Transformation of environmental charges

Pepeliaev Group advises that a draft law has been made available for public discussion. This draft law provides for the charge for a negative environmental impact to be replaced with an environmental tax, and for environmental and recycling fees to be replaced with a recycling fee, with the new payments being introduced into the Russian Tax Code[1].

Environmental tax: proposed amendments

The draft of the law (the “Draft Law”) provides for chapter 25.5 ‘Environmental Tax’ to be introduced into part two of the Russian Tax Code (the “Tax Code”)

In general the provisions of the new chapter of the Tax Code correspond to the provisions of Federal Law No. 7-FZ “On environmental protection” dated 10 January 2002 (the “Law on Environmental Protection”), and the Resolution of the Russian Government “On calculating and collecting charges for a negative environmental impact” (“the Russian Government’s Resolution No. 255”). Thus, the approach with respect to the following elements of the charge remains the same:

• the general definition of the payer;
• the definition of the taxable item and the tax base;
• the establishment of tax and reporting periods, and the procedure for calculating tax and advance payments;
• the establishment of tax deductions (under the Law on Environmental Protection, a set-off of environmental costs);
• the establishment of coefficients to be applied.

However, there are certain new developments, namely, the following:

• users of mineral resources have been stated separately as payers of environmental tax;
• a concept of a ‘group of taxpayers’ has been introduced with a reference to the criteria established by article 105.1 of Tax Code, with respect to separate cases when users of mineral resources calculate tax;
• a restriction has been established with respect to applying K=0 once the best available technologies are implemented – for 10 tax periods;
• the tax rates correspond to the rates of the charge established for 2018[2], while at the same time provision is made for an inflation coefficient to be applied annually.
• taxpayers who apply special tax regimes (except for the taxation system applied when production sharing agreements are performed) are not obliged to calculate and make advance payments.
• provision is made for an obligation to file a set of reporting documents together with a tax return with respect to taxpayers operating category III facilities;
• the placement of waste in placement facilities that exclude a negative environmental impact (“NEI”) is not recognised as a taxable item, provided that a resolution of the competent authority to this effect has been filed with the tax authority.
• a restriction has been established on the application of the tax deduction: this is possible only within the amount of tax calculated within the limits of standards of permitted emissions and permitted discharges.

• a threshold for a tax deduction has been established: not more than 70% of the amount of tax calculated within the tax period.

Issues of tax administration of the environmental tax

A NEI facility is registered as a taxpayer according to its location, which is understood to mean the relevant constituent entity of the Russian Federation. Accordingly, if NEI facilities are located in different constituent entities of the Russian Federation, then a taxpayer needs to be registered in each constituent entity.

The Federal Supervisory Natural Resources Management Service (known by the Russian abbreviation Rosprirodnadzor) is obliged to provide the tax authorities with information about volumes of NEI (annually), as well as information and amendments to the information entered in state registers of NEI facilities (within 10 days from the date when the information and amendments were entered).

When conducting a desk tax audit of an environmental tax return the tax authorities have been granted the right to examine territories and premises as well as documents and items of the audited entity.

Unified recycling tax

The Draft Law provides for the currently collected recycling and environmental fees to be replaced with a unified recycling fee (actually a tax) and for this to be included in the Tax Code.

The Draft Law mainly transfers to the Tax Code the current regulatory provisions related to payment of the recycling fee (on vehicles) and the environmental fee (on certain types of goods that must be recycled once they have lost their consumer properties). What is more, who constitute the payers, the item subject to the fee, rates, and the procedure of calculation and payment more or less correspond to current regulation.

At the same time the legal regulation of waste treatment ensures that manufacturers and importers lose the incentive to recycle waste, in the sense of using waste in the business activities as additional sources of raw materials. For example, current legislation applies lowered standards of recycling to packaging produced from recoverable resources. The Draft Law contains no such provision.

Moreover, currently the main method of fulfilling recycling standards is to recycle waste either using one's own resources or by entering into contracts with parties that recycle waste, and the environmental fee is paid only by manufacturers and importers of goods who do not ensure the recycling of waste from the use of goods. The Draft Law also does not contain any such procedure.

In fact, the recycling fee that is proposed to be included in the Tax Code will represent a hidden excise duty on a wide range of goods, which is collected from manufacturers and importers who sell their goods in Russia. At the same time, as with the replacement of the charge for a negative impact on the environment, the inclusion of the recycling fee in the Tax Code will entail all the above problems associated with toughening the procedure of administration of these payments, including a threat of criminal liability.

Conclusions

If there are no significant changes in terms of the range of parties obliged to pay the ‘new’ fees, the item that is subject to these fees, the rates, and the procedure for calculation and payment, then with regard to the procedure of conducting audits, and, most importantly, with regard to the collection of the tax, once the law has been adopted, highly effective measures of tax administration will be applied, including direct recovery, the blocking of accounts, seizure of documents, collection of default interest, and imposition of fines and criminal liability. Despite the promises of government officials[3], this will clearly result in an increase of the tax and administrative burden on business.

Instead of specialists in the relevant area, these fees will be administered by the tax authorities, whose employees will probably lack the necessary qualifications at the beginning.

In the light of the above the decrease to 10% of the amount of fine under article 122(1) of the Tax Code for the failure to pay, in full or in part, an amount of environmental tax and/or of the recycling fee in the period from 1 January 2020 to 31 December 2029 does not seem to be a significant concession to business. Moreover, as follows from the explanatory note to the Draft Law, it is the possibility of imposing criminal liability together with other measures aimed at ensuring the payment and collection of taxes, that the Draft Law's proponents consider to be an advantage and a reason for transferring NEI charges to the tax authorities, since current legal regulation does not ensure a ‘proper incentive’[4] to perform the obligations to pay NEI charges.

An attempt to ensure a ‘proper incentive’ for the payment of the environmental charge seems to be a draft of a federal law prepared by the Russian Ministry for the Protection of the Environment and Natural Resources concerning the amendment of the Code of Administrative Offences in terms of toughening liability for a violation of legislation for dealing with production and consumption waste, which establishes draconian fines[5]. A draft law with similar content was submitted to the State Duma, the lower house of Russia's parliament, on 6 December this year by a representative[6].

The issue of whether the funds being collected are being spent on the designated purpose is still outstanding, and this is one of the main disadvantages of the Draft Law. The absence of the designated nature of the environmental and recycling taxes also evidences that the inclusion of the new payments to the Tax Code is pursuing only the goal of replenishing the treasury's coffers, and has nothing to do with resolving environmental issues[7].

What to think about and what to do

The provisions of the Draft Law need to be analysed together with tax and environmental (technical) departments of companies, then suggestions for improvement need to be prepared and sent to the relevant business associations and state authorities.

Help from your advisers

Pepeliaev Group’s lawyers are ready to analyse risks arising in connection with the Draft Law as a whole, and with regard to specific companies, to draw up proposals for improvement and to send them to the corresponding business associations and state authorities.