Review Of Crisis Management Amendments In Tax Legislation - Sales Taxes: VAT, GST

Temporary Crisis Management Measures

Confirmation of the right to apply zero VAT rate

Russian taxpayers who have placed their goods under the customs regime of export, international customs transit, free customs zone, or transportation of stock in the period from July 01, 2008, to December 31, 2009, are granted an additional term of 90 days to collect and file documents confirming the validity of applying the zero tax rate. The time for determining the tax base related to the term for submitting such documents has been moved accordingly.

Specifics of recording under expenses the interest rates on liabilities (Article 269 of the Tax Code)

Up to and including December 31, 2009, the application of the provision according to which the threshold interest rate recognized as an expense is taken as equal to the refinancing rate of the Central Bank of the Russian Federation multiplied by 1.1 (liabilities in Rubles) and equal to 15 percent (liabilities in foreign currencies), provided that there is not commensurate liabilities, has been suspended.

It is prescribed for the term of suspension that the threshold interest rate recognized as expenses is taken as equal to the refinancing rate of the Central Bank of the Russian Federation multiplied by 1.5 for liabilities in Rubles and equal to 22 percent for liabilities in foreign currencies.

Procedure for calculating tax and advance payments for the IV quarter of 2008

Taxpayers making monthly advance payments according to the results of the reporting (tax) period are granted the right to change the procedure for calculating advance payments due for the fourth quarter of 2008.

The amount of monthly advance payment due in the fourth quarter of 2008 may be calculated on the basis of the actually received income calculated using the accrued method from the beginning of the reporting period to the end of the month preceding the month of the advance payment. The change in the procedure for calculating advance payments of income tax should be represented in the accounting policy of the relevant entity. Taxpayers who have exercised the right to change the tax payment procedure shall give notice thereof to the tax authority at the place of their registration prior to the fixed due date of the relevant advance payment, including cases where the calculated advance payment amount is negative or equal to zero.

Tax audit (administration)

Duration of acts of legislation on taxes and duties (Article 5 of the Tax Code)

A special procedure has been prescribed for the entry into force of legislative acts on taxes and duties which improve the situation for taxpayers. Provided that such acts expressly provide for such measures, they will enter into force from the date of their official publication. This innovation will be applicable to relations arisen after October 01, 2008.

General issues of tax base calculation (Article 54 of the Tax Code)

From January 01, 2010, taxpayers are granted the right to re-calculate the tax base and tax amounts of the tax (reporting) period in which errors (misstatements) attributable to prior tax (reporting) periods are revealed, as well as in the events when errors (misstatements) made resulted in overpayment of tax. This right may be exercised where it is impossible to determine the period in which such errors (misstatements) were made.

Writing off bad debts (Article 59 of the Tax Code)

From January 01, 2009, the provision prescribing a new ground for validating and writing off bad debts on taxes and duties. Bad debts are recognized as debts on taxes, duties, penalties and fees which have been written off of taxpayers' bank accounts, but not transferred to the state budget system of the Russian Federation. Such debts will be validated as bad, provided that the relevant paying banks are liquidated.

This provision will apply to the amounts of a tax, duty, penalty or fee which have been written off of accounts of taxpayers, duty payers, and tax agents, but not transferred by banks to the state budget system of the Russian Federation prior to the date of entry into force of the law on introducing the said amendments to the Tax Code of the Russian Federation (hereinafter the "Tax Code").

Thus, many taxpayers will be enabled to "clean up" their business accounts with tax departments.

Granting tax deferment/extension (Articles 64-64.1 of the Tax Code)

From January 01, 2009, new provisions prescribing additional qualifications for deferments and extensions on federal taxes are to enter into force. Deferments or extensions on federal taxes, as well as interest fines and penalties thereon, may be granted if the outstanding tax amount of an entity on the first day of the month of application for deferment or extension exceeds 10 billion Rubles, and its lump sum settlement may give rise to adverse social and economic consequences. It should also be noted that the said decisions on varying due dates of taxes may be adopted before January 01, 2010.

Suspending bank account operations (Article 76 of the Tax Code)

Note the major adopted amendments to the procedure of suspending taxpayer bank account operations:

Tax authorities are granted the right to suspend operations on an account for execution of an enforcement decision not only on recovering a tax or levy but also penalty and fine.

