stamps of customs authorities;



copies of transport and/or other documents proving that goods crossed the border of the Russian Federation territory.


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

For goods exported outside of the Russian Federation territory through a commissioner (agent) the export confirmation package will also contain the commission (agency) agreement (or its copy).

1.4

Confirmation deadline (art. 165)

1.4.1

Summary so far



Export confirmation documents are to be presented to the tax inspectorate within 180 days starting the day of customs clearance of the exported goods. If this condition is met than export will be considered as confirmed and subject to 0% VAT rate.



The VAT base of a confirmed export is determined using the exchange rate on the last day of the quarter in which the complete package of documents proving the export has been collected is presented to tax authorities (art. 167.9).



If no confirming documents are presented during this time, on 181st day after export date export will be recognised as unconfirmed, which will “trigger” a VAT liability either at 18% or 10% rate, depending on the type of goods.



The VAT base of an unconfirmed export is calculated using the exchange rate on the export date (art. 167.9). The Tax Code also provides for revaluation of the unconfirmed export on the payment date (art. 153.3). However this adds to the complexity of the calculations and is not examinable.

1.4.2

Additional points



Late interest is calculated at 1/300 of CB refinancing rate on VAT payable as a result of the unconfirmed export. Late interest penalty begins on the day following the statutory deadline for VAT payment (see Illustration 2). Any changes in the CB refinancing rate are taken into consideration.



Even if no confirmation package is presented within 180 days starting the export day (and export was classified as unconfirmed) it is still possible to confirm it later (i.e. to present the confirmation package later). In this case, export will be treated as unconfirmed first and then as confirmed (see Illustration 2).



If both 181st day and package submission day occurs in the same tax period (quarter) for exam purposes export is regarded as confirmed in this quarter. For example, export took place on 5 January 2013. The confirmation package is presented on 20 July 2013 (i.e. after the 181st day (4 July) but in the same month). Overall result: export is regarded as confirmed in the 3rd quarter 2013.



Input VAT related to exported goods cannot be recovered until export is confirmed or unconfirmed. Input VAT becomes available for recovery at the same tax period when output VAT on confirmed/unconfirmed export is recognised.


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Illustration 2 A Russian company exports wood to Spain under a direct contract with a Spanish company. Shipment of wood took place on 3 March 2013 (export date). Input VAT incurred in relation to this shipment was 703,033 RR. The price of the shipment was 220,000 USD; revenue was received on 5 May 2013. Foreign exchange rates (notional) 3 March –30.3; 5 May –30.8; 30 June – 31; 29 August –31.2; 30 August –31.3; 31 August –31.4; 10 October – 32.1; 31 December – 32.3 Option 1: Export confirmation package was submitted on 6 June 2013. Because the package was submitted within 180 days starting from the export date, the export will be considered as confirmed. 0% rate applies to VAT base of 220,000 × 31 (rate as at the last day of June, when the export confirmation package was submitted). Input VAT of 703,033 RR becomes recoverable in 2nd quarter. (Actual VAT refund will be postponed until the tax authorities complete the verification of export documents.) Option 2: Export confirmation package was submitted on 10 October 2013. 3rd quarter (export is recognised as unconfirmed) On 30 August (181st day starting from the export date) export will be recognised as unconfirmed. VAT taxable base will be calculated using the exchange rate on export date (i.e. on 3 March 2013). Standard VAT declaration for 1st quarter is amended and resubmitted. Output VAT on unconfirmed export: (220,000 × 30.3) × 18/118% = 1,016,847 RR Input VAT of 703,033 RR relating to unconfirmed export is available for refund. Late interest penalty of 1/300 CB rate applies to 313,814 RR (1,016,847 – 703,033) starting 21 April (the day after payment day for 1st quarter VAT) and up to the day of VAT payment or subsequent export confirmation in following order: 21 April – 20 May: 104,605 RR (313,814× 1/3) 21 May – 20 June: 209,209 RR (313,814× 2/3) 21 June – the day of actual VAT payment: on the full amount 313,814 RR. 4th quarter 2013 (export is recognised as confirmed) On 31 December (the last day of the quarter in which the full package of documents confirming export is submitted to a tax inspectorate) export will be confirmed for VAT purposes. 0% rate applies to VAT base of 220,000 × 32.3 (rate on 31 December). VAT recognised on unconfirmed export in August (1,016,847 RR) becomes available for recovery. (Actual recovery will be postponed until the tax authorities complete the verification of export documents.) There is no refund of late interest penalty paid or cancellation of late interest penalty accrued.


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1.5

Timing of input VAT recovery (art. 176)



The decision on the refund of input VAT (including VAT relating to zero-rated sales as well as VAT paid in relation to exports) must be made by the tax authorities no later than three months after the date the standard VAT declaration and documents, confirming export, were filed and submitted to the tax authority. All VAT declarations showing a refund from budget must therefore be checked by the tax authority.



Taxpayer can obtain a refund of input VAT before the tax authority check in the following cases (“declarative procedure” of VAT recovery): –

Taxpayer submits bank guarantee together with VAT tax declaration. The bank guarantee should be issued by a bank included in the list of banks meeting official standards;

–

Where the total amount of taxes paid to the budget by the company for the previous three years is 10 billion RR or more. The company must have been operating for at least three years.

Illustration 3 A Russian company exports wood abroad. Shipment of wood took place on 3 March 2013 (export date). Shipment value is 220,000 USD. Input VAT related to export is 703,033 RR (all paid in February 2013). Exchange rates (notional): 3 March –30.3; 30 June – 31, 30 August –31.3 Option 1: Export confirmation package was submitted on 6 June 2013. Export is confirmed on 30 June (the last day of the quarter in which the full package of the documents proving export was collected). VAT base: 220,000 × 31 RR = 6,820,000 Output VAT at zero rate (6,820,000 × 0%) 0 Input VAT available for recovery: (703,033) Net result: VAT for recovery (703,033) This is shown in the standard VAT declaration. Input VAT is not immediately available for recovery (there are 3 months for verification of this amount by the tax authorities). Option 2: Export confirmation package was not submitted in 2013 On 181st day from the export day (i.e. 30 August) export is regarded as unconfirmed. VAT base: 220,000 × 30.3 (the exchange rate on the export date) = 6,666,000 Output VAT at 18/118%: Input VAT available for recovery:

1,016,847 (703,033) ________

Net result: VAT payable

313,814 ________

Amounts of 1,016,847 and (703,033) are shown in amended standard declaration for 1st quarter of 2013. The net amount of 313,814 is shown as an additional VAT liability in the amended standard VAT declaration for 1st quarter 2013. Late interest penalty is calculated starting 21 April.


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1.6

Advances for future export



Advances received for goods to be exported are not subject to VAT as other advances.

Example 2 A Russian company exports wood to Spain under a direct contract with a Spanish company. On 26 December 2012 the Spanish company has made a 100,000 USD prepayment for a shipment of wood, which actually took place on 3 February 2013. The price of the shipment was 160,000 USD and the remaining amount of 60,000 USD was received on 5 May 2013. The Russian company has submitted a package of documents, confirming export, on 10 October 2013. Input VAT incurred in relation to this shipment is 520,000 RR (paid in January 2013). Required: (a)

Calculate the VAT liability (recoverable VAT), assuming the following notional USD/RR exchange rates: 26 December 2012 3 February 1 August 3 August 31 December

30.1 30.3 31.2 31.4 32.3

31 January 5 May 2 August 10 September

30.2 30.8 31.3 32.1

Do not recalculate VAT on the unconfirmed export using the exchange rate on payment day. (b)

Explain what amounts will be shown in VAT declarations and when.

Solution


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2

OTHER ACTIVITIES

2.1

Sales of assets with capitalised VAT (art. 154)



Special rules apply to VAT calculation on disposal of property with “capitalised” VAT (i.e. VAT incurred on this property purchase was added to its cost).



The VAT base is the sales margin, or the difference between the selling price (net of sales tax) and the net book value (NBV) of the property, which is calculated in accordance with financial accounting rules (item 3, art. 154).



VAT is calculated based on “raschetniye stavki” of 18/118 (or 10/110).

Illustration 4 In 2011 Company ABC purchased a fixed asset for 120,000 RR (including VAT). The asset was used for production of VAT exempt goods and all VAT on purchase was added to fixed asset cost. In 2013 ABC decided to sell this asset for 80,000 RR gross (i.e. including VAT). Accumulated tax depreciation was 45,000 RR; accumulated accounting depreciation was 55,000 RR. VAT on sale is calculated on the margin between sales price and accounting NBV: Sales price Accounting NBV (120,000 – 55,000)

80,000 (65,000) ______

Margin

15,000 ______

VAT at 18/118

2,288

Note that ABC has to pay VAT on the fixed asset sale even if the main sales of the company are VAT exempt, because these are two different VAT objects. Note also the CPT gain calculation: Sales price VAT Tax NBV (120,000 – 45,000)

80,000 (2,288) (75,000) ______

Gain for CPT purposes

2,712 ______

Commentary The treatment of gains and losses on assets disposals for CPT purposes is explained in Session 4.


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2.2

Factoring operations (art. 155)



As all companies use accruals method for VAT purposes, there is no VAT liability upon debt factoring as the tax was already calculated and paid at the time of sale.



For the new creditor (factor) the VATable base is determined as the difference between the amount received from the debtor and the amount paid to the seller (initial creditor).

Example 3 In May 2013 AO Lidia made a 23,600 RR shipment to a customer (including VAT of 3,600 RR). No payment was received for this shipment and in August 2013 Lidia sold this receivable to AO Elf for 12,000 RR. Elf paid Lidia in October 2013. In November 2013 Elf managed to collect 15,000 RR from the customer. Required: (a)

Calculate the amount of VAT liability of AO Lidia and state the realisation date for VAT purposes.

(b)

Calculate the amount of VAT liability of AO Elf and state the realisation date for VAT purposes.

Solution (a)

AO Lidia

(b)

AO Elf

2.3

Commission income (art. 156)



Companies often use agents to sell their goods (works, services) or to buy goods. The agent may act under a disclosed commission agreement or under an undisclosed commission agreement. In both cases, VAT is payable by the agent on the commission income only.



If an agent sells goods, that are VAT exempt, it is still liable to VAT on its commission with certain exceptions, which are not examinable.



The owner of the goods is liable to VAT on the full amount of sale. Input VAT on agent’s commission is generally available for recovery.


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Illustration 5 Company A (principal) sells its goods under a commission agreement with Company B (agent). On 21 March A delivered 540,000 RR worth of goods (including VAT) to the agent. B shipped the goods to a final customer and sent the proper report to A on 15 April. The customer paid 540,000 RR to the B on 17 May. B withheld 60,000 RR of its commission and paid the remaining part to A on 20 May. B issued a respective VAT invoice to A on 25 May. Output VAT of 82,373 is recognised in April (when the sale took place). In May A will recognise input VAT on A’s commission (9,153 RR). Company B will recognise VAT liability on its commission income only (9,153 RR) in May. 2.4

Self-supplied construction works (art. 159)



VAT is assessed on self-supplied construction services (art. 146). The VAT tax base is the amount of all costs related to the construction as per financial accounting data.



Self-supplied output VAT is assessed on costs incurred each quarter. It is available for recovery at the moment of the VAT charge (i.e. on the last date of each tax period) under the following conditions: (a) (b)



constructed property is planned to be used for VATable activities; cost of construction is deductable for CPT purposes (via depreciation).

Input VAT on materials and construction services from third parties is recovered under general rules (i.e. services must be received and documents in place).

Example 4 In December 2012 Mosstroi started to build a new warehouse for its own production use. The total cost of construction was comprised of the following (in million RR): Costs of December 2012: Materials Wages and salaries Construction services from subcontractors

23.6 (including VAT) 12 14.16 (including VAT)

Costs of 2013 (incurred evenly during January – June): Materials Wages and salaries Construction services from subcontractors

118 (including VAT) 40 236 (including VAT)

The construction of the building was completed in June. The documents were submitted for registration of the title of ownership in September 2013. The registration of the building (certificate of ownership) was received in October 2013. The building was intended for usage for operations subject to 18% VAT. SIC was payable at 30% on construction wages and salaries. Required: Calculate VAT arising on self-supplied construction. State the amounts and timing of their recognition separately for output and input VAT on 2012 and 2013 costs.


