TAX AUDIT (ADMINISTRATION)
On January 01, 2009, the provisions which has long been introduced into the Tax Code (hereinafter the "Tax Code") will enter into force prescribing the mandatory extrajudicial procedure for appealing against decisions of tax authorities to subject a taxpayer to tax liability or to refuse to subject to tax liability.
Judicial appeal against such decisions is only possible after taking recourse to a higher tax authority.
In the event an appeal is filed with a higher tax authority, the decision being appealed enters into force only upon examination of the taxpayer's appeal application. Prior to the date specified the tax authority does not have the right to perform any actions aimed to enforce the decision being appealed.
Thus, in the event you have, or are going to, become a subject of tax inspections, appeals against the results of such inspections (both cameral and field) where a decision is made after January 01, 2009, shall be made in accordance with the new procedure.
1. Expenses on remuneration of labor (Article 255 of the Tax Code)
1) From January 01, 2009, the list of expenses on remuneration of labor recognized for tax purposes (toward reducing the income tax base) is to be extended. A taxpayer is entitled to include the following into such expenses:
- Amounts of payments (contributions) of employers made pursuant to the Federal Law "On additional insurance contributions to the funded component of labor pensions and state support for the formation of pension savings". These contributions are recognized for tax purposes within the overall limit – in the amount not exceeding 12 percent of expenses on remuneration of labor fixed for employers' payments (contributions) payable under employee long-term life insurance contracts, voluntary pension insurance and/or employee non-state retirement plan;
- Expenses on reimbursing employees for expenditures for interest payments on loans (credits) for purchase and/or construction of residential premises. The indicated expenses are recognized for tax purposes in the amount not exceeding 3% of expenses on remuneration of labor. This provision shall be in effect until January 01, 2012.
Amounts paid to reimburse employee expenditures for interest payments on loans (credits) for purchase and/or construction of residential premises are also exempt from the unified social tax and the personal income tax. We believe that these developments of the Tax Code may be used to the mutual benefit of employers and employees as a legal way of optimizing expenses on remuneration of labor (for instance, these payments may substitute year-end bonuses etc.).
2) The maximum value of contributions under voluntary personal insurance agreements, which may be recognized towards reducing the income tax base, has been increased. From January 01, 2009, such expenses may be included by the taxpayer in the amount not exceeding 6 percent of the expenses on remuneration of labor (currently 3 percent).
2. Expenses on scientific research and/or development activity (Article 262 of the Tax Code)
For the purpose of encouraging scientific research and development activity, taxpayer expenses in these fields (including those that yielded no positive result) in accordance with the list determined by the Government of the Russian Federation, shall be recognized in the reporting (tax) period in which they were incurred and included into other expenses in the amount of actual expenditures with the factor of 1.5.
For the first time in tax legislation a provision enabling the taxpayer to decrease the income tax base by an amount exceeding the taxpayers actual expenses is established.
3. Other expenses related to production and/or sale (Article 264 of the Tax Code)
1) From January 01, 2009, the taxpayer is entitled to include into expenses not only those amounts spent on training and retraining of employees, but also those spent on their training at professional education programs in Russian and foreign educational institutions.
In addition, it will be allowed to recognize expenses on training of prospective employees who are to be employed for no less than a year. However, a labor agreement shall be entered into within three months following the completion of training. If such agreement is terminated prior to the expiry of one year (except for termination of a labor agreement on account of circumstances beyond the reasonable control of the parties – Article 83 of the Labor Code of the Russian Federation), the taxpayer shall include the amounts spent on the training into non-operating costs of the period in which the labor agreement was terminated. The same rules will apply to cases where a labor agreement is not entered into upon the expiry of three months following the completion of training by a prospective employee.
Mandatory terms of employment upon the completion of training of a taxpayer's employees (persons employed under a labor agreement at the time of training) are not fixed.
2) The amount of expenses on acquisition of exclusive rights to computer software, the acquisition costs of which may be taken into account once in the composition of other expenses without incurring depreciation, is increased to 20,000 Rubles (currently 10,000 Rubles).
