Russian Federation: Tax Alert 4/96 - New Tax Reform And Amnesty Decree

Last Updated: 27 May 1996
1. In this Tax Alert we consider Presidential Decree No. 685 of 8 May 1996 which was published in Rossijskaja Gazeta of 23 May 1996.

Status of the Decree

2. The Decree contains four categories of provision:

  • A limited number of items enter into force on 20 May 1996;
  • The Decree contains suggestions and proposals for a draft law on a "tax amnesty" and a draft law on deductible expenses and
  • depreciation. Such laws would have to be approved by the State Duma, which has the right to amend proposed drafts and it is very likely that the final version of such laws would differ from the intentions expressed in the Decree.
  • Other parts of the Decree are scheduled to enter into force at a later date and require additional Government regulations to be adopted or amended, although the Government is bound by the instructions given by the President;
  • Finally, the Decree makes some general statements of principle regarding the future development of the Russian tax system.


3. The following changes are directly implemented by the Decree, although in line with current practice, tax offices are unlikely to apply these until "officially" introduced by a letter or instruction from the State Tax Service.

  • From 20 May 1996, the rate of late payment interest is reduced to 0.3% per day. This effectively repeals the 0.7% per day rate that was brought into force by Presidential Decree No. 2270 of 22 December 1993, when the rate of inflation was much higher than at the present time. Whilst this reduction applies equally to personal income tax, it is however believed that the rate of interest for late payment of contributions to the non-budgetary funds will remain unchanged, i.e. 1% per day (except for the Social Insurance and Employment Funds), the interest in the
  • Funds' legislation being linked to the interest provisions in the Law on the Fundamentals of the Tax System.
  • "Technical errors" in the preparation of tax returns which are reported on a "timely basis" to the tax authorities are not considered to be tax violations, and thus penalties and interest are not payable from 23 May 1996 as a result of such errors.
  • "Technical error" appears to mean arithmetic error rather than, for example, differences in interpretation. The requirement to report such errors "on a timely basis" probably implies the obligation to disclose the error before it is discovered by the tax authorities. Previous practice was not to levy concealment penalties in such cases, but late payment interest remained payable.
  • If taxes have been collected by the tax authorities without proper legal basis, reimbursement has to take place within three days after the error has been conceded or the relevant court decision has entered into force. In the past, the tax authorities have been reluctant to reimburse such amounts but have instead set them off against future tax liabilities, and we believe that in practice the tax authorities will try and persuade taxpayers to accept an offset against other liabilities. The reimbursement would not, however, apply to overpayments of taxes as a result of a miscalculation by the taxpayer.
  • Interest on tax arrears due to the Federal budget as at 20 May will cease to be charged from that date, whilst arrears arising after 20 May will be charged at the 0.3 % per day rate described above. It should be noted that this provision does not extend to interest on tax payable to the local budget.


4. The Decree instructs the Government to prepare, within one month, a tax amnesty proposal which would include the following orders to the State Tax Service:

  • not to charge penalties and interest during 1996 on voluntary tax payments, including taxes previously concealed. This exemption would not apply if the tax authorities have "discovered" underdeclared or concealed taxes before such amounts are disclosed by the taxpayer;
  • to cancel the tax liabilities of enterprises fulfilling defence orientated orders.

Profits Tax: deductible expenses

5. Currently, an expense is only deductible if listed in the legislation as a deductible item. The Decree instructs the Government to amend the system of profit tax deductions and stipulates that all expenses connected with generating income are in principle tax deductible and lists certain explicitly non-deductible items.

6. It should be noted that the rules for deductibility of interest will change. The intention is to waive the limitation on the deductibility of interest on bank loans used for capital expenditure. It appears that interest will become deductible irrespective of the nature of the creditor and of the purpose of the loan. There will however be an overall ceiling for deductibility established by resolution of the Government.