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Solution VAT in the 4th quarter 2012

mln RR

Self-supplied output VAT Input VAT on materials Input VAT on construction services Recovery of self-supplied VAT ____ VAT payable/(recoverable) ____ VAT in 1st quarter of 2013

mln RR

Self-supplied output VAT Input VAT on materials Input VAT on construction services Recovery of self-supplied VAT ____ VAT payable/(recoverable) ____ VAT in 2nd quarter of 2013

mln RR

VAT payable/(recoverable)

____

3

VAT PAYMENT AND REPORTING

3.1

VAT invoice (“schet-factura”) (art. 169)



VAT invoice is a document for VAT accounting which is required to offset input VAT



VAT invoices are issued within five days after the date of goods shipment (provision of works, services) in electronic or hard copies.



VAT invoices can be issued in electronic form by mutual consent of the parties having all required compatible technical assets and resources for admitting and processing such VAT invoices. Electronic VAT invoices need to include:  

all the details required an a paper invoice: and an electronic digital signature of an authorised representative of the company.



A VAT invoice is required, even if the sale of goods (works, services) is VAT exempt (under art. 149). In such a VAT invoice, it is written “without VAT”.



VAT invoices are not prepared in relation to transactions with securities (with the exception of brokerage and intermediary services) and by banks, insurance companies and non-state pension funds in relation to VAT-free sales.



No VAT invoices are required in retail trade with physical persons and for businesses providing services directly to physical persons. (The term “physical persons” does not include individual entrepreneurs).


0911

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

The Tax Code provides for the following detailed contents on a VAT invoice (art. 169):       

date and number of invoice; TIN (tax id number), name and address of the parties; names and quantities of goods (services) in question; currency; price of goods (services); VAT rate and amount; Country of origin and Custom Declaration number (for imported goods).

VAT invoices issued for advanced payments should additionally contain the number of the payment document. 



Amendments to the transaction which increase or decrease the value of the supply require an amended (“corrective”) VAT invoice to be issued: 

details of items to be included in the invoice are specified by the Tax Code and follow those for the original invoice;



where the amendment relates to an increased value of supply (and therefore additional output VAT payable by the supplier) it is treated as being in the original period of supply, and therefore an amended VAT return should be submitted;



where the amendment reduces the value of supply, the adjustment is instead made in the current VAT reporting period;



changes to the VAT input recovery by the purchaser are made in the same period as the output amendments.

VAT invoices are recorded in the following registers:   



journal of VAT invoices received and issued; sales ledger (“kniga prodazh”); purchase ledger (“kniga pokupok”).

VAT invoices are not registered in the purchases book, if received:  

in relation to gratuitous transfers; or by a commissioner (attorney) from its principal in relation to goods transferred for sale (see next section).

3.2

VAT journal



The VAT journal is essentially a log book in strict sequence of received and issued invoices (including those relating to exempt supplies). Keeping such a journal is a statutory requirement and subject to government regulation; it is expected that changes to these regulations will shortly be introduced following the acceptance of electronic invoicing.



The journal is a prime source supporting the VAT return and would not normally be part of the double entry accounting system of the business.


0912

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3.3

Commission operations

3.3.1

Commissioner (agent)



An agent issues a VAT invoice showing the price of the goods (work, services) plus VAT, in its own name. Two copies are issued (based on the chronological numbering sequence for VAT invoices of the agent rather than the principal):  

one copy is issued to the buyer; the second copy is attached to the ledger of issued VAT invoices, BUT is not registered in the sales book.



The agent issues a separate VAT invoice addressed to the principal for its sales commission. This invoice is registered in the sales book. One copy is given to the principal; the other is retained by the commissioner.



The agent does not register the VAT invoice received from the principal for the cost of the goods (work, services) in its purchases book.

3.3.2

Principal



The principal issues two copies of a VAT invoice (one for itself and one for the agent) including all the details included by the agent in the agent’s VAT invoice issued to the buyer. This invoice is registered in the sales book. The VAT invoice is numbered in the chronological numbering sequence of the principal.



The principal registers the VAT invoice received from the agent for its commission in its purchases book.

Example 5 ZAO Prodinvest sells its goods under a commission agreement with ZAO Lanstore. In January Prodinvest delivered 360,000 RR worth of goods to Lanstore who sold them to a customer in March 2013. The customer paid 360,000 RR to Lanstore in May 2013. Lanstore withheld 44,000 RR of its commission and paid the remaining amount to Prodinvest in July 2013. Lanstore submitted the report about the sale in March 2013 and issued a VAT invoice to Prodinvest dated 31 March on 3 April 2013. Required: (a)

Calculate the VAT liability of ZAO Prodivest and state the timing of VAT liability recognition.

(b)

Explain VAT invoicing procedures for ZAO Lanstore.

Solution (a)

(b)


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3.4

VAT declaration forms



Since 1 January 2007 there has been just one type of VAT declaration – the standard declaration to be filed by all taxpayers.



VAT adjustments introduced by the taxpayer prior to an audit by the tax authorities with respect to the VAT amounts charged must be disclosed in a separate (amended) VAT declaration for the relevant tax period.



Organisations maintaining separate subdivisions are required to file a copy of the VAT return prepared by the head office

3.5

Due dates for payments and declaration submission (art. 174)



The VAT declaration is submitted quarterly not later than 20th day of the month following the current tax period.



Tax is due in three equal parts not later than 20th day of each of the three months following the current tax period.

3.6

VAT recovery procedure (art. 176)



If input VAT exceeds output VAT, the excess amount can be recovered either:  

by offset against current tax obligations; or by refund to the taxpayer after obligatory cameral tax inspection.



The excess amount is first applied to offset against any outstanding tax liability (including customs duties), late tax interest and assessed tax penalties payable to the same budget. The tax inspectorate makes such offset without the taxpayer’s involvement. The time period for the offset is three calendar months following the reporting period. If all or a portion of the excess amount is not utilised within three calendar months, it must be refunded to the taxpayer upon his written request.



For very large companies which have operated for at least three years and who submit an appropriate bank guarantee, the declarative procedure of VAT recovery can be applied (see section 1.5).



Where the deadline for refund is missed, daily interest at the CBR rate is accrued on the amount.


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Example 6 ZAO Univers has exported some goods to the UK. Export confirmation package were submitted to the tax inspectorate on 6 July 2013. The amount of VAT for recovery, shown in the declaration, was 120,000 RR. Assume that tax inspectorate has the following records of Univers: Total due from Univers as at 20 July 2013 – 99,000 RR: – – – –

taxes due – 32,000 RR; late interest due – 3,000 RR; penalties assessed and confirmed by the court – 8,000 RR; penalties assessed (still under court consideration) – 56,000 RR.

Required: (a)

Calculate the amounts available for the offset and refund based on the above information. Ignore allocation of tax amounts between different budgets.

(b)

Explain the recovery procedure.

Solution (a)

(b)


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compute the VAT on: – – – –

trade debt factoring for both parties; a fixed asset disposal, including assets accounted for at VAT-inclusive amount; a self-supplied construction; sales made through commissioners for both the principal and the commissioner;



explain the timing and methods of recovery of input VAT;



explain the main requirements for declarative procedure of VAT recovery;



explain and apply the specific rules for VAT recovery relating to capital construction and selfsupplied construction;



prepare a basic VAT computation showing separately all elements of input and output VAT;



explain and apply the specific rules for VAT recovery related to zero rate supplies (export);



explain the usage of VAT invoices and journals;



list the information that must be given on both VAT invoice and amended VAT invoice;



state the deadlines for the filing of returns and making of VAT payments;



explain the procedure for VAT refunds (including the refund of VAT on exports);



state the set of documents for confirmation of export in a basic situation;



state the requirements for electronic VAT invoice for VAT recovery;



explain the consequences of a non-confirmed export and compute the related VAT;



compute the claw-back of recovered VAT in case of using goods (services, property rights), including fixed assets and intangible assets for transactions subject to 0% VAT (art. 164); and



explain the application of VAT rules and amended VAT invoices in the case of price change or quantity changes for goods (services, property rights) after shipment.


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EXAMPLE SOLUTIONS Solution 1 (a)

Collected 20 November

1 March is the export date. The export sale will be recognised as unconfirmed on 28 August, which is 181st day later. VAT declaration for the 1st quarter should be amended and re-submitted to tax authorities in August. VAT taxable base will be calculated using the exchange rate on 1 March. In the 4th quarter the export will be confirmed and export confirmation date will be 31 December (the last day of the quarter for the tax period when confirmation package and VAT declaration will be submitted). (b)

Collected 10 June

30 June, which is the last day of the quarter in which export package was presented to the tax authorities. Solution 2 December 2012 – Advance payment is not subject to VAT. February 2013– No VAT consequences arise on 3 February as the goods are shipped for export and accruals method does not apply. May 2013 – No VAT consequences arise on 5 May because the payment relates to export. August 2013 On 2 August (i.e. on 181st day starting from the export date) export will be recognised as unconfirmed. VAT taxable base will be calculated using the exchange rate on the export date (i.e. on 3 February 2013). Output VAT on the unconfirmed export is calculated as: (160,000 × 30.3) × 18/118% = 739,525 RR This amount is shown in amended VAT declaration for 1st quarter 2013. Input VAT of 520,000 RR will decrease the VAT payable to the budget: Output VAT on unconfirmed export Less: Input VAT

739,525 (520,000) _______

VAT payable

219,525 _______

December 2013 On 31 December (the last day of the quarter in which the full package of documents confirming export is submitted to a tax inspectorate) export will be confirmed for VAT purposes: VAT base: 160,000 × 32.3 = 5,168,000 RR This amount is shown in a standard VAT declaration as:


0917

5,168,000 (VAT base) × 0% = 0.

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VAT amounts previously recognised on unconfirmed export in August will again be shown in standard VAT declaration for 4th quarter 2013. VAT on unconfirmed export available for recovery

(739,525 RR).

The decision on the refund of this input VAT should be made no later than 3 months after the date the VAT declaration and documents, confirming export, were filed. Overall result for the year: 219,525 VAT payable (739,525) VAT recoverable ________

1st quarter 4th quarter

(520,000) total VAT recoverable Solution 3 (a)

AO Lidia Lidia will recognise 3,600 RR of VAT in 2nd quarter 2013. The amount of actual payment received from Elf does not have any impact on VAT recognised.

(b)

AO Elf Elf will recognise VAT on the difference between the amount received from customer (15,000 RR) and the amount paid to Lidia (12,000 RR). The tax will be calculated in 4th quarter 2013 as 18/118 of 3,000 RR (458 RR).

Solution 4 Costs of 2012 Output VAT is assessed on costs incurred in 2012 each quarter. It is available for recovery in the same period when it is charged. In this case it will be charged in December 2012 and could be recovered in the 4th quarter 2012. Input VAT on materials and construction services from third parties is recovered under general rules. VAT in the 4th quarter 2012

mln RR

Self-supplied output VAT (W1) Input VAT on materials (23.6 × 18/118) Input VAT on construction services (14.16 × 18/118) Recovery of self-supplied VAT

8.57 (3.6) (2.16) (8.57) ____

VAT recoverable

(5.76) ____


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Costs of 2013 The dates of registration of the building do not influence VAT rules. Costs are split equally for two tax periods. VAT in 1st quarter of 2013

mln RR

Self-supplied output VAT (W2) Input VAT on materials Input VAT on construction services Recovery of self-supplied VAT

31.68 (9.0) (18.0) (31.68) _____

VAT recoverable

(27.00) _____

VAT in the 2nd quarter of 2013

mln RR

st

VAT recoverable (as for 1 quarter)

(27.0) _____

WORKINGS (1)

Output VAT 4th Quarter

Materials net of VAT (23.6 × 110/118) Labour Social insurance contributions (30% × 12) Services net of VAT (14.16 × 110/118)

20 12 3.6 12 _____

Total cost

47.6 _____

Self-supplied VAT assessed on total cost at 18% (2)

8.57

Output VAT (1st and 2nd Quarters)

Materials net of VAT (118/2 × 110/118) Labour Social insurance contributions (30% × 20) Services net of VAT (236/2 × 18/118)

50 20 6 100 ____

Total cost

176 ____

Self-supplied VAT assessed on total cost at 18%

31.68

Tutorial note: Social insurance contributions (SICs) are covered in Session 10.