3) To the delight of all taxpayers the provision that allowed including expenses decreasing the income tax base for expenditures on payment of daily and field allowances only within the norms approved by the Government of the Russian Federation is excluded from the Tax Code. Concurrently, the corresponding provision, which prohibited including the expenditures on payment of daily and field allowances in excess of the norms established by the Government of the Russian Federation, is excluded from Article 270 of the Tax Code.
From 2009 a taxpayer is entitled to maintain records of these expenses in accordance with limits independently established by its local normative act or collective agreement.
4. Particulars of determining expenses when selling goods and/or property rights (Article 268 of the Tax Code)
The law has closed the chapter on numerous disputes between tax authorities and taxpayers and eliminated a technical discrepancy in the wording of Article 268 of the Tax Code which caused a number of disputes, including lawsuits over the opportunity to reduce the income tax base by the amount of expense incurred in the result of selling property rights (for instance, a share in the charter capital of a limited liability company).
In particular, from January 01, 2009, in accordance with the changes in Clause 2, Article 268 of the Tax Code, damages of a taxpayer recognized for tax purposes include, without limitation, damages from the sale of property rights. In addition, it should not be forgotten that such damages must be documented and economically feasible, i.e. comply with the requirements of Article 252 of the Tax Code.
5. Depreciation (Article 256-259.3 to the Tax Code)
Amendments introduced to depreciation method are the most significant changes of the procedure for determining the income tax base. The most essential amendments are the following:
- By January 01, 2009 all taxpayers shall adopt a decision on the depreciation method for use and stipulate it in its accounting policy. A taxpayer, in respect to all depreciable property items (save for buildings, structures, transfer devices and intangible assets included in eight – ten depreciation groups in regard to which there is no choice and only the straight-line depreciation method is permitted) may determine only one depreciation method;
- A taxpayer is stipulated to have the right to include capital expenditures as part of expenses of a reporting (tax) period in the amount not exceeding 10 percent of the initial cost of fixed assets (save for fixed assets received gratuitously) and not exceeding 10 percent of expenses incurred in connection with completion, equipping, reconstruction, modernization, technical re-equipment, and partial liquidation of fixed assets;
- Depreciation methods during operation of items of fixed assets can be amended from the beginning of the next tax period, and changeover from the declining balance method to the straight-line method can be performed no more than once in five years. There are no restrictions for the changeover from straight-line method to the declining balance method;
- Capital investments will be included in the depreciable property in form of inseparable improvements to fixed assets that are provided under the gratuitous use agreement, the depreciation procedure of such property has been determined;
- New procedure for determining residual value of property depreciated under the declining balance method is established;
- Additional criteria for determining a depreciation group (subgroup) for fixed or intangible asset are established;
- Each depreciation method is independently regulated by the new Articles of the Tax Code – Articles 259.1 and 259.2;
- The declining balance method for accrual of depreciation is materially amended: upon application of the declining balance method, depreciation shall be compounded for the whole depreciation group rather than on individual fixed or intangible assets; a fixed depreciation rate is established for each depreciation group; the residual value limit for fixed assets in the amount of 20 percent, subsequent to achieving which changeover to the straight-line method, followed is annulled;
- Reduction factor of 0.5 applied to passenger cars and minivans with initial cost of 600 thousand rubles and 800 thousand rubles, respectively, is annulled. If purchasing such a vehicle is planned, it is better to postpone the purchase to the beginning of 2009.
6. Expenses not recognized for tax purposes (Article 2570 of the Tax Code)
Another controversial issue causing numerous court disputes with the tax authorities has been settled. The legislator expressly established that starting from January 01, 2009 expenses in the form of remuneration amounts and other payments made to members of the Board of Directors cannot be recognized for tax purposes in reducing income tax base.
There is a positive aspect with regard to payments made in favor of members of the Board of Directors after January 01, 2009; the requirement necessitating the inclusion of such payments into the tax base for the Unified Social Tax cannot be imposed on the taxpayer.
7. Peculiarities of tax calculation and payment by a taxpayer holding separate subdivisions (Article 288 of the Tax Code)
Additional obligations are imposed on the taxpayer to notify the tax authority not only of selection of a responsible subdivision for tax payment in a certain constituent entity of the Russian Federation, but to notify the tax authority of changes in tax payment procedure, number of subdivisions in the territory of the constituent entity or other changes affecting the tax payment procedure. However, the term for delivering such notice is not stipulated in the Tax Code.