7. Entertainment, business trips and training expenses will be deductible up to 10% of the post tax profit (as calculated before deducting the corresponding expense). Depending on the cost structure of an enterprise, the application of this rule may worsen the deductibility of certain expenses as compared to the current situation. If deductibility is not granted because the limit is exceeded, the Decree provides there should be a possibility of carrying forward these expenses to the subsequent accounting period.

Profits Tax: depreciation

8. Depreciation rates for profits tax purposes are somewhat more generous than the ones currently in force and are very similar to those used for property tax purposes in respect of foreign legal entities in Russia. Small enterprises are allowed to use higher depreciation rates. An item with a value less than 100 times the statutory minimum monthly wage (approximately US $ 1,500) can immediately be charged as an expense. The detailed scale of depreciation norms is to be abolished and four schedules for different types of property introduced with fixed rates. The schedules will broadly differentiate between: immovable property (except land), vehicles and office equipment, other equipment and intangible assets.

Profits Tax: accruals basis for sales

9. With effect from of 1 October 1996, sales income for profits tax purposes will be calculated on an accruals basis, such that a sale is recognised on the earlier of either the date a prepayment is received, or the production is shipped/service rendered. Small businesses will continue to be able to choose between the cash and accruals basis.


Value Added Tax: Export, Import, Invoicing

10. The Decree states that, with effect from 1 July 1996, input VAT incurred in relation to exported goods will only be reimbursed after the payment has first been received in a Russian bank account. This generally reinforces one of the current provisions of paragraph 22 of Instruction Ą 39 of the State Tax Service of RF "On the Procedure for Calculation and Payment of Value Added Tax" dated 11 October 1995 which states that, in order to recover input VAT on exported goods, a taxpayer must also keep in its files documents confirming payment for exported goods as well as a copy of the export contract with a foreign customer and customs declaration which confirms the export. The attention paid by the tax authorities to the compliance of a taxpayer with this provision of the Decree and Instruction No. 39 might therefore increase.

11. With effect from 1 July 1996, import VAT should be paid when payment is made for the imported goods but no later than the date the goods are cleared through customs. Currently, import VAT is payable upon clearance through customs. The new rule would thus adversely affect importers which make prepayments to their foreign suppliers.

12. With effect from 1 January 1997, an invoice has to be issued within 10 days after a prepayment has been received or supply has taken place.

13. Although the Decree establishes the right to escape an advance payments procedure for taxpayers from 1 January 1996, we believe the criteria for obtaining the exemption are unrealistic and unlikely to be met by most taxpayers.


14. There is a stated intention to make the Russian tax system more stable with future changes introduced and effective only from the beginning of a calendar year. The system of taxes is intended to be of universal application throughout Russia with a detailed but shorter list of taxes and a fair allocation of major taxes between local, regional and federal budgets. In line with this requirement it is expected that non-budgetary social funds will be consolidated from 1 January 1997.

15. The President promises a reduction in the number of tax allowances whilst lightening the tax burden for producers of goods.

16. It is envisaged that excise duties on mineral resources will be replaced by payments under production sharing agreements or fixed monthly payments to be levied on each extraction site. The proportion of environment pollution fines and penalties in total revenue is expected to increase.


17. The Decree goes some way to meeting criticism of the punitive penalty and interest regime in Russia, but nevertheless still falls short of marking a wholesale reform in this area of law. The amnesty provisions in relation to voluntary tax payments are important, are seen as a tool to assist in revenue collection, but the detailed proposals will need to be reviewed before being able to come to any conclusion on this point, and previous tax amnesties have had little effect. Finally, the general provisions relating to the profits tax law pre-empt some of the provisions of the draft Tax Code, and it remains to be seen whether these will indeed enter into force before the Code.


On an unrelated topic, the State Tax service issued a letter on 14 May 1996 (No PV-6-13/325) confirming that it will accept company accounts without an audit opinion.

This publication is intended for public guidance only and should not form the basis for specific decisions.

For further information contact the firm on +007 503 232 5511 or enter a text search 'Coopers & Lybrand' and 'Business Monitor'.

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