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Solution 5 (a)

Prodinvest will recognise output VAT of 54,915 RR (360,000 × 18/118) in the 1st quarter of 2013 according to report submitted by Lanstore, regardless of the period when the amount is paid to the commissioner. Input VAT on commission service 6,712 RR (44,000 × 18/118) will be available for recovery in the 1st quarter also upon the receipt of the VAT invoice from Lanstore.

(b)

Lanstore should not register in its purchases book the VAT invoice received from Prodinvest for commissioned goods. Lanstore should issue VAT invoice on goods sold to the customer. Two copies should be issued: one copy should be given to the customer; the second copy should be attached to the register of issued VAT invoices, but should not be registered in the sales book of Lanstore; Lanstore should issue a separate VAT invoice addressed to Prodinvest for the amount of commission. This invoice should be registered in the sales book of Lanstore.

Solution 6 (a)

Amount available for offset is 32,000 + 3,000 + 8,000 = 43,000 RR Penalties assessed and not yet confirmed by the court (56,000 RR) are not available for offset. The remaining portion of 77,000 RR (120,000 – 43,000) is available for recovery.

(b)

The amount of 120,000 RR is first of all applied for payment of any outstanding tax liability (including customs duties), late tax interest and assessed tax penalties to the same budget. Penalties assessed but not yet confirmed by the court are not counted for the above-mentioned purposes (i.e. the amount for offset is 32,000 + 3,000 + 8,000 = 43,000). The tax inspectorate makes the above-mentioned offset without the taxpayer’s involvement. The time period for offset is three calendar months following the submission of VAT declaration and documents confirming export. If all or a portion of the excess amount is not utilised within three calendar months it can be carried forward and utilised in the future or can be refunded to the taxpayer upon its written request. Where the deadlines for the refund are missed interest at the CBR rate is accrued on the amount.


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OVERVIEW Objective 

To explain the calculation of social insurance contributions payable by employers and individual entrepreneurs.


SIC BASE FOR EMPLOYERS

 

      

ADMINISTRATION FOR EMPLOYERS   

Scope SIC payers

SIC object SIC base SIC calculation period and reporting period SIC rates Exempt items Calculation Copyright agreements

INDIVIDUAL ENTREPRENEURS  

Reporting rules Payment rules Specific reporting and payment rules for branches

Calculation of SIC Payment and reporting rules

SIC OFFICIAL AUDIT 

Types of audit


1001

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1


1.1

Scope



All references to articles given in this Session relate to the Federal Law # 212-FZ which introduced SICs.



Since 1 January 2010 SICs have replaced unified social tax (UST).



SICs are not taxes; they are compulsory payments for obligatory social insurance, including: 

pension insurance to the RF Pension Fund;



social insurance to the RF Social Insurance Fund;



medical insurance to the Federal and territorial Obligatory Medical Insurance Funds.



IMPORTANT! Although the law provides for separate contribution to different funds, only “lump-sum” amounts will be considered in the examination (i.e. combined SIC rates only).



SICs are estimated based on wages and salaries and on some other payments to individuals. Thus, it is an additional financial burden for employers unlike the personal income tax (PIT), which is taken out of employees’ salaries.

Illustration 1 Irina’s annual salary equals 100,000 RR. PIT rate is 13%; SIC rate for employers is 30%. SICs equal 100,000 × 30% = 30,000 RR This amount is paid by the company-employer to the related funds. The company withholds 13% of PIT and also pays it to budget. Irina gets in cash 87,000 RR net of PIT. The company’s total expense is 130,000 RR (100,000 RR of gross salary + 30,000 SIC assessed on the salary). 1.2

SIC payers (art. 5)



There are two principal groups of SIC payers:





employers, including organisations and individual entrepreneurs who pay SICs in respect of private persons/employees; and



individual entrepreneurs (who do not pay to private persons/employees).

A SIC payer, who simultaneously belongs to both groups mentioned above (e.g. an individual entrepreneur who employs workers) is liable to SICs on both on his own SIC liability and on the payments to persons he employs.


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2

SIC BASE FOR EMPLOYERS

2.1

SIC object (art.7)



The SIC object for organisations and individual entrepreneurs who pay to private persons/employees is payments according to:

  

labour agreements (“trudovyie dogovora”); and civil law agreements (“grazhdansko – pravoviye dogovora”) for rendering works, providing services; and copyright, licence agreements (see section 2.4).

2.2

SIC base (art.8)



The SIC base is the sum of all payments to the private persons/employees which are a SIC object reduced by exempt amounts.



SICs are estimated on the gross accrued amounts (i.e. on the amounts before PIT withholding).



The SIC base is calculated cumulatively for calculation period for each person separately. It is based on the total amount up to a maximum of 512,000 RR for each person for the calculation period.



Above 512,000 RR a lower rate (10%) is applied.

Illustration 2 Company AZ accrued salary for its employees (labour agreements) for June 2013: Name of employee Ivanov Petrov Sidorov

June Salary RR

Salary for January – June RR

PIT withheld January – June RR

50,000 100,000 120,000

350,000 600,000 720,000

45,500 78,000 93,600

Calculation of the SIC base for June 2013 is as follows: Employee Ivanov

SIC base (RR) ≤ 512,000 >512,000 50,000

Cumulative amount is less than 512,000 RR. 500,000 (600,000 – 100,000) – salary for the previous periods is less than limit.

Petrov 12,000 Sidorov

Total

Comments

(512,000 – 500,000) – SIC base for June. 88,000

(600,000 – 512,000)

0

120,000

Cumulative amount is more than 512,000 (720,000 – 120,000).

__________

__________

62,000

208,000

__________

__________

AZ should accrue and pay SICs for June totaling 39,400 RR (62,000 × 30%) + (208,000 × 10%).


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2.3

SIC calculation period and reporting period (art.10)



SIC calculation period is a calendar year, such that it is calculated on a cumulative basis starting at the beginning of the year.



SIC reporting period is each calendar quarter.

2.4

SIC rates (art.12)

The Federal Law establishes rates for each insurance category (though these are not examinable) and reduced rates for some SIC payers. The single threshold for SICs for the year 2013 is: SIC payers

Income amount for SIC calculation (RR)

Rate

For employers (general) and individual entrepreneurs

Up to 512,000

30 %

For employers (licence, copyright, civil contracts)

Up to 512,000

27.1%

Both categories

Excess over 512,000

2.5

10%

Exempt items (art. 9)

SICs are not applied to the following payments: 

Government support payments (“posobija”), including sick leave payments and payments in case of unemployment.



All kinds of compensations made under the Russian laws (Federal and regional) within the limits established by these laws, including: 

Payments relating to the dismissal of employees (excluding compensation for unused vacation);



Reimbursement of expenses relating to professional training, education and raising employees’ skills ;



Compensation by the organisation of expenses incurred by an employee in connection with the fulfilment of the civil law agreements (not labour) related to the organisation’s business.



Actual business travel expenses, confirmed with supporting documents, including per diem allowances (without limits), transportation costs, taxi to/from the airport/railway station, accommodation costs, etc. Accommodation costs are also exempt but only within the statutory limit in the absence of supporting documents.



Extraordinary support payments (“materialnaja pomosch”) paid by the SIC payers to:    

Any employee up to 4,000 RR for the calculation period (a year); Private persons in the event of acts of God (fire, flood, etc) in full amount; An employee in the case of the death of a relative in full amount; An employee in the case of child birth or adoption. The support payment is SIC exempt in amount up to 50,000 RR and must be made within one year from the child being born or adopted.


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

Medical and life insurance contributions made by an employer for the benefit of an employee in the following cases: 

insurance of employees as required by law; or



voluntary medical insurance according to the insurance agreements concluded for a period not less than one year;



life insurance (payments in case of death or health hazard).



Contributions which are made by a SIC payer under a “non-state pension agreement” (“negosudarstvennogo pensionnogo obespechenija”).



Additional pension payments made by the company to the “cumulative” part of an employee’s pension up to 12,000 RR per year per employee;



Cost of transportation expenses to the place of vacation and return for the persons working or living in the Far North regions of Russia (although significant in Russia the examiner has confirmed that this will not be specifically examined);



Payments for the main and additional professional training, including retraining.



Compensation to employees of interest paid on mortgage loans.



Payments according to the civil law in respect of contributions to the Social insurance Fund. (This is why the SICs rate is lower for employers who pay individuals under a civil contract (see 2.4 above).)

Illustration 3 Ruslan concluded a civil law agreement to render services to company LN for 200,000 RR gross. The agreement provides for the reimbursement of expenses connected with fulfilling the contract. On the day of signing the act of acceptance for the services Ruslan submitted supporting documents confirming his expenses of 20,000 RR. Ruslan’s SIC base is 200,000 RR; the expense reimbursement is exempt from SIC. Example 1 Irina, who works under an employment contract, received the following income and benefits in-kind from her employer in 2013: RR Salary 560,000 Performance bonus 200,000 Voluntary medical insurance contributions by employer (in the contract) 35,000 Travel allowance within the limit 30,000 Per-diem allowance exceeding statutory norms (for PIT) 68,000 Meal tickets for a free meal (provided in the contract) 8,000 Interest income imputed on a loan from employer 12,000 Voluntary pension insurance contributions by employer (in the contract) 10,000 Payment for study leave in respect of education in St. Petersburg 15,000 Reimbursement of professional education costs in university 7,000 Required: (a) (b)

Calculate the amount subject to SIC and the SIC thereon. For items which are not subject to SIC briefly explain the reason for exemption.


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(a)

Items subject to SIC RR

(b)

Items which are not subject to SIC

2.6

Calculation (art. 8)



As mentioned above for employers SIC is assessed on all payments and other remuneration accrued to employees within the limit, excluding SIC exempt amounts under the:

  

labour agreements; civil law agreements for rendering works, providing services; and copyright agreements.



All payments, including payments in-kind, are subject to SIC only if they are paid in accordance with the terms of agreement. For example, SIC is assessed on the cost of meals for employees only if they are provided according to the contract.



SIC is assessed on the gross amounts of the above-mentioned payments (i.e. on the amounts before PIT withholding).



For employers, the date of SIC charge is the date when income is accrued to employees.



SIC applies to both cash and in-kind payments.

2.6.1

Payments in-kind



The SIC base for payments in-kind is their value as stated by the contracting parties on the payment date (including VAT and excises, if applicable). Where there is public regulation of the price for the goods used as payment the SIC base is the public retail price.


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Illustration 4 In January a company accrued 10,000 RR as a salary for Vasily. In addition the company gave him as salary some goods valued at 20,000 RR. Also a TV set valued at 7,000 was given to him as a birthday gift (as provided for by his labour agreement). Vasily’s SIC base is 37,000 RR (10,000 in cash + 27,000 in-kind). 2.6.2

Discounts on products produced/sold by employer



Discounts on employer’s products available to employees are not subject to SIC as the SIC base is defined as “any payments (in cash or in-kind) in favour of an employee/family members” (art. 8) and does not refer to any benefits such as discounts. This differs from PIT rules under which such discounts are taxable.

2.7

Copyright, licence and civil law agreements (art.8 p.7)



Payments made under copyright or licence agreements are subject to SIC under the same rules which are used for PIT purposes.



The SIC base is the gross payment amount less allowable deduction, which is either:

 

actual expenses (with documentary proof); or a standard professional deduction as a percentage of income (20% – 40% depending on the subject of agreement).

Illustration 5 A painter Popov has concluded an agreement to produce five paintings for a new restaurant for 100,000 RR gross. Popov’s actual (and documentary proven) expenses on this engagement were 50,000 RR. Standard professional deduction for this type of activity is 40%. Amount subject to SIC can be calculated as follows: Option 1 (based on actual expenses) 100,000 – 50,000 = 50,000 RR Option 2 (based on professional deduction) 100,000 – (100,000 × 40%) = 60,000 RR. Option 2 is less beneficial than Option 1. 

