This Tax Alert discusses the new amended version of the recent letter on the taxation of GKOs (treasury bills) and other State securities, which was issued jointly by the Central Bank of Russia (CBR), the Ministry of Finance (MinFin) and the State Tax Service (STS) dated 4 February 1997. The amended letter clarifies some of the uncertainies raised by the earlier version of the letter with respect to the practical application of the new tax regime for transactions with State securities with effect from 21 January 1997 and was discussed in our Tax Alerts No. 2/97 of 30 January 1997, No. 3/97 of 18 February 1997 and No. 4/97 of 7 March 1997. In addition to the amended letter, the STS has also issued Letter No. BE-6-36/337 dated 30 April 1997, which provides forms to be used in connection with payment of the tax and certain other filing information.
The amended letter provides that each of the following types of income should be taxed at a 15% rate. Tax alert No. 3/97 provides in detail how the tax would be applied to each type of income.
capital gains on couponless state securities issued at a discount (including GKOs) and the positive revaluations on these types of securities which should be conducted by Russian banks and other entities required to revalue under Russian law
accrued coupon income on certain securities - which is defined as the difference between the accrued coupon paid by the buyer at the time of purchase (if any) and the coupon amount paid by the issuer and/or the accrued coupon received upon sale - this mainly applies to OFZs, Savings Certificates and RAO VSM
interest income on other state securities issued with a coupon for which calculation of accrued coupon should not be performed.
The amended version of the letter has been stamped by the Ministry of Justice as not requiring registration by decision of the Ministry of Justice of the Russian Federation No. 07-02-150-97 of 22 April 1997.
TAXATION OF NON-RESIDENTS
The amended letter addresses specifically the taxation of non-resident purchasers through "S" accounts. The letter provides that the bank in which the S account is held is responsible for the calculation, withholding and submission to the tax authorities of the 15% tax on state securities. Therefore, foreigners seeking exemption from the tax under relevant double tax treaties should file treaty exemption claims with the bank in which they maintain an "S" account.
Unfortunately, the procedure is not completely clear in the case of a non-resident who maintains an "S" account in more than one authorised bank because the letter can be read to imply that the non-resident should choose one of those banks to make all the withholdings and payments on its behalf. However, we believe this is simply a case of imprecise drafting and the Russian authorities will not seek to impose such an impractical requirement.
INTEREST INCOME ON COUPONLESS STATE SECURITIES WITH DISCOUNT
The original letter did not address specifically couponless state securities issued at a discount other than GKOs. The amended letter makes clear that the taxation of other non-coupon state securities issued at a discount, including the securities of local and regional government bodies, will be the same as that described for GKOs.
SUBMISSION OF TAX RETURNS
The calculation of taxes in accordance with the regime provided in the letter should be performed by the 10th of each month. Therefore, the next submission of forms should be made by 12 May 1997 (since 10 May 1997 is a Saturday the next working day is 12 May 1997). For entities that have not filed the forms for prior months, all forms may be filed by 12 May 1997.
Negative revaluation of state securities for 1996 by banks and other Russian entities required to revalue
For 1996 profits tax, the letter states that negative revaluations on OFZs and RAO VSM may be deducted only if they arise after 1 April 1996 and only within the amount of positive revaluation for the year. Negative revaluations of exempt issues of GKOs are not tax deductible and for non-exempt issues of GKOs are deductible within the amount of positive revaluations.
The letter of the STS dated 30 April 1997 provides that the Russian banks and other Russian entities required to perform any recalculations based on paragraph 8 above should submit these recalculations together with their second quarter 1997 returns.
The STS letter of 30 April 1997 also contains a recommended form of the report of income tax calculation to the tax authorities.
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.
For further information contact Alla Shaulina on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Alla_Shaulina@ru.coopers.com or enter a text search 'Coopers & Lybrand' and 'Business Monitor'.
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