Decision on canceling a suspension of operations on accounts of a taxpayer company shall be served to a bank representative by a tax authority officer not later than the day following the day of adopting such decision.

Starting from January 01, 2010 tax authority shall bear liability in form of interest in the event of failure to comply with timeframes stipulated for cancellation of a decision on suspending operations on accounts or for serving such decision to a bank representative (delivery to a bank).

A taxpayer shall be paid interest for each calendar day of failure to meet the timeframe. The interest rate employed shall equal the refinancing rate of the Central Bank of the Russian Federation.

In-house tax audit (Article 88 of the Tax Code)

The issue with regard to procedure of holding an in-house tax audit of a revised tax declaration submitted prior to the end of an in-house tax audit of an initial declaration has been settled. It is established that in this event the in-house tax audit of the declaration (calculation) submitted earlier shall be terminated and the new in-house tax audit shall commence based on the revised tax declaration (calculation).

Documentation of tax audit results (Article 100 of the Tax Code)

The timeframe for serving an act of tax audit to a party with respect of which an audit is carried out has been determined. This timeframe constitutes 5 days from the date of such act. Taking into account Article 6.1 of the Tax Code, the term is calculated in business days.

Adopting a decision based on tax audit results (Article 101 of the Tax Code)

It has been clarified that in the event a taxpayer failed to submit documents (or information) with regard to the taxpayer's activity to a tax authority in timeframes stipulated in the Tax Code, such documents (or information) received by the tax authority shall not be deemed received in violation of the Tax Code. This regulation is significant in the context of admission of evidence received in violation of the Tax Code.

Value added tax

Operations not subject to taxation (Article 149 of the Tax Code)

Starting from January 01, 2009 operations on selling ferrous scrap metal shall not be subject to taxation. Earlier such incentive was granted only with respect to non-ferrous scrap.

Import of goods not subject to taxation to the Russian Federation (tax-exempt import) (Article 150 of the Tax Code)

Grounds for granting incentives at import of technical equipment to the Russian Federation (including components and spare parts) have been changed.

Firstly, the provision on the necessity to import equipment as a contribution to charter capital in order to qualify for the incentive has been cancelled. This means that the incentive can be received in the event the equipment is imported to the Russian Federation under any foreign trade agreement.

Secondly, equipment is limited to process equipment analogs of which are not manufactured in Russia. List of such equipment will be determined by the Government of the Russian Federation.

This regulation comes into force from January 01, 2009 but no earlier than the first day of the next VAT period when the relevant Resolution on approval of the equipment list of the Government of the Russian Federation will take effect.

Specifics of determining the tax base by tax agents (Article 161 of the Tax Code)

A procedure for determining value added tax base has been established and tax agents in respect to transactions subject to VAT have been defined. Previously these issues have not been regulated in the Tax Code:

1) In the event of disposal (or transfer) of state property comprising the treasury of the Russian Federation, constituent entity of the Russian Federation or a municipal entity, tax agents are purchasers (transferees) of the said property, excluding individuals who are not registered as individual entrepreneurs.

2) In the event of disposal of property under a court order (including but not limited to bankruptcy proceedings), tax agents are state bodies, entities or individual entrepreneurs authorized to effect the disposal of the said property.

3) In the events of transfer of property rights, performance of works and provision of services on the territory of the Russian Federation by foreign persons not registered with the tax authorities, in cases where such transfer is effected through intermediaries by virtue of mandate agreements, commission agreements, or agency agreements, the tax agents are persons registered with tax authorities as taxpayers and conducting business activities with participation in settlements under such intermediary agreements with the said foreign persons.

Procedure for confirming the right to tax refund when applying zero tax rate (Article 165 of the Tax Code)

It is now permitted to substitute customs declarations (or their copies) with registry entries (lists) of customs declarations containing the particulars of customs clearance for the goods in accordance with the customs export regime, or information on actually exported goods with marks of the border customs authority of the Russian Federation.