These deductions are given to SIC payers at their written requests submitted to the organisation/individual entrepreneur who makes the payment under the agreement. In the absence of such requests SIC is assessed on the gross contract amount.



Note that payments made under civil law agreements, copyright and licence agreements are assessed at lower SIC rate.

Example 2 In 2013 Polina has concluded an agreement with a recording company for a CD recording. For this recording, she has received 156,600 RR net of personal income tax. The standard professional deduction on recording income is 20%. Required: Calculate the amount of SIC paid by the CD company on Polina’s income.


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Solution RR Gross income Less: PIT __________

Net income received __________

3

ADMINISTRATION FOR EMPLOYERS

3.1

Reporting rules (art. 15 p.9)



During the calculation (reporting) period SIC payers accrue SIC cumulatively on a monthly basis (e.g. at the end of March SICs are charged on the SIC base/payments to employers accrued in January, February and March with the deduction of SIC charged for January – February).



As SIC are not taxes but obligatory payments reports are called “calculations”.



SIC payers submit reports for each SIC separately on the quarterly basis: Social insurance type

Pension insurance

Deadline

Authority

1st day of the second month following the reporting period

Pension Fund RF (territorial authority)

15th day of the month following the reporting period

RF Social Insurance Fund

Medical insurance Social insurance

3.2

Payment rules (art. 15)



Employers are required to make monthly obligatory payments of SIC to each Fund separately based on the SIC base calculated from the beginning of the year and up to the last calendar month. Monthly payments are made not later than 15th of the month following the reporting month.

Illustration 6 A company had the following SIC liabilities (on a cumulative basis): January: 300,000 RR January – February: 650,000 RR January – March: 900,000 RR First obligatory payment of 300,000 RR must be made not later than on 15 February. Second advance payment of 350,000 RR (650,000 – 300,000) must be made not later than on 15 March. Third payment of 250,000 RR (900,000 – 650,000) must be made not later than on 15 April. The calculations (reports) are to be submitted not later than 15 April (social insurance) and not later than the 1 May (pension and medical insurance).


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3.3

Specific reporting and payment rules for branches



Sub-divisions located on RF territory, which have individual balances, bank accounts and accruing payments to the persons/employees pay SIC and submit corresponding reporting at the place of their location.



The SIC base is determined for each subdivision separately. The SICs payable at the location of the head office comprises the difference between the SICs due in relation to the whole company and SICs payable at the location of branches.

4

RULES FOR INDIVIDUAL ENTREPRENEURS

The following concerns individual entrepreneurs who do not pay employees or other private persons. (If they are employers the same rules apply as for companies.) 4.1

Calculation of SIC (art. 13 & 14)



SIC amount is defined based on the “insurance year value”.



Insurance year value is a product of minimal salary established at the beginning of the financial year and SIC rates multiplied by 12.



Individual entrepreneurs are not liable to pay contributions to the Social Insurance Fund, so they use the reduced SIC rate (27.1%).



Calculation of SIC of individual entrepreneurs who do not pay to other private persons is not examinable.

4.2

Payment and reporting rules (art. 16)



SIC liability commences on the date of individual entrepreneur activity outset (calendar month of entrepreneur statutory registration).



The SIC payments are calculated by individual entrepreneurs themselves.



SIC amounts are calculated and paid separately to each Fund not later than 31 December of the current calendar year.



Pension insurance and medical insurance contributions’ calculations (reports) are submitted to Pension Fund by the 1st March in the year following the reporting period.



Note that SIC accrued on salary of workers employed by entrepreneur is a tax-deductible cost for PIT purposes.

Illustration 7 Business income of Petr (who is registered as an individual entrepreneur) is 160,000 RR. For personal income tax purposes Petr uses professional business deduction of 20%. (160,000 RR × 20% = 32,000 RR) His income subject to PIT is 160,000 – 32,000 = 128,000 RR. His SIC base does not depend on the business income or deduction; it is the same for each individual entrepreneur who does not pay to employees or other private persons.


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Example 3 Renat is an individual entrepreneur. He does not keep track of his business expenses. His business income before standard professional deduction is 620,000 RR. Required: Explain when and where Renat should pay and report SIC.

5

SIC OFFICIAL AUDIT

5.1

Types of audit (Chapter 5 of 212-FZ)

In order to control the accuracy and completeness of SIC payment the control authority (territorial Pension and Social Insurance Funds together) can carry out an official audit. Two types of audits are provided by the Federal Law:  

cameral (in-house) SIC audit (also called “desk audit”); and field SIC audit.

5.2

Cameral audit (art.34)



This audit is conducted at the authority’s location and based on the SIC payer’s reporting (calculations), documents submitted by the SIC payer and other documents regarding the SIC payer’s activity.



If any calculation mistakes or discrepancies are found the SIC payer must submit necessary explanation and/or make essential corrections within five days of being requested to do so.

5.3

Field audit (art.35)



This audit is conducted at the SIC payer’s location under a decision made by the Head of the authority.



It cannot be conducted more often than once in three years (without subdivisions audits) and only for a period not exceeding three calendar year (prior to the calendar year of the decision being made).



It cannot last longer than two months.



A field audit of a sub-division which has individual balances, bank accounts and accrued payments to persons/employees cannot last longer than 1 month.



A field audit can be suspended under appointed reasons. The suspension period cannot exceed six months.


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5.4

Documents requirement (art.37)

The control authority can ask for necessary documents by serving a requirement for their delivery. Required documents are to be submitted in the form of authorised copy (not notarised) within 10 days from the requirement receipt. If necessary the control authority can inspect original documents. FOCUS You should now be able to: 

describe the scope of SIC;



recognise and apply the major types of income exempt from SIC (art. 9);



prepare a basic SIC computation in respect of employees under labour agreements, under civil law agreements and copyright agreements;



prepare a basic SIC computation for an individual entrepreneur;



explain how employers and individual entrepreneurs report and pay SIC;



state the limitations and conditions under which social funds audits can be carried out.


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EXAMPLE SOLUTIONS Solution 1 – SIC on income and payments in-kind (a)

Items subject to SIC RR 560,000 200,000 8,000 15,000

Salary Performance bonus Meal tickets for a free meal Study leave

__________

Total

783,000 __________

SIC thereon: On 512,000 × 30% On excess (783,000 – 512,000) × 10%

153,600 27,100 __________

180,700 __________

(b)

Items not subject to SIC Medical insurance (non-mandatory) contributions by employer Travel allowance up to the limit Per-diem allowance in excess of statutory norms Interest income imputed on a loan from employer Deductible pension insurance Professional education

35,000 (1) 30,000 (2) 68,000 (3) 12,000 (4) 10,000 (1) 7,000 (2)

(1)

Payments made under voluntary insurance agreements concluded for not less than one year and contributions under non-state pension agreements for not less than five years are specifically exempt from SIC.

(2)

Reimbursements of employees’ expenses within the norms are SIC exempt.

(3)

Per diem allowance is SIC exempt in full.

(4)

Imputed interest income is not subject to SIC.

Solution 2 – Professional deduction RR x (x – 0.2x) × 0.13

Let Polina’s gross income be Less: PIT

__________

Net income received

156,600 __________

Solving: x – (0.8x × 0.13) = 156,600 Gives: x = 174,777 RR Income subject to SIC = 174,777 RR less 20% professional deduction = 139,822 RR SIC is applied at reduced rates (there are no contributions to social security fund): SIC = 139,822 × 27.1% = 37,892 RR Solution 3 – Individual entrepreneur’s paying and reporting liability SIC amount does not depend on business income; it is calculated on the insurance year value. Renat should accrue and pay SIC by 31st December of the current year and submit obligatory pension insurance and medical insurance contributions reports (calculations) to the territorial body of RF Pension Fund by 1st March of the following year. ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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OVERVIEW Objectives tax 

To explain and compute the property tax liability of Russian legal entities.

OTHER TAXES

CORPORATE PROPERTY TAX      

Taxpayers Scope Average property value (art. 376) Tax and reporting period Calculation (art. 380, 382) Reporting and payment deadlines


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1


1.1

Taxpayers (art. 373)



Corporate property tax is payable by:

 

enterprises, organisations with legal entity status; foreign legal entities having property in Russia. (This is not examinable.)



Individual entrepreneurs and physical persons are not subject to corporate property tax.



If a legal entity has a branch (separate sub-division) with a separate balance sheet, it must pay property tax to the tax inspectorate of this branch. Tax is calculated by applying the rate, established at the branch location, to the average value of the property subject to property tax at the location of the branch (art. 384).



If a legal entity has an item of taxable property (immovable only) in a location other than the place of its tax registration (or branch registration), tax is paid at the rate established at that place (art. 385).

Illustration 1 “Sigma Ltd” is registered in Moscow. The company has a branch in St. Petersburg and owns a building in Samara. Sigma does not have any employees in Samara. Sigma pays property tax to the budgets of Moscow, St. Petersburg and Samara. The average value of property in all these locations is calculated. Tax is assessed at local rates.

Commentary Knowledge of entities which are relieved from property tax is not examinable. 1.2

Scope

1.2.1

Tax object (art. 374)



Tax object for property tax is movable and immovable property which is accounted for as a tangible fixed asset (except for land and other natural resources).

1.2.2

Tax base (art. 375)



Tax base is an annual average value of property which is a tax object. Annual average value is based on accounting net book value (NBV), i.e:

  

fixed assets (account “Fixed assets”); less depreciation (account “Accumulated depreciation”).

Accounting depreciation is used for property tax purposes. This means that no adjustment to depreciation recorded in the financial accounting books is necessary when calculating the taxable property amount.

Commentary Knowledge of property excluded from property tax is not examinable. ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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Example 1 Identify which of the following items of property will be subject to property tax:            

building; exclusive trademark licence; cash in bank; industrial plant and equipment; promissory note from customer (“veksel”); materials; work-in-progress; land; accounts receivable; prepaid expense; finished products; products shipped to customer (title has not passed yet).

1.3

Average property value (art. 376)



In order to calculate the property tax base, the average property value is determined by dividing the total amount (which is sum of the NBV as at the 1st date of each month of the reporting period and the 1st date of the month following the reporting period) by the number of months in the reporting period increased by one.

Average value in 1st quarter 

Sum of taxable property NBVs as at 1 January, 1 February, 1 March, 1 April divided by 4

Average value for the first half year 

Sum of taxable property NBVs as at 1 January, 1 February, 1 March, 1 April, 1 May, 1 June, 1 July divided by 7

Average value for the period January – September 

Sum of taxable property NBVs as at 1 January, 1 February, 1 March, 1 April, 1 May, 1 June, 1 July, 1 August, 1 September, 1 October divided by 10

Average value for the year 

Sum of taxable property NBVs as at 1 January, 1 February, 1 March, 1 April, 1 May, 1 June, 1 July, 1 August, 1 September, 1 October, 1 November, 1 December, 31 December divided by 13. For this calculation the last NBV is specified to be as at the last date of the tax period (art. 376).

1.4

Tax and reporting period



Tax period for corporate property tax is a calendar year.



Reporting period is the calendar quarter (3 months, 6 months, 9 months).


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1.5

Calculation (art. 380, 382)



The maximum property tax rate is 2.2%.



The legislative body of the region establishes a rate for a given region. Relevant rates will be provided in the examination.



Property tax is calculated each quarter. These amounts of tax are called “advance payments” while payment for the year is considered to be a “final payment”.

Reporting periods 

Advance payments for reporting period (3, 6 and 9 months) = Average property value for the reporting period × ¼ × tax rate

Final payment 

Final payment = (average property value for the year × tax rate) – advance payments



The tax is included in “other” (“prochie”) deductible expenses for the CPT purposes of the legal entity.