In the event of establishment of new separate subdivisions or liquidation of separate subdivisions within the current tax period, the taxpayer shall, within 10 days following the end of the reporting period, notify the tax authorities located on the territory of a constituent entity of the Russian Federation where separate subdivisions are established or liquidated, of the choice of a separate subdivision through which taxes shall be paid to the budget of such constituent entity of the Russian Federation.
In this event the tax shall be paid within the terms prescribed by the Tax Code starting from the reporting (tax) period subsequent to the reporting (tax) period in which such separate subdivision has been established or liquidated.
UNIFIED SOCIAL TAX
List of payments not subject to taxation is extended (Article 238 of the Tax Code) and additionally includes:
- Amounts of payments for education of employees under primary and secondary professional education programs, professional training, and re-training included in expenses recognized during determination of the corporate income tax base;
- Amounts paid by companies (individual entrepreneurs) for reimbursing their employees' expenditures on interest payment on loans (credits) for the purchase and/or construction of residential premises, included in expenses recognized when determining corporate income tax base;
- Employer contributions made by the taxpayer pursuant to the Federal Law "On additional insurance contributions to the funded component of labor pensions and the state support for the formation of pension savings" in the amount of contributions paid but not exceeding 12,000 Rubles per year for each employee, in whose favor employer contributions were paid.
PERSONAL INCOME TAX
1. Composition of income not subject to taxation (Article 218 of the Tax Code)
Composition of income not subject to taxation is extended; composition of such income additionally includes:
- Amounts of payment for education of the taxpayer (note: it means payments made by third parties) under primary and secondary general and professional education programs, professional training, and re-training;
- Contributions for co-financing of pension savings aimed at ensuring state support for the formation of pension savings pursuant to the Federal Law "On additional insurance contributions to the funded component of labor pensions and the state support for the formation of pension savings" (note: it means payments made by third parties);
- Employer contributions made pursuant to the Federal Law "On additional insurance contributions to the funded component of labor pensions and the state support for the formation of pension savings" but not exceeding 12,000 rubles per year for each employee, in whose favor employer contributions were paid;
- Amounts paid by companies for reimbursing their employees' expenditures on interest payment on loans (credits) for the purchase and/or construction of residential premises, included in expenses recognized when determining corporate income tax base.
2. Standard tax deductions (Article 218 of the Tax Code)
1) The amount of income upon receiving which a taxpayer shall lose the right to the standard tax deduction of 400 Rubles has been increased.
From January 01, 2009, the right to such deduction shall cease from the month in which income exceeds 40,000 Rubles (currently 20,000 Rubles).
2) The tax deduction amount for persons providing for the welfare of children has been increased to 1,000 Rubles. Concurrently, the amount of income that is subject to deduction has been increased from 40,000 to 80,000 Rubles. In addition, from January 01, 2009, such tax deduction may be granted in double amount to one of the parents in cases where the second parent waives such tax deduction.
3. Social deductions (article 219 of the Tax Code)
1) List of expenses in relation to which a taxpayer is entitled to claim social tax deductions is extended; in particular, within the context of the current pension reform social deduction may provided when the taxpayer pays additional insurance premiums toward pension savings pursuant to the Federal Law "On additional insurance contributions to the funded component of labor pensions and the state support for the formation of pension savings";
2) The amount of factual expenses the taxpayer is entitled to claim as part of social deductions, excluding expenses for education of children (Sub-Clause 2, Clause 1, Article 219 of the Tax Code) and expenses for expensive medical treatment (Sub-Clause 3, Clause 1, Article 219 of the Tax Code), is increased from 100,000 to 120,000 Rubles.
4. Taxation in the form of material gain (Article 212 of the Tax Code)
Procedure for determining material gain obtained from interest savings on loan (credit) funds will be amended. Now, calculation of such gain will be performed based on the difference between the sum of interests calculated on the basis of two thirds of the refinancing rate established by the Central Bank of the Russian Federation as of the date the taxpayer factually receives income and the sum of interests calculated pursuant to the conditions of an agreement.
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.