Russian Federation: Analysis 3/96 - Supervision Of Banking Sector / Double Tax Treaties / State Pens

Last Updated: 5 September 1996
In this issue of analysis we begin by reviewing new developments in the supervision of the banking sector. We examine the recent development of double taxation treaties between Russia and other countries, and then we take a look at the State Pension Fund. Our economic analysis focuses on the likely effect of the new Land Code on the problematic agricultural sector.

For further information on developments in double taxation arrangements, contact Lioudmila Mamet in our Moscow office on (095) 232 5511.

Banking Supervision

In line with its supervisory function and conscious of the need to introduce conditions designed to strengthen the Russian Banking sector, the CBR's amended banking ratios (introduced at the end of January 1996) became effective as from 1 April 1996.

The amended ratios represent a significant change to those previously required and deal with such areas as:

  • increased minimum capital requirements;
  • minimum capital adequacy ratios
  • increased and improved liquidity requirements
  • increased limits of lending exposure limits to single borrowers or groups of connected borrowers
  • new maximum limits on lending to shareholders and management
  • maximum dependence on single depositors for source of funding
  • limits on the extent to which banks can purchase shares in other legal entities.

In recognition of the difficulties which certain banks may have in complying with the new ratios, the CBR have permitted an interim period (up to 1 July 1996) during which time they will not be penalised for failing to comply provided that the ratios do not worsen during the intervening period. The new Instruction also provides for a timeframe for the introduction of tighter requirements up to the year 1999.

The changes will affect banks in different ways depending on their current operations. The new ratios in respect of lending operations are likely to pose some banks considerable difficulty in achieving the required targets in the short term due to the nature of current lending practices. Under the previous rules banks were permitted to lend to individual customers up to a level of 75% of the bank's capital with guarantees from third parties being subtracted from the exposure for the purposes of the calculation. Under the revised requirements the limit is set at 60% with no deduction for guarantees.

In summary, the Instruction is a definite positive step towards the aim of a better regulated and strengthened banking sector. The Instruction should result in ultimately a reduced number of banks with a greater concentration on better capitalised banks. The ratios also favour a reduction in the practice of banks servicing primarily shareholders and should encourage a greater spread of banking activities.

New treaties, new chances

Currently, there are twenty-six agreements on the avoidance of double taxation in force between Russia and other countries, seventeen of which were concluded with Russia's legal predecessor, the Union of Socialist Soviet Republics. In view of the dramatically changed circumstances since the collapse of the Soviet Union, most of the old Soviet treaties are currently being renegotiated and thirty-four new double tax treaties are being prepared.

A multilateral double tax treaty has been in force between all Comecon countries. Unlike many other treaties between former socialist countries, the Comecon tax treaty was repudiated only by Hungary and remains in force between Russia, the Czech Republic and Mongolia. New treaties have been concluded with Poland, Bulgaria and Rumania.

Over the last five years, a combination of restrictive domestic currency legislation and changing tax legislation has inspired a massive capital flight from Russia. The battle against tax evasion and currency law violation is a top priority for Russia's tax and financial authorities, which is reflected in most current treaty negotiations. Tax treaties usually contain a provision on the exchange of information between tax authorities, and the Russian tax authorities are eager to use and expand such provisions in order to facilitate both the identification of foreign companies' ownership and the verification of amounts of income declared abroad.

The current double tax treaty with Switzerland, for example, does not provide for any exchange of information. Obviously, Russia would like to be able to ascertain the ownership of the allegedly billions of old and new Russian dollars sitting in Swiss banks, while the Swiss want to maintain their status as a country where money from all sources is safe and secure. A similar situation exists with regard to Cyprus, where low withholding tax rates and an extensive international treaty network combine with a rather flexible approach by the local authorities vis-a-vis foreign capital. These factors have made Cyprus not only a standard intermediary country for Russia-bound investors but also a popular 'holiday' destination for some Russian business people.

In this respect, a new kind of treaty has recently seen the light. The new tax agreement between Russia and Armenia, for example, deals exclusively with the exchange of information, joint operations and the prevention of tax evasion. The "competent authority" on the Russian side is the tax police, which has recently been upgraded from an operative unit to a Ministry with federal status. More treaties of this kind are said to be in preparation.

A relatively new feature in Russian double tax treaties is a differentiated dividend withholding rate, where dividends from an investment exceeding a certain capital and/or participation threshold enjoy lower withholding rates. For Sweden and Korea, the capital threshold is set at US$ 100,000, whereas the draft treaty with Vietnam stipulates a minimum holding capital of US$ 10 million. For US companies only, a participation threshold exists: dividends from companies that are at least 10% US owned are taxed at 5% instead of 10%.

Without exception, all recently concluded double tax treaties of the Russian Federation contain provisions relating to transfer pricing. The notable absence of any provisions in Russian domestic legislation, which enable tax authorities to correct the income of a Russian taxpayer for tax purposes, has made tax planning relatively straightforward in the past. Within a company structure, purchase prices for transactions between a foreign parent and its Russian subsidiary can be kept artificially high so that only a small profit is made in Russia.

Transfer pricing provisions have not been applied so far by the Russian tax authorities, as this would require additional legislation to be adopted. Practice in other countries shows that successfully challenging prices between related companies requires a thorough understanding of the taxpayer's business, something the Russian tax authorities are currently lacking. In order to prevent double taxation, however, most treaties provide for some form of co-ordination between competent authorities of treaty countries in case the transfer price article is applied.

Russia's tax legislation and practice will inevitably be influenced by the more than fifty new treaties that are to be concluded in the near future. Hopefully the growing international exposure will change the focus of the Russian tax system and encourage not only foreign investment but also business originating from Russia. They should also increase the Russian authorities' knowledge of a taxpayer's business so that they may use the legal powers at their disposal on a more selective basis.

Focus on the Pension Fund

Payroll costs are a favourite target, not only for the Russian tax authorities, but also for the `non-budgetary funds'. These are special purpose funds established by law but which function independently from the tax authorities. Payroll expenses are subject to contributions to six different funds, resulting in an aggregate liability of 40.5%. Originally, the contribution base - the definition of payroll expense - for each fund was similar, but these have now begun to diverge. In this issue we focus on the State Pension Fund which has a special position not only due to its size, but also due to the political importance of the pension issue.

As a rule, pension fund contributions are made on the basis of gross salary: 28% contribution for the employer and just 1% for the employee. However, pension fund contributions are clearly not value for money given the minimal pension which bears little relation to the salary once earned, and which is usually only paid after a considerable delay. Whilst pensions are calculated broadly by reference to the statutory minimum wage, this has not kept up with inflation and thus pensions are effectively unindexed. Some employers - and employees - are beginning to recognise the benefits of private pension fund schemes, where there is a direct correlation between contributions and benefits, but most individuals are generally not yet ready to plan for the future in this way, and prefer the cash alternative.

In order to avoid exposure to pension fund contributions and other payroll taxes, various indirect remuneration schemes have emerged: examples include generous business trip allowances, payment in kind and insurance schemes under which `salaries' are paid as premiums to insurance companies and then subsequently paid out as `insurance benefits' to the employee.

A recent Instruction of the Pension Fund has imposed