Illustration 2 The following data, in 000 RR has been extracted from the accounts of a company: Description / Date Fixed assets Intangible assets Materials Depreciation as per accounting books Depreciation as per tax books Amortisation as per accounting books Amortisation as per tax books

01.01 1,200 650 250 400 300 100 60

01.02 1,600 700 400 450 320 110 65

01.03 1,950 750 320 500 340 120 70

01.04 2,000 800 400 600 400 150 90

The property tax rate is 2.2%. In calculating average property value only the accounting book value of the fixed assets is relevant: ((1,200 + 1,600 + 1,950 + 2,000) – (400 + 450 + 500 + 600))/4 = 1,200 RR (000) Property tax for Quarter 1 = 1,200 × ¼ × 2.2% = 6.6 RR (000)


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Example 2 You have been provided with the following data extracted from ABC company’s accounts: In 000 RR Date: Fixed assets (01) Depreciation (02)

01.01 850,000 (350,000)

01.02 01.03 01.04 900,000 1,200,000 1,500,000 (400,000) (500,000) (750,000)

Required: (a)

Calculate the average property values for property tax purposes for the first quarter.

(b)

Calculate the property tax for this period assuming a rate of 2.2%.

Solution

1.6

Reporting (art. 386) and payment deadlines (art. 383)



Property tax returns are submitted according to the following deadlines:

  

for quarterly reports on advance payments of property tax –by the 30th of the month following the reporting period; annual report – by 30th March of the year following the tax period.

The regional authorities establish payment deadlines.


describe the scope of corporate property tax;



define the tax base in respect of both head office property and the property of separate subdivisions of Russian legal entities:



state the maximum tax rate and tax period;



describe the method of property valuation used to determine the corporate property tax base;



compute the corporate property tax base for both a head office and its separate sub-divisions;



state the deadlines for: – –

filing the annual tax return and advance tax calculations (art. 386); property tax payments and advance tax payments (art. 383).


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EXAMPLE SOLUTIONS Solution 1 Only the tangible property i.e. buildings (immovable) and plant and equipment (movable) is taxable. Land is exempt (non-depreciable). Solution 2 In 000 RR (a)

Average annual value for the first quarter

((850,000 – 350,000) + (900,000 – 400,000) + (1,200,000 – 500,000) + (1,500,000 – 750,000))/4 = (500,000 + 500,000 + 700,000 + 750,000)/4 = 2,450,000/4 = 612,500 (b)

Property tax for the first quarter

612,500 × 2.2% × ¼ = 3,369 RR (000)


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TAX ADMINISTRATION & CONTROL


To describe the procedures relating to tax audit, appeals and disputes.



To explain the sanctions for tax violations, tax penalties and interest on late tax payments.

TAXPAYERS AND TAX AGENTS Definition Registration of taxpayers Registration deadlines Penalties for late/nonregistration

   

TAX AUDITS


TAX PAYMENTS AND COLLECTIONS        

General Mandatory collection Execution of tax payments Late payment interest Suspending bank transactions Offset and refund of taxes Penalties for non-payment Tax penalties for noncompliance with transfer pricing rules

    

Tax control bodies Tax audits Confidentiality of information Presumption of innocence Penalties for non-compliance

TAX RETURNS    

General Amendments and additions Penalties for late/incorrect submission Violations in accounting rules


1201

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Right to appeal Lodging an appeal

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1

TAXPAYERS AND TAX AGENTS

1.1

Definition (art. 19, 24)



Taxpayer and contributions payer are companies and individuals obliged to pay taxes and contributions according to the RF Tax Code.



Tax agents are bodies obliged to calculate taxes, withhold them from taxpayer and pay them to the budget.



Tax agents have the same rights as tax payers.



Taxpayer is liable for calculation and is obliged to pay tax in correct amount, and make correct tax declarations if required.



Tax agents’ obligations are limited. They should calculate, withhold and pay tax (or inform the tax authority if this is impossible) and account for the operations and submit related documents. If an agent has not carried out its withholding duty, it is not obliged to pay the tax to the budget, but is liable to a fine of 20% of the tax.

1.2

Registration of taxpayers (art. 83, 84)



All Russian corporate taxpayers (companies and individuals) should register with a local state tax inspectorate. Upon the registration, each taxpayer is assigned a taxpayer identification number (TIN), which must be shown on every invoice and payment document of the taxpayer. A TIN is a tracking device, which allows the tax authorities to review the payment history and activity of the taxpayer.



Rules for foreign companies’ registration are not examinable.

1.3

Registration deadlines



Data on the registration of newly-established organisations, their official (i.e. as specified in the organisational charter) branches and representative offices and individual entrepreneurs is entered in the Unified State Register of Legal Entities.



Corporate taxpayers should register at the places where the organisation and its subdivisions are located. Individual entrepreneurs should register at their place of residence.



Registration at the location of taxable real estate property and transport vehicles is performed by the tax authority based on the information received from the authorities responsible for the official registration of the property.



Registration of a corporate taxpayer at the location of a subdivision which is not specified in the organisational charter is performed by the tax authority on application.



Deadlines for filing tax registration applications are as follows:

Location of tax registration body

Deadline for tax registration application

For a corporate taxpayer – at the place where its branches and subdivisions are located.

Within one month following the establishment of the branch (subdivision).

A corporate taxpayer should inform the tax authority at the place where its branches and subdivisions are located in the event of termination of their activities.

Within 3 days following the date of termination.


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

The tax body must perform the taxpayer’s registration within five days from the date of filing the required documents.



Individual entrepreneurs must notify the tax inspectorate of any change in the place of their residence within 10 days from the date of this change.

Illustration 1 A television company “TV10” located in Moscow has a reporter (employee) in Samara and a piece of equipment (transmittal station in St. Petersburg). The company must register with the tax authorities in Samara if the reporter has a permanent working place there for a period exceeding 30 days. No tax registration in St. Petersburg is required. 1.4

Penalties for late/non-registration (art. 116)



Penalties on taxpayers for failure to comply with registration requirements are as follows:

Failure of a taxpayer to meet the deadline for filing an application for registration with a tax authority. No business activity is conducted (art. 116 point 1).

A 10,000 RR fine.

Conducting business activities without tax registration (art. 116 point 2)

A fine of 10% of income earned during this period from the business activities, but not less than 40,000 RR.

Example 1 An individual entrepreneur has conducted trade activities without tax registration for 80 days. His gross income earned for that period was 50,000 RR. Required: Calculate the amount of tax penalty. 2

TAX AUDITS AND RELATED ISSUES

2.1

Tax control bodies and their powers (art. 30, 31)



The state tax service of the Russian Federation is comprised of the Federal Tax Service (FTS) with the headquarters located in Moscow, its regional departments and local (“territorial”) state tax inspectorates. This united centralised control system is the main executive body responsible for collecting taxes.



Tax officers (“state tax inspectors”) may: – – – – –

conduct on-site tax audits (see below); suspend bank account operations; seize property; charge interest for late payment (non-payment) of taxes; file claims with courts for imposition of tax penalties, annulment of licenses to perform licensed activities, liquidation of corporate taxpayers, etc.


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

The other major tax collector is the customs service headed by the State Customs Committee. Customs collects VAT paid on import/export duties, customs excises, customs clearance and other fees. The extra-budget Social Funds (Pension Fund, Social Insurance Fund, Federal and territorial Obligatory Medical Insurance funds) are in charge of collecting and spending obligatory contributions payable to them by both corporate and individual taxpayers in the form of the social insurance and pension contributions.

2.2

Tax audits (art. 87- 89, 100)

2.2.1

Types



There are two types of tax audits:



cameral (in-office) audit (“kameralnaja proverka”) which can be conducted within 3 months from the date of tax declaration submission (also called “desk” audit); and



field (on-site) audit (“viezdnaja proverka”) with access to taxpayers’ books and premises used for carrying out taxable activities. The audit can be conducted based on the decision of the tax authority’s director.



The details relating to each type of audit are not examinable. However you should be aware of the limitations imposed on tax audits by the Tax Code.

2.2.2

Limitations



Documents (or verified copies) which have already been submitted to the tax authority cannot be required again (except in case of acts of God).



A tax audit cannot cover more than the three calendar years prior to the year of the decision to undertake the audit.



A tax audit on the same tax for the same period can be conducted only once. This limitation does not apply if:



the taxpayer submits corrected tax declaration for the audited period showing a reduction in tax



the taxpayer undergoes a reorganisation or liquidation; or



a superior tax authority carries out a tax audit to control the tax body that performed the first tax audit.



A maximum of two on-site audits of one taxpayer (i.e. head office) can be conducted during one calendar year (this limitation does not relate to branches).



The timeframe during which a tax audit can be performed is usually limited to two months. However, it can be increased up to four months (six months in exceptional cases).



The tax audit can be suspended for carrying out additional procedures but not longer than 6 months in total.



If a taxpayer has branches (representative offices), the maximum common audit timeframe is one month for each branch (representative office). This term cannot be increased.


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2.2.3

Actions



Actions that may be undertaken by the tax authorities during tax audits:

       

witnesses may be summoned (the taxpayer’s auditor and legal adviser cannot be questioned as witnesses); tax officials should be given access to the relevant grounds or premises; inspections of premises, objects, etc may be held; provision of documents may be requested; documents and other objects may be seized; conclusions of experts may be sought; specialists may be recruited to perform part of the tax control actions; interpreters may be used.

Again the details will not be examined but a summary of possible actions may be called for. 2.2.4

“Spravka”



After the tax audit is completed, a special document called “spravka” is prepared. Within two months after the completion of the audit, the audit act is drawn up and presented to the taxpayer. The tax inspectorate will consider any objections that the taxpayer may have and will prepare a decision on the audit. A payment request (“platezhnoie trebovanie”) is sent to a taxpayer. The whole process is summarised in the table below:

Action

Timeframe

Audit act

Not later than two months after “spravka” is issued

Written objections to the act by a taxpayer

15 days after the act is received by the taxpayer or his authorised representatives

May apply to the Act as a whole, or to its separate parts

Consideration of taxpayer’s written objections

No later than 10 days after the deadline for filing objections

Is signed by the chief of tax body (or deputy-chief)

First tax decision on audit

No later than 10 days after the deadline for filing objections (can be extended for 1 month)

The decision may provide for:  imposition of penalties;  no penalties or sanctions.

Payment request

Payment request is issued within 10 days after the decision on audit is effective.

The request is issued in relation to underpaid tax, penalties and late payment interest.

Appeal to the superior tax authority.

(1) Before the first tax decision is effective (10 days).

Performance of the first tax decision is suspended until the date of Superior authority’s decision.

(2) Within 1 year from the first tax decision (if effective).

Taxes and fines should be paid in this case

Superior authority’s decision.

One month from the appeal receipt.

Decision on tax audit comes into effect on the date of the Superior authority’s approval.

Appeal to court

Only after appeal to the superior authority.

See section 5.


Note

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

Non-compliance with the above procedure can serve as basis for the annulment of the decision of the tax body by the superior tax body or by the court.

2.3

Confidentiality of information (art. 102)



All information about a taxpayer received by a tax authority is considered confidential with the exception of the following:

   

information made public, by the taxpayer or with the consent of the taxpayer; TIN; information on violations of the tax legislation and corresponding penalties; information provided to tax or law enforcement agencies of other nations under international treaties on mutual tax co-operation.

2.4

Presumption of innocence (art. 108 and 109)



The Tax Code introduces presumption of innocence with respect to taxpayers and tax agents.



The burden of proving tax offences and the taxpayer’s guilt lies with the tax authorities. Any irremovable doubt concerning the guilt of taxpayers, in committing tax offences, is resolved in the taxpayer’s favour.



Persons cannot be brought to account for tax offences, if more than three years have elapsed (statute of limitation) since: – –

the day when the offence was committed; or the first day following the tax period, when the offence was committed.

2.5

Penalties for non-compliance with tax audit rules (art.126)



The following main penalties apply to taxpayers for a failure to comply with tax control requirements:

Non-submission of documents and/or other information envisaged by the Tax Code (and other legislative acts on taxes and levies) by a taxpayer or a tax agent to the tax bodies within the established period of time (art. 126.1).

A fine equal to 200 RR for each nonsubmitted document.

Non-provision of information about a taxpayer to the tax authority in the form of refusal of an organisation to turn over the documents envisaged by the Tax Code containing information on the taxpayer at the request of a tax authority, or provision of documents containing false information (art. 126.2).

A fine of 10,000 RR.


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3

TAX PAYMENTS AND COLLECTIONS

3.1

General (art. 44, 45)



A tax obligation is considered to be fulfilled from the moment that:





a payment order is submitted to the bank, provided the bank account balance allows the payment;



the relevant cash amount of tax payment is deposited with the bank (or the cashier of the local government authority or a branch office of the Ministry of Communications);



the tax authorities (or court) issues a decision to offset overpaid taxes against the tax liability;



taxes are withheld by the tax agent.

A tax obligation is terminated in the following cases:



when the taxpayer pays the tax;



when circumstances which are equated with the termination of a tax obligation under the tax legislation arise;



with the death of an individual taxpayer (with exception of property taxes);



with the liquidation of a corporate taxpayer.

3.2

Mandatory collection of taxes (art. 45 and 46)



In case of failure to pay, tax, late interest and fines are collected:



–

from organisations and individual entrepreneurs under mandatory procedure without a court decision; and

–

from individuals – in accordance with a court decision.

A mandatory collection of tax from a taxpayer may not be effected without a court decision if: –

the additional tax liability arose due to the re-classification by the tax authorities of the legal status of transactions or nature of business in which the taxpayer is engaged; or

–

the decision for the mandatory collection is made later than 60 days after the deadline established in the “demand” to pay tax (art. 46.3).

3.3

Methods for ensuring execution of tax payments (art. 72)



Methods for ensuring execution of tax payments are:

    

pledges of assets; guarantees; late payment interest; suspending bank transactions; seizure of property and assets.

These methods will not be examined in detail except for the late payment interest. ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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3.4

Late payment interest (art. 75)



Late payment interest is an additional amount of money which a taxpayer or a tax agent should pay where taxes/levies are paid after the established deadline.



Late payment interest is not a tax penalty (which is a further additional payment (fine) for tax violations) but interest for the use of budget money. Late payment interest can be collected from:



legal entities and individual entrepreneurs along with the taxes overdue without a court decision;



individuals (excluding individual entrepreneurs) only through court.



Late payment interest is accrued for each calendar day of arrears, beginning on the day following the statutory deadline for the payment of taxes/levies.



The late payment interest rate equals 1/300 of the effective CBR rate. Late payment interest should be paid simultaneously with the payment of tax liability or following such a payment (i.e. before the tax penalties and fines are paid).

Example 2 Tax payment deadline was 31 March 2013. Tax amount was 60,000 RR. Actual payment was made on 5 July 2013. Required: Calculate the late interest amount using Central Bank refinancing rate given in Rates and Allowances (see Session 00). 3.5

Suspending bank transactions (art. 76)



Suspending operations through bank accounts is used to ensure:  

the execution of a decision to recover a tax or fee; or the receipt of a tax return (where submission is delayed more than 10 days).



Suspension of operations means that the bank suspends all debit transactions, or operations within the limits specified in the tax authority’s decision.



Suspension of a taxpaying organisation's transactions is effective when the bank receives a decision of a tax authority until the reversal of this decision.



Suspension is reversed by the decision of a tax authority not later than one day after the tax authority receives the documents (copies thereof) proving that tax has been collected or tax return received.



A copy of a decision (to suspend or reverse) is sent to the bank the day after it is made.



If a tax authority breaches the term of cancelling a block on a taxpayer’s bank account, interest accrues in favour of the taxpayer.



Such interest accrues on the suspended amount for each calendar day of arrears, beginning on the day following the statutory deadline for the decision having been taken or its submission to the bank.


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Illustration 2 On 5 February 2013 two bank accounts of the Company GF totalling 500,000 RR were blocked because it did not submit a tax return (the deadline was 20 January 2013). The tax return was submitted to the tax authority on 8 February 2013. The tax authority made a decision to unfreeze GF’s bank accounts and sent it to the bank on 11 February 2013 (instead of 9 February). Interest accrues to GF for the two days delay: 500,000 × 15% × 2/365 = 411 RR Commentary This very practical issue is important in defending the rights of taxpayers. 3.6

Offset and refund of taxes (art. 78, 79)



Overpaid taxes can be:

   

offset against future payments of the same tax; offset against future payments of other taxes payable to the same budget; refunded from the budget; offset against tax arrears, late interest and penalties, provided that these amounts are payable to the same budget to which the overpaid tax was remitted.



The taxpayer should make an application for a refund of the overpaid tax. The tax should be refunded to the taxpayer within one month of the date the refund application was received by the tax authority.



If the timeframe for a tax refund is violated, interest accrues at the Central Bank refinancing rate.

Example 3 The tax inspectorate has collected on 10 March 2013 130,000 RR from a taxpayer through a mandatory collection order (“inkasso”). The taxpayer complained to the court and won the case. The tax inspectorate made a refund on 5 June 2013. Required: Calculate the refund amount. Solution RR

________ ________


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3.7

Tax penalties for non-payment (art. 122, 123)

Failure to pay or failure to pay in full taxes due as a result of understating the tax base or incorrect calculation of taxes due based on the results of a tax period, if discovered by the tax authority during a field (on-site) audit.

A fine equal to 20% of the unpaid tax liability.

The same actions committed intentionally.

A fine equal to 40% of the unpaid tax liability.

Failure of a tax agent to fulfil the duty of withholding and/or remitting taxes.

A fine equal to 20% of the amount that was subject to withholding and remittance.



In addition to these tax penalties the taxpayer should also pay late payment interest.

Example 4 The tax inspectorate has discovered an intentional understatement of taxable revenue for the year to December 2012 amounting to 200,000 RR. The deadline for payment was 28 March 2013. Payment was made by the taxpayer on 30 June 2013. The applicable tax rate was 35%. Required: Calculate the amounts which have to be paid to the budget, including the sanctions (tax penalties and interest on late tax payment). Solution RR

_______ _______ 3.8

Tax penalties for non-compliance with transfer pricing rules



Where the tax authorities recalculate tax due on transactions under the new transfer pricing legislation (see Session 2), the taxpayer is required to pay:

   

the additional outstanding tax; late payment interest, calculated in the normal way based on CBR; and where a taxpayer has not provided requested transfer pricing documentation, an additional penalty fine.

Transitional rules apply to the amount of the penalty fine:

  

in 2012 and 2013 no penalty fine is being charged; from 2014 the penalty will be 20% of the additional tax due; from 2017 onwards the penalty will be 40% of the additional tax due, but not less than 30,000RR.


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4

TAX RETURNS

4.1

General (art. 80)



A tax return is a taxpayer’s written statement showing income generated and expenditures incurred, sources of income, tax allowances and tax amounts calculated and other data relating to the calculation and payment of a tax.



A tax return should be filed by each taxpayer for every tax due from such a taxpayer unless the tax legislation provides otherwise.



A tax return should be filed in a prescribed form with the tax authority at the place of the taxpayer’s registration. In cases established by the Tax Code, a tax return may be submitted on a floppy disk or another device that can be computer processed.



A taxpayer may deliver his tax return to the tax authority in person or send it by mail.



The tax authority may not decline to accept the tax return and must, if the taxpayer so requests, make a note on a tax return copy to acknowledge the acceptance and date of submission; if a tax return is mailed the date of its submission is that of mailing the registered letter with a list of contents attached.



A filed tax return bears the TIN that is used with respect to all taxes.



The tax authorities cannot require that a taxpayer includes in the tax return data that is not related to the calculation and payment of taxes.



A tax return is filed within the statutory deadlines.



Instructions on how to complete a tax return for the payment of federal, regional and local taxes are given by the Ministry of Finance of the Russian Federation.

4.2

Amendments and additions to tax returns (art. 81)



On discovering that a tax return which has been filed does not reflect the true data, or reflects incomplete data, resulting in the understatement of the amount of the tax due, a taxpayer must make the necessary additions and amendments to the tax return.



Where mistakes are discovered in the tax return which do not result in the underpayment of tax, the taxpayer still has a right to amend the tax return.



Where it is impossible to establish the tax point in which a mistake arose, the correction is made in the tax period in which the mistake is discovered (art.54).



Where the above statement on additions and amendments is made prior to the expiration of the deadline for filing a tax return such a tax return is recognised as having been filed on the date of the statement.



Where the statement on additions and changes is made following the expiration of the deadline for filing a tax return but before the expiration of the deadline for payment of the tax, the taxpayer is not held responsible if the statement has been made prior to the date when the taxpayer learned about the discovery of these circumstances by a tax body or about the appointment of a field tax audit.


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

Where a statement on additions and changes is made following the expiration of the deadline for filing a tax return and also after the deadline for payment of the tax, the taxpayer is still not held responsible if the above statement has been made by the taxpayer prior to the date when the taxpayer learned about the discovery of these circumstances by a tax body or about the appointment of a field tax audit. The taxpayer is released from penalties (but not late payment interest) provided that before filing such an application the taxpayer has paid the deficient amount of the tax and the corresponding late payment interest.

4.3

Penalties for late/incorrect submission (art. 119)



The following main penalties apply to taxpayers for a failure to comply with tax returns submission deadlines and forms:

Failure by a taxpayer or his legal representative to meet the tax declaration filing deadline.

A fine in the amount of 5% of the tax as per this declaration for each complete or incomplete month from the submission day, but not more than 30% of the tax amount and not less than 1,000 RR

Violation of established method of tax return submission (i.e. not electronically).

A fine equal to 200 RR.

Example 5 The deadline for tax declaration submission was 20 January 2013. The actual submission date was 4 May 2013. The tax amount declared was 10,000 RR. Required: Calculate the tax penalty. Solution

4.4

Violations in accounting rules (art. 120)



Serious violation of accounting rules is understood as:



–

the absence of source documents and/or VAT invoices and/or accounting registers/journals;

–

systematic (more than twice per year) non-recording of transactions in accounting.

The following main penalties apply to taxpayers for a failure to comply with accounting rules for income/expenses and objects of taxation:


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Serious violation of accounting rules which did not result in any decrease of a tax base

A fine in the amount of 10,000 RR if violation took place in one tax period, or a fine of 30,000 RR if the violation took place in several tax periods.

Serious violation of accounting rules which resulted in the decrease of a tax base.

A fine in the amount of 20% of the tax underpaid but not less than 40,000 RR.

5

TAX APPEALS

5.1

Right to appeal (art. 137)



Taxpayers and tax agents have the right to lodge an appeal against the acts, actions, or inaction of the tax authorities.



Taxpayers (tax agents) have the right to appeal against the decisions of the tax authorities:

 

with superior tax authorities; in court of law (arbitration court). (Since 01.01.2009 a taxpayer is obliged to appeal to superior tax authorities before filing an appeal in court.)



The procedure for a “tax appeal order in respect of the first tax decision” is set out in the Tax Code (art. 101.2).



Appeals against the decisions of the tax authorities in court are made by bringing suit with an arbitration court in conformity with the laws on arbitration procedure.

5.2

Lodging an appeal (art. 139)



Lodging an appeal with a superior tax authority does not suspend execution of the act or action being appealed (except for cases where such acts are suspended by the tax authority considering the appeal).

Action

Deadline

Filing

3 months from the time when the taxpayer discovered or should have discovered that its rights were violated.

Consideration

Up to one month from the date when the appeal has been received.

Decision

Decision is taken within one month and is made known to the taxpayer within 3 days after the decision has been adopted.



Consequences

Served in writing to the person that lodged the appeal.

After considering the appeal the tax authority is entitled to:

   

dismiss the appeal; invalidate the tax authority’s act and order another audit; overturn the decision and quash the case; amend the decision or issue another ruling.


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state the limitations related to tax audits conducted by tax authorities;



state the conditions under which the consequent tax audit can be carried out;



outline the procedure for a tax appeal order in respect of first tax decision received (art. 101.2);



explain and calculate the administrative tax sanctions for non-compliance;



explain the procedure by which the tax authorities collect penalties from taxpayers;



explain the difference between interest on late tax payments and tax penalties;



compute interest on late tax payments;



explain the procedure of interest accrued in favour of taxpayer in case of tax authorities breach the term of cancellation the decision on blocking the accounts in taxpayer’s bank;



explain the refund procedure and deadlines for individual income tax and corporate profits tax;



state the amounts of penalties for tax underpayments or non-payments;



state the amounts of penalties for non-filing or late filing of tax returns;and



state the amounts of penalties for non-compliance with transfer pricing rules.


