On Recent Amendments to Tax Legislation

On September 2, 2010 the new law amending the Tax Code of Russia entered into force (Federal Law of 27th of July, 2010 № 229−FZ).

The amendments to Part One of the RF Tax Code refer, inter alia, to the registration of taxpayers with the tax authorities, the reconciliation of settlements with the budget, the collection and write-off of tax arrears, an extension of payment terms and instalment payments, tax audits and liability for violations of legislation on taxes and levies.

The amendments to Part Two of the RF Tax Code cover certain issues relating to the calculation and payment of corporate profit tax and personal income tax.

We highlight in this article the most important amendments.

Implementation of electronic document management

To expedite tax control procedures, the law stipulates the use of electronic document management (involving the cooperation of the tax authorities with taxpayers, banks, registration authorities (organisations), notaries, attorneys and persons submitting information in accordance with article 93.1 of the RF Tax Code). At the same time, the procedure for lifting suspensions on bank account transactions does not provide for the electronic transfer of information, which may infringe on taxpayer rights (clause 9.2, article 76 of the RF Tax Code).
Please note that the amendments stipulate that tax claims and requests for the submission of documents may be filed in different fways (against receipt, electronically (through telecommunications channels) and also by registered mail). This does not require that tax authorities serve claims directly to a taxpayer if possible, and the lack of this requirement might negatively affect the taxpayer’s rights.

The amendments also reinforce the opportunity to compile VAT invoices in electronic format (clause 1, article 169 of the RF Tax Code). This provision will enter into force fr om the fourth quarter of 2010. The Ministry of Finance and the Federal Tax Service are required to develop a procedure for raising and receiving VAT invoices in electronic format that incorporates the use of electronic digital signatures.The old rules will apply until the RF Government approves the new forms and procedure for filling VAT invoices, ledgers for registering VAT invoices, purchase and sale ledgers.

Tax control issues

Registration with the tax authorities

A new standalone sub-division opened at the place where the company is registered should be registered with the tax authorities, irrespective of where the company is registered with the tax authorities. At the same time, the taxpayer retains its ability to sel ect the tax authority where it registers a newly opened standalone sub-division, if it is located in the same municipal area or federal city.

The draft law introduces the obligation to notify the authorities about “amendments to the data previously communicated to the tax authority on the standalone sub-division” (with the exception of branches and representative offices) within three days of “amendments to corresponding data”.

The taxpayer should notify the tax authority about the closure of the standalone subdivision (branch, representative office) within three days of such a decision, and not after the closure of the sub-division.

Tax reporting

The authority to approve the tax reporting forms (formats) and procedure for compiling tax reporting are transferred fr om the Russian Ministry of Finance to the Federal Tax Service, which may involve corresponding amendments to the reporting forms.

Reconciliation of settlements

The draft law stipulates that the tax authorities should serve (send by mail or transfer in electronic format) copies of the report on the joint reconciliation of tax settlements, default interest and fines on the day after the reconciliation (sub-clause 11, clause 1, article 32).

Tax audits

The obligation of the tax authorities to attach to the tax audit report the documents of third parties, which confirm violations of legislation by the audited taxpayer, is a positive development. Information that constitutes the commercial secret of third parties should not be provided to the audited entity. The documents should be presented in the form of excerpts.

The draft law stipulates the taxpayer’s right to read the additional tax control materials before the tax authority issues a decision on the tax audit results (paragraph 2, clause 2, article 101 of the RF Tax Code).
At the same time, the draft law states that if the taxpayer submits an adjusted tax return within the scope of a field tax audit, the tax authority is entitled to audit the period for which the adjusted tax return is filed (clause 4, article 89 of the RF Tax Code). In practice this may imply an expansion of the tax audit.

Interim relief

The draft law establishes the term when the tax authority should serve the taxpayer with a copy of a decision on the acceptance (lifting) of interim relief - within five days of the issue of such a decision to grant (lift) interim relief (clause 13, article 101 of the RF Tax Code).

The law stipulates that if the tax authority issues a decision on the suspension of transactions on a taxpayer’s bank accounts for no good reason, interest should accrue on the blocked assets (clause 9.2, article 76 of the RF Tax Code).
 
Calculation of taxes

Corporate profit tax

The lowest value of depreciated property has been increased twice – up to RUB 40,000.

The interest rate on debt obligations acknowledged for tax purposes in the absence of other debt obligations on comparable terms shall be set fr om 2011 within the limits of 80 percent of the rate of the Central Bank of Russia. Therefore, the state provides an incentive to use roubles as the currency for debt obligations.