Procedure for calculation, inclusion, payment and deduction of VAT when receiving advance payment (Articles 168, 169, 170, and 171 of the Tax Code)

The Law regulates an entire range of issues arising when VAT is calculated in the event of receipt/payment of advance payments:

when receiving advance payments a taxpayer is made responsible for presenting VAT to the purchaser of goods (works, services), along with the payment;

when receiving advance payments, a commercial invoice ('schet-faktura') is stipulated to be issued no later than Five (5) days from the day of receipt of payment installments towards future supplies (or performance of works, or provision of services) or transfer of proprietary rights;

requirements for commercial invoice issued when receiving advance payments have been established;

procedure for refunding VAT by a purchaser paid as part of an advance payment has been legalized;

right to deducting accrued VAT paid by a purchaser when transferring advance payments has been legalized; said right is exercised on the basis of commercial invoices issued by sellers when receiving an advance payment.

Calculation and payment of VAT in case of in-kind settlements (Articles 168, 172 of the Tax Code)

The requirement binding taxpayers to pay VAT to each other separately on the basis of a payment order for transfer of funds when exchanging goods, offsetting mutual claims and using securities in settlements has been repealed.

At the same time, provisions of Article 172 of the Tax Code allowing for a possibility of claiming deduction of "input" VAT only when possessing a respective payment order evidencing VAT transfer were repealed.

At the same time, amounts of VAT a taxpayer is charged with when purchasing goods (works, services), or proprietary rights, recorded on the books before or on December 31, 2008 in the course of selling and purchasing goods, offsetting mutual claims and using securities in settlements from January 01, 2009, have been stipulated to be subject to deduction under the procedure effective on the date when the respective goods (works, services), or proprietary rights were recorded on the books, i.e. under the effective procedure.

Personal Income Tax Property tax deductions (Article 220 of the Tax Code)

The cap amount of property tax deduction a taxpayer can be granted when covering costs on construction of newly built structures or acquisition of residential real estate within Russia has been increased from 1,000,000 to 2,000,000 rubles. This rule has a retroactive effect in that it extends to legal relations arising from January 01, 2008.

Calculation of taxes with respect to certain types of income. Procedure for paying taxes (Article 228 of the Tax Code)

Sub-Clause 2 Clause 1 Article 228 of the Tax Code was amended thus putting an end to numerous disputes with tax authorities on necessary performance by legal entities and individual entrepreneurs of tax agent responsibilities when acquiring proprietary rights, e.g. shares in a share capital of a Limited Liability Company, from individuals under a paid services agreement.

Starting from January 01, 2009 a purchaser is no longer responsible for acting as a tax agent inasmuch as now the individual is made responsible for paying tax when receiving income from exercising proprietary rights.

At the same time, tax agents regained their obligation to calculate and withhold Personal Income Tax provided they happen to be the source of income received by a taxpayer whether in monetary equivalent or in kind by way of gift.

Corporate Profit Tax Depreciation (Articles 258-259 of the Tax Code)

The principle changes made to the tax legislation and taking effect as of January 01, 2009 pertaining to accrual of depreciation and amendment of provisions of Articles 258-259 of the Tax Code were described in sufficient detail in our previous Tax Legal Briefing.

Among additional changes introduced, the following should be noted particularly:

Increase of bonus depreciation from 10 to 30 percent in relation to fixed assets included into the 3rd through 7th depreciation groups.

Cancellation of the 0.5 reduction factor applicable to cars and passenger minibuses with initial cost of 600,000 and 800,000 respectively, including vehicles commissioned into operation after January 01, 2009.

Expenditures associated with compulsory and voluntary property insurance (Article 263 of the Tax Code)

The list of types of voluntary insurance has been made an open one, thus enabling a taxpayer to recognize its insurance premiums incurred under any property insurance as its expenditures, provided the taxpayer's business requires procurement of such insurance under the effective Russian legislation.

In addition to civil liability insurance (against inflicting harm or injury), provided the taxpayer's business requires procurement of such insurance under the effective international obligations of the Russian Federation or conventional international requirements, a taxpayer has been permitted to recognize insurance of liability under an agreement as its expenditures.

Tax rates (Article 284 of the Tax Code)

Reduction of profit tax rate is the most popularized amendment to the Tax Code. Starting from January 01, 2009 the aggregate tax rate will constitute 20 percent (unless a lower rate is established). That being so, the tax rate will be reduced exclusively through the share of the federal budget – to be established at 2.5 percent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Russian Federation: Review Of Crisis Management Amendments In Tax Legislation