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EXAMPLE SOLUTIONS Solution 1 The fine is the greater of: 10% of gross income earned (i.e. 5,000 RR); or 40,000 RR. Therefore, the fine is 40,000 RR. Solution 2 Central Bank refinancing rates (notional): 1 January 2012 – 30 April 2013: – 15% 1 May – 30 September 2013: – 8% The late interest is calculated as follows: 60,000 RR × 30 days × 1/300 × 15% 60,000 RR × 66 days × 1/300 × 8%

RR 900 1,056 _____

Total late interest

1,956 _____

Solution 3 The refund will be made along with interest, calculated using Central Bank rate: RR 130,000 2,725 1,026 _______

130,000 130,000 × 15% × (21 + 30)/365 days 130,000 × 8% × (31 + 5)/365 days

133,751 _______ Solution 4 RR Amount of underpaid tax (200,000 × 35%) 70,000 Intentional violation at 40% penalty 28,000 Interest on late tax payment (70,000 RR × 33 days × 1/300 × 15%) 1,155 (70,000 RR × 61 days × 1/300 × 8%) 1,139 _______ Total amount

100,294 _______

Solution 5 Minimum penalty – 1,000 RR Maximum penalty – 30% × 10,000 RR (3,000 RR) The time delay is equal to 5 months (January – May). Penalty for late submission will be 5% of tax liability per declaration multiplied by 5 months, or 2,500 RR. (Each complete and incomplete month counts.)


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GLOSSARY

Words highlighted by italics within an entry indicate other entries under which further explanation or information can be found. A Accounting depreciation – depreciation used for accounting purposes only. May be different from depreciation calculated for tax purposes. Accounting profit – difference between accounting income and accounting expenses. Accrual – a liability to pay for goods received/services supplied that has not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (e.g. holiday pay). Accruals method of income recognition – under this method income/expenses are recognised for tax purposes when they were accrued rather than paid. Generally income is accrued when the title to goods (works, services) is transferred from seller to buyer. Accumulated depreciation – total of depreciation charges for a certain period of time. Advance Pricing Agreement – a voluntary agreement with the tax authorities for three to five years which guarantees against adjustments on transfer prices and additional tax assessments thereon. Allocation – see Expense allocation. Allowances –decrease in taxable income of the individual or a legal entity (e.g. standard child deduction for individuals). Allowed expenses – see Tax deductible expenses. Amortisation – the systematic allocation of depreciable amount of an intangible asset over its useful life. APA – Advance Pricing Agreement. Asset – a resource controlled as a result of past events and from which future economic benefits are expected to flow. Asset cost – amount that includes: acquisition cost; own cost if produced/installed with own labour (include appropriate direct cost and overhead). Audit – the objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. Avoidance – reduction of tax burden using legitimate techniques. B Bad debt – a debt that is considered non-collectible. Bad debt write-off – removing debt from accounting records. Tax consequences depend on the specific circumstances of the write-off. Basic VAT rate – 18%, it applies to most goods and services. Benefits in kind – benefits provided to employees in a non-cash form. Branch – organisational component of a company. It is not a separate legal entity. See also Separate subdivision. Business – see Enterprise.


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GLOSSARY

Business income – type of income for personal income tax purposes, includes income of individual entrepreneurs. C Cameral audit – an audit conducted at the authority’s location based on the SIC payer’s reporting (calculations) documents submitted. Cash method of income recognition – one of the two allowable methods of income/expense recognition, under which income/expense is recognised when actually received/paid. Capital – see Registered capital. Capitalisation – recognising an amount as part of the cost of an asset. Charter capital contribution – a transfer of assets to the charter capital of a legal entity. Contributions can be monetary, ie for cash or non-monetary, ie for consideration other than cash. Children allowance (deduction) – reduction of individual’s taxable income subject to 13% rate. Apply up to (not including) the month when gross income exceeds 280,000 RR. Confirmed export – export which is proved by required documents for VAT purposes . Controlled transactions – different types of related party transactions identified under transfer pricing legislation. Copyright – applies to literary, scientific, and artistic works that are the result of creative activities by their authors. CPT – corporate profits tax. Corporate profits tax – type of income tax levied on entities. Customs declaration – a statement which must be filled in every time goods are imported or exported to indicate the customs regime used and customs value of items. Customs duty – duties levied on import of goods. Customs regime – a regime used for importation or exportation of goods. VAT and customs duty are then payable according to the type of the regime. Customs value – value of the goods imported to the Russia. Usually it is the invoiced amount plus any directly related expenses such as transportation, licence fee, etc. D Declarative procedure of VAT recovery – The procedures by which certain taxpayers can obtain a refund of input VAT before their tax declaration is checked by the tax authority. Deductions from tax – (a) qualified expenses of individuals, decreasing their PIT liabilities (e.g. social and property deductions); (b) expenses of a legal entity, deductible for CPT purposes. Depreciable property – property, capital improvements, objects of intellectual rights, etc used for income-generating activities with a useful life of more than one year and an original value more than 40,000 RR. Depreciation – the systematic allocation of depreciable amount of an asset over its useful life. Desk audit – see Cameral audit. Direct taxes – taxes where the taxpayer is known (e.g. income taxes, property taxes). ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

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GLOSSARY

Direct expenses – expenses that directly relate to the cost of goods (works, services) manufactured or bought for resale (i.e. direct materials, wages and salaries of main production workers). Direct expenses must be prorated between cost of goods sold and ending stocks. Disallowed expenses – non-tax deductible expenses. Disposal of an asset – sale, liquidation or donation of an asset. Dividends – distributions of profits to equity investors in proportion to shareholdings. Donations – free transfer of assets to legal entities or physical persons. Double taxation – occurs when the same income is subject to the same type of tax more than once. DTT – double tax treaty. Double tax treaty – convention for the avoidance of double taxation designed to ensure that a taxpayer, whether corporate or individual, will not suffer double taxation on the same income, if that income is taxable in more than one country or “contracting state” at the same time. E Educational deduction – one of several social deductions granted to an individual taxpayer. Income taxed at 13% rate can be decrease by the amount of documentary confirmed expenses of a taxpayer on his own education and education of his children. Employment income – type of income for personal income tax purposes, includes salary and wages. Enterprise – aggregate of the tangible, personal and intangible components of business activities. Equity – accounting term, which comprises registered capital, capital funds, profit and loss for the period, reserves, etc. Excise duty – duty levied on hydrocarbon fuels and lubricants, spirits, wine, beer, tobacco and some other goods. Exclusions – income, which is not subject to CPT (i.e. excluded from taxation). Exempt supplies – supplies which are not subject to VAT. Input VAT on such supplies is either capitalised or deducted for CPT purposes. Expenses – decreases in economic benefits in the form of outflows (or depletions) of assets or incidences of liabilities that result in decreases in equity (other than distributions to equity participants). Expense allocation – see proration of expenses under accruals method. Export of goods – customs regime under which goods are leaving the RF territory with no return obligation. Export of services – in a VAT sense can refer to services that were related to exported goods.


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GLOSSARY

F FMV – fair market value. Fair market value – selling/purchase price in an active market defined according with article 40 of the Tax Code. Field audit – an audit conducted at the SIC payer’s location under a decision made by the Head of the authority. Financial lease – under such an agreement the lessor provides an asset to the lessee which is accounted for on the lessee’s balance sheet. Financial statements – the balance sheets, income statements (or profit and loss accounts), the cash flow statement, notes and other statements and explanatory material which are identified as being part of the financial statements. First-in, first-out (FIFO) – assumes that items, which were bought first is sold first therefore periodend inventory is that most recently purchased/produced. Fixed assets for CPT purposes – assets with an estimated useful life exceeding one year and the original cost exceeding 40,000 RR. G Gifts – see Donations. H Housing incentive – a tax incentive granted to individual taxpayers, acquiring residential property or plots of land for individual residential house construction in the form of reduction of taxable income subject to 13% by the acquisition amount. The incentive is limited to 2,000,000 RR and is granted once in a lifetime. Any unused incentive amount can be carried forward until it is completely utilised in subsequent years. I Individual entrepreneur – an individual, carrying out business activities, registered with tax inspectorate. In-office audit – tax audit conducted in a tax office based on the returns submitted by a taxpayer and additional documents, requested by a tax body. Also called “in-house”, “desk” or cameral audit. Immovable assets – real estate (i.e. buildings, constructions, land, etc). Imputed interest income on loans – taxable income, which is assessed on zero-rate/low interest loans. This interest is calculated for tax purposes only. Income – increases in economic benefits in the form of inflows (or enhancements) of assets or decreases of liabilities that result in increases in equity (other than those relating to contributions from equity participant). Income tax – tax levied on individual’s income (personal income tax). Indirect taxes – taxes where the taxpayer is not known and the tax is withheld by the tax collector (e.g. value added tax, excise duty).


1304

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GLOSSARY

Indirect expenses – expenses, which decrease taxable base for CPT in the period when they arise. These expenses are not allocated (prorated) between cost of goods sold and ending stocks. Inheritance –assets, etc received from the estate of a person who has died (e.g. a relative) as a beneficiary of a will or by operation of law (e.g. where there is no will). Input VAT – VAT imposed on purchases. Intangible asset – an identifiable non-monetary asset without physical substance (held for use in producing/supplying goods/services, for rental to other, or for administrative purposes. J Joint-activities agreement – an agreement between two or more parties to join their efforts in a specific area. See also Simple partnership. Joint stock company – company whose registered capital is divided into shares of a specific nominal value. The company is liable for a breach of its obligations with its entire property. L Last-in, first-out (LIFO) – assumes that inventory items bought last are sold first therefore period-end inventory is that most lately purchased/produced. Late payment interest – compensation to the budget for late payment of tax (levy). This is not a tax penalty and may be collected from a taxpayer through a mandatory collection procedure. Liability – a present obligation arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Limited liability company – legal entity whose registered capital is made up of contributions agreed in advance by its members. Linear depreciation method – depreciation is calculated monthly for each fixed asset as the original tax cost (after deduction of any initial write-off) multiplied by the depreciation rate determined for the specific fixed asset. Losses – see Net operating losses. M Medical deduction – one of several social deductions granted to an individual taxpayer. Under this deduction income taxed at 13% rate can be decrease by the amount of documentary confirmed own medical expenses of a taxpayer and medical treatment of his/her closed relatives (parents and children under 18 years of age). Movable assets – assets other than real estate.


1305

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GLOSSARY

N NBV – Net book value. Net book value – the difference between the original cost of assets (adjusted for any allowable revaluations) less related accumulated depreciation. Net business assets – business property reduced by liabilities incurred in connection with business activity. Net operating losses – losses from operational activities. Can be carried forward and utilised over 10 years following the year of loss. Non-linear depreciation method – depreciation is calculated for each depreciation group (subgroup) based on its total net balance value. Non-operational income/expenses – income not included in sales/cost of sales, i.e. interest received/paid, rental income/expense, commercial penalties received/paid. Non-recoverable VAT – input VAT which cannot be recovered and is either capitalised/deducted or charged out of after-tax-profits. Non-profit organisations – entities which are established without a purpose of a profit making business activity. Non-resident – see Tax non-resident. Non-tax deductible expenses – expense, which is not allowed for tax purposes and is ignored for tax accounting. O OMV – open market value. On-site audit – tax audit conducted in the office of taxpayer. Operating lease – under such an agreement the lessor provides an asset to the lessee but it is still accounted for on the lessor’s books. Operational income/expenses – income/expenses arising from sales of goods (works, services), sales of fixed and other assets. Output VAT – VAT imposed on sales. Offset – see tax offset. Original asset cost – purchase price of an asset plus all related expenses, which were capitalised at the moment of purchase according to CPT rules. P Pension deduction – one of several social deductions granted to an individual taxpayer. Under this deduction income taxed at 13% rate can be decreased by the amount of documentary confirmed personal taxpayer’s expenses on non-state pension security and/or voluntary pension insurance for the benefit of taxpayer or his spouse, parents and/or children.