The law simplifies the procedure for recognising expenses for the maintenance of so-called auxillary amenities and facilities. However, the liberalisation of the procedure for recognising losses of auzillary amenities and facilities appears ambiguous, given that the law continues to classify, for instance, golf courses, race tracks, horse stables and saunas as social amenities and cultural facilities.

Losses obtained “in the period of taxing income at the rate of 0 percent” may not be carried forward. It is impossible to conclude from a literal interpretation of this provision whether the 0% tax rate applies to all income (as has been proposed for residents of Skolkovo innovation centre) or specific types of income.
The timeframe for remitting withholding tax has been shortened – now the tax should be paid no later than the day following the payment on which the tax is being withheld.

Personal income tax

The amendments explain how a tax agent should return the excess tax that was withheld from the taxpayer.
If losses from transactions with securities and financial instruments are carried forward, there is no need to file an application for a tax deduction together with a tax return.

Amendment to the payment terms for taxes, levies, default interest and fines

The procedure for granting a deferral on payments of taxes and duties (or right to pay in instalments) now also applies to default interest and fines.

The regional and local authorities are entitled to grant a deferral on payments (right to pay in instalments) in respect of taxes remitted to the local budget.

A taxpayer applying for a deferral on payments (or right to pay in instalments) should provide supporting evidence that it is unable to pay the tax within the established period owing to its financial position and that there are sufficient grounds for believing that it will be able to pay the tax within the period established for the deferral on payments (right to pay in instalments). The law stipulates the types of supporting documents that a taxpayer should provide to confirm that it qualifies for a deferral on payments/the right to pay in instalments (sub-clause 5, 51, article 64 of the RF Tax Code).

The law clarifies the grounds for granting the deferral on payments (right to pay in instalments) or an investment tax. It also lists the documents, which should be submitted to the tax authority together with the application for changing the deadline for tax payment.

The law establishes lim its on deferrals on payments (right to pay in instalments) granted on various grounds. For example, a deferral on payments (right to pay in instalments) may be provided to a company on an amount that does not exceed the value of its net assets, to an individual – the value of his or her property, with the exception of property on which execution is not levied (clause 2.1, article 64 of the RF Tax Code).

Now the taxpayer should always pay interest on the debt, irrespective of the grounds on which the deferral on payments (right to pay in instalments) was granted.

The law stipulates an increase in the amount of the investment tax credit from 30 to 100% of the cost of the equipment acquired by the interested company and used for R&D or design work, the technical upgrade of the production process, as well as energy-saving equipment (article 67 of the Tax Code).

Collection and write off of tax arrears

The draft law stipulates the grounds for writing off tax arrears, including cases wh ere the arrears are no longer recoverable, as confirmed by a judicial act. The tax and customs authorities are vested with rights by legislation to write off tax arrears (previously these issues had been regulated by subordinate legislation).

The amendments increase the statute of lim itation when the tax authority may file a lawsuit with a court to recover tax arrears from a taxpayer’s property to two years from the expiry of the tax arrears payment term. At the same time, the law stipulates that a missed deadline may be restored.

Tax offences, penalties

The amendments on liability issues are generally the increases in fines and thus have a harshly punitive and fiscal basis. This is especially true of fines for violations that do not lead to budget losses (the minimum amount of the fine for failure to file a tax return in the absence of payable tax has been increased from RUB 100 to RUB 1,000 – article 119 of the RF Tax Code). The penalty for failure to provide the tax authority with the information required for tax control was quadrupled – fr om RUB 50 to RUB 200 per document that was not submitted (article 126 of the RF Tax Code).

The draft law stipulates liability for non-compliance with the procedure for filing tax returns (calculation) in electronic format (article 1191 of the RF Tax Code) and for gross violation of tax accounting rules (article 120 of the RF Tax Code). At the same time, the rules on holding a witness liable for an illegal refusal to give evidence and for giving false evidence have not been rendered more stringent.

[1]   Draft law No. 269777-5 “On Amendments to Part One and Part Two of the Russian Tax Code and Certain Other Legislative Acts of the Russian Federation and also on the Invalidation of Certain Legislative Acts (Provisions of Legislative Acts) of the Russian Federation in Connection with the Settlement of Arrears on the Payment of Taxes, Levies, Default Interest and Fines and Certain Other Issues of Tax Administration.”