According to Moscow tax officials, the Moscow tax authorities expect all tax returns for 1997 to be submitted in the new format. We therefore recommend that representative offices comply with this requirement, but if the change in format adversely impacts your ability to complete the tax return accurately or to meet the tax return filing deadline, you may wish to negotiate submission in the old format with your tax inspector, with our assistance if needed. We understand that some tax authorities, for example St.Petersburg, continue to accept tax returns in the old format.
Recommendations on completion of the new Tax Return ("TR") form have not yet been issued by the Federal State Tax Service but should be in the near future. These recommendations are likely to be issued in the form of amendments to Instruction ü 34 "On taxation of profits of foreign legal entities" and dated December 1997 in order to allow their introduction with effect from 1998 (similar to how the 1997 tax return form was introduced). We describe below the amendments as currently understood, but some issues may be clarified by the official recommendations to follow.
The new TR is an eight-page document and much more detailed than the old two-page TR. We understand that there is no requirement to use an official form - substitutes in a similar format are acceptable. There are different sections to be completed by foreign legal entities depending on the different types of presence in Russia, as described below:
- The general part of the TR (Sections 1-3) should be completed by all foreign legal entities which are obliged to file TRs. Sections from 4 to 7 of the TR should be completed in respect of those activities of a Russian permanent establishment of a foreign legal entity which are subject to Russian profits tax calculated by the direct method (revenues less costs).
Section 8 of TR should be completed by:
- Russian legal entities or individuals who are considered to be a dependent agent, thus constituting a permanent establishment of the foreign legal entity; andin respect of activities of foreign legal entities subject to Russian profits tax calculated by the notional method (i.e. taxable profit calculated as a 25% mark-up on costs or 20% margin on revenues).
The TR should now be completed in two copies, the first of which should be submitted to the territorial (e.g. Moscow) tax inspectorate and the second should be sent to the Federal State Tax Service for information purposes.
Changes to the disclosure of general information about the foreign legal entity (Sections 1-3)
If the TR is submitted in the first or last year of activity of the foreign legal entity in Russia, this should now be indicated in the TR. The TR now contains a more detailed list of potential activities which the foreign legal entity could carry out in Russia.
The TR should contain the names of any Russian companies associated with the reporting foreign legal entity. If during the reporting period the foreign legal entity and its Russian associated companies carried out any transactions other than at arms-length 'under the terms of the relevant double tax treaty', this should be stated in Section 1. However, no detailed disclosure of such transactions is required and it is unclear what reporting obligation applies if there is no applicable double tax treaty, or provision therein.
In addition to stating the methods adopted for accounting for income and inventory, Section 2 of TR should also disclose the method adopted for calculating depreciation.
Detailed information on the types and amounts of Russian-source income derived by the foreign legal entity, as well as on the amounts of Russian income tax due to be withheld and actually withheld at source should be disclosed in Section 3 of the TR.
Additional financial information to be disclosed in the TR (Sections 4-8)
In Section 7, the foreign legal entity can self-assess the profits tax liability and, if the tax is calculated at a lower rate, provide details of the regulations supporting the applicability of this tax rate.
Section 8 is specifically designed for reporting on those activities which are either carried out through a dependent agent or subject to profits tax calculated by the notional method. This section does not itemise the categories of expenses which are to be reported on, and thus the level of detail will need to be determined in each case. However, we would recommend that the level of detail is not materially less than that provided in the 1996 TR in the previous format.
Changes in the Moscow requirements for the Activity Report
In this part of the tax alert we address changes introduced to the State Tax Inspectorate's requirements as to the contents of the annual activity report, as compared to the requirements for similar reports in 1996. Please note that requirements in other regions of Russia may be different from those described below.
If the foreign legal entity has state licences for carrying out specific activities in Russia, copies of these licence certificates should be attached to the activity report. Details of bank accounts maintained by the foreign legal entity in Russian banks in 1997 should be disclosed, using both the 1997 and 1998 bank account numbers.
In addition to details of contracts realised in Russia in 1997 with the participation of the Moscow representative office of the foreign legal entity, the activity report should also disclose the extent to which the Moscow representative office was involved in facilitating these contracts (i.e. market research, negotiation, signing, carrying out credit control, etc.)
Information on all notifications of income from Russian sources (forms 1011FE) submitted by the foreign legal entity in 1997 (if any) should be disclosed in the activity report. If amounts of income actually received from sources in Russia during 1997 were different from the amounts stated in the relevant Notifications, the reasons for these differences should be explained.
If any sales proceeds are declared in the tax return for 1997, the activity report should contain a detailed list of sales invoices issued/paid during the year.
If in 1997 the foreign legal entity paid Russian-source income to another foreign legal entity, a return of such income paid and taxes withheld by the foreign legal entity at source should be submitted together with the activity report for 1997. In 1998, submission of this return will be required quarterly.
Point 16 of the Letter by the Moscow State Tax Inspectorate requires that foreign legal entities which do not declare any sales proceeds in their tax return should declare all expenses related to their activity in Russia regardless of deductibility under Russian profits tax law. This provision may adversely affect the profits tax liabilities of foreign legal entities which calculate a notional taxable profit based on a 25% mark-up of their Russia-related expenses. We believe there is insufficient legal basis for this requirement and it may be subject to challenge.
If any profits tax reliefs are claimed by the foreign legal entity under either domestic tax law or an applicable double tax treaty, reference to the relevant provisions should be made in the activity report.
As transport tax was abolished as from 15 November 1997, it has now been confirmed that transport tax due for November 1997 should be calculated on 50% of total salaries for that month.
If you wish to discuss the impact of the new format of the tax return or Activity Report on the disclosure obligations of your company, please call your normal contact person in the tax department of Coopers & Lybrand. If you would like to receive a copy of the new tax return form or the new requirements relating to the activity report, please contact Svetlana Tsyganova in our Moscow office.
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