1306

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GLOSSARY

Permanent working place – a working place created for the period exceeding one month. Person liable to tax – tax subject, can be either a taxpayer or a tax agent. Personal income tax – type of income tax levied on individuals. PIT – Personal income tax. Proration of expenses under accruals method – procedure used if a company uses accruals method for CPT purposes. The direct operational expenses are prorated. Non-operation expenses are not prorated. Proration of input VAT – input VAT incurred on resources used for both VATable and exempt supplies is partially recovered and partially capitalised (included in the cost of related resources). The proration is performed based on exempt/total sales ratio. Property deductions – deductions available to individuals on sales of personal property. The amount of deduction depends on the type of property and the period of property ownership by a taxpayer. Provision – a liability of uncertain timing or amount. For tax purposes only certain provisions can be lead to tax deductible expenses. Property tax – tax on property of legal or physical persons. Q Qualified property–property that is taken into account for tax purposes in various given circumstances. R Recovery – see VAT recovery. Recurring supply – a taxable supply within agreed time limits, so that under the contract the supply is rendered in the form of the same kind of goods or services, or transfer and use of rights (e.g. electricity supply). Reduced VAT rate – 10%, it applies mostly to food stuff and some children’s goods. Registered capital – is a total of participants’ monetary and non-monetary contributions to the company. Repair – as opposed to technical appreciation, repair is a current year expenses, which does not have to be capitalised. Research – original and planned investigation undertaken to gain new scientific/ technical knowledge/understanding. Reserves – see Provision. Resident – see Tax resident. Residual value – see Net book value. Revaluation – change (increase or decrease) of fixed asset’s original cost. Can be mandatory or optional. Revenue – see Income.


1307

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GLOSSARY

Russian source income – includes income from activities carried in Russia (including income from employment in the Russia), income from services provided in Russia, income from the sale of real estate situated in Russia, copyright, dividends, interest payments received from Russian persons, etc. Non-residents are taxed on Russian source income only. S Securities – shares, bonds, bills of exchange, cheques, participation certificates, etc. Self-employed – see Individual entrepreneur. Separate subdivision – any subdivision with permanent working places in a location other than the location of the head office. Share – a security to which are attached shareholder’s rights to participate in the management of the company, its profit and also liquidation share, if the company’s is dissolved. SIC – see Social insurance contributions. Simple partnership – not a legal entity created under joint activity agreement. The income of a simple partnership is allocated to its participants and taxed either by CPT or by PIT. Social deductions – see Educational, Medical and Pension deductions. Social insurance contributions – compulsory payments for obligatory social insurance (Social Security Fund, Pension Fund, Medical Fund). Standard VAT declaration – VAT declaration, which is filed by all VAT payers. Straight line depreciation – method of depreciation under which an asset is depreciated evenly over its useful working life. See Linear method. T Tangible asset – asset with physical substance. Tax accounting – accounting system maintained according to the rules of the Tax Code Chapter 25. Tax accounting policy – a document in which an organisation selects and ratifies the methods and variants of tax accounting. Tax audit – an examination conducted by tax officers in order to verify the tax data submitted by a taxpayer. See also In-office audit and On-site audit. Tax assessment – see Tax decision. TC – Tax Code of Russian Federation. Tax agent – a person with a duty to calculate and withhold tax from payments to taxpayers and to remit these amounts to budget. Tax cost – of depreciable property – for a fixed asset purchased from third parties this includes purchase price and all costs required for transportation, installation and testing of the asset. Tax decision – document issued as a result of a tax audit. Any additional tax liabilities and penalties can be imposed only on the basis of an official tax decision.


1308

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GLOSSARY

Tax deductible expenses – expenses, which are allowed for tax purposes. Tax depreciation – the method (Linear/Straight-line or Non-linear) is chosen by the taxpayer and defined in tax accounting policy. Tax non-resident – an individual staying in Russian for less than 183 days. Tax offset – application of tax receivable to future tax liabilities on this tax or to current liabilities on other taxes. No money is given back to taxpayer as in case of a tax refund. Tax point – date when a taxable supply was made. Important to determine, as it is a day when output VAT is due. Tax rate – rate of tax applicable to a tax base. Tax recapture – arising of a tax liability, which was previously not recognised. Tax receivable – amount due to a taxpayer from budget generally as a result of a tax overpayment. Tax recovery – cancellation of a tax receivable either through a tax offset or a tax refund. Tax refund – payment of a tax receivable back to a taxpayer. Tax resident – an individual who spends 183 or more days in Russia in a calendar year and is liable to tax on his/her world-wide income. Tax return – a document disclosing the taxpayer’s tax liability. Tax year – year for which a tax liability is calculated, in Russia it is always a calendar year. Taxable income – for CPT purposes means taxable revenue less deductible expenses; for PIT purposes means gross taxable income less all available deductions and housing incentive. Taxpayer – a person who is liable to tax. TIN – tax identification number, all taxpayer are given this number when they register with a tax inspectorate. Thin capitalisation rules – special set of interest deductibility rules relating to loans received from foreign legal entities, which directly or indirectly control the Russian company – loan recipient. Total net balance value – for each depreciation group (subgroup) this is the sum of all values of fixed assets included in this group (subgroup) less accumulated depreciation of the group (subgroup). Transfer pricing methods – acceptable methods of setting prices for controlled transactions include comparable uncontrolled price (preferred), resale minus, cost plus, comparable profitability and profit split (as last resort).


1309

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GLOSSARY

U Unconfirmed export – export that is not proved by required documents for VAT purposes within 180 days starting from the export date. Useful life of an asset – expected term of the asset’s service life. V VAT – see Value added tax. Value added tax – tax levied on taxable supplies in Russia, import of goods. VATable supply – delivery of goods, provision of services and transfer of rights which are subject to VAT. VAT declarations – see Zero-rate VAT declaration and Standard VAT declaration. VAT tax base – amount subject to VAT, which is calculated in accordance with the Tax Code art. 153. Z Zero-rated – supplies are zero rated when there is no output VAT but at the same time full recovery of input VAT is allowed. Generally relates to export of goods. Zero-rate VAT declaration – VAT declaration filed by taxpayers carrying out operations that are VATable at zero-rate. Such declaration is filed within the same time limits as a standard VAT declaration.


1310

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INDEX

A

CPT taxpayers Cross-border transactions

Accounting policy 421 Accruals method of income recognition 207 Advance payments 809 Advance Pricing Agreement 222 Advertising expenses 307 Allocation of direct expenses 210 Allocation principles 813 Allowances for receivables 408 Amended VAT invoice 912 Amendments to tax returns 1211 Amortisation of intangible assets 323 Assets for no consideration 402 Average property value 1103

D Declarative procedure Depreciable property Depreciation expense Depreciation groups Destruction of property Direct expenses Direct tax Discounted goods Disposal of materials Dividend income Dividends Dividends paid Dividends received Domestic transactions

B Blocking bank accounts 1208 Branches 1009 Branches of Russian legal entities 113 Business activities 112 Business entertainment 308 Business training expenses 309 Business travel expenses 305, 607 Business trips 608

906 314, 420 323 316 609 207 107 1007 330 610 203 412 412 221

E Education expenses Elements of taxation Execution of tax payments Exempt activities Exempt income Expense classification Export confirmation Export sales

C Capital improvements 326 Capitalised VAT 908 Cash method of income recognition 218 Charity contributions 511 Classification of depreciation expense 323 Clawback of input VAT 812 Collection of taxes 1207 Commercial contracts 407 Commercial debt factoring 405 Commission income 217, 909 Commission operations 913 Confidentiality of information 1206 Controlled transactions 221 Copyright agreements 1007 Corporate profits tax 201 Corporate property tax 110, 1102 Court system 106 CPT allocation to separate subdivisions 417 CPT exclusions 205 CPT quarterly payment system 424 CPT reporting and payment procedures422 CPT tax and reporting periods 202 CPT tax liability computation 204 CPT tax rates 203 ©2013 DeVry/Becker Educational Development Corp. All rights reserved.

202 221

511 106 1207 806 506 205 903 809, 902

F Factoring operations Federal Tax Service Federal taxes Filing requirements Financial lease Fines and penalties Fixed assets Foreign currency Foreign diplomatic missions Foreign exchange gains/losses Future export

909 1203 107 704 324 407 314 808 902 403 907

G General profits tax Gifts Government spending Gross income

1401

203 506, 605 102 504

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INDEX

H Housing incentive

O 516, 705

Object of taxation Obligations of taxpayers Offset of taxes Operating lease Optimisation instrument Output VAT

I Immovable property Imputed interest Income classification Income receipt Income recognition Indirect expenses Indirect tax Individual entrepreneurs In-kind payments Input VAT recovery Insurance contributions Insurance expenses Insurance income Intellectual property Interest Interest expense Interest on bank deposits Interest reimbursement International tax legislation Investment income

812 603 204 504 505 207 107 703, 1009 1006 810 507 309 608 324, 521 809 302 602 311 105 610

P Partial exemption 813 Partially deductible expenses 302 Payment deadlines 704 Payments based on actual profits 424 Payments based on estimated profits 422 Payments in-kind 1006 Penalties 1203, 1206, 1210, 1212 Pension deduction 512 Pension insurance 610 Personal and children allowances 510 Personal income tax 109 Personal income tax calculation 705 Personal income tax reporting 704 Presumption of innocence 1206 Production company 414 Production expenses 209 Production operations 212 Professional deductions 519 Profits and losses of previous years 403 Profits tax 108 Property damage 609 Property deductions 515 Property disposals 327 Property insurance 609 Property sales income 507 Property tax 1101

L Late payment interest Leased assets Life insurance Local taxes Lodging an appeal Loss carry forward

1208 324 608 107 1213 411

M Medical expenses

512

R

N Net balance value No consideration Non-current assets Non-deductible expenses Non-linear method Non-operational expenses Non-operational income Non-state pension security Notional units

Recovering VAT Refund of taxes Regional taxes Registration deadlines Registration of taxpayers Related parties Research and development Right to appeal Rights of taxpayers

320 402 314 206 319 216 214, 402 610 403


805 111 1209 324 421 805

1402

914 1209 107 1202 1202 221 324 1213 110

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INDEX

S Sale of property Sale of securities Sales income Securities Self-supplied construction Shipment date SIC base SIC object SIC objects SIC payers Simple partnerships Social deductions Social insurance contributions Special depreciation coefficients Sports prizes Spravka Standard deductions State Customs Committee Straight-line method Sum difference

Trading company Trading operations Transfer pricing

515 611 207 611 910 207 1003 1003 1006 1002 217 511 110, 1002 322 605 1205 510 1204 318 215, 808

U Unconfirmed export

902

V Value added tax VAT declaration forms VAT due dates VAT exempt supplies VAT invoice VAT journal VAT payers VAT rates VAT tax base Violations in accounting rules

109 914 914 806 911 912 803 804 808 1212

W Withholding tax

T

613

Z

Tax accounting 419 Tax accounting register 420 Tax agents 111, 702, 1202 Tax appeals 1213 Tax audits 1203, 1204 Tax base 106, 202 Tax Code 102 Tax cost of depreciable property 315 Tax declaration 704 Tax depreciation 317 Tax exemptions 506 Tax laws 103 Tax legislation 105 Tax object 106, 202, 804 Tax officers 1203 Tax payments 1207 Tax period 106, 804 Tax point 806 Tax rate 106 Tax returns 1211 Tax withholding 502 Taxable supply 805 Taxpayer identification number 1202 Taxpayer obligations 703 Taxpayers 110, 1202 Thin capitalisation rules 312 Time-limits 104


416 210 221, 1210

Zero rate VAT

1403

902

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INDEX


1404

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Visual overview

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Definition of terms

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Key points

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Session summary

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End of session quiz

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A bank of questions

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Acca Atc f6 Taxation Russia Study System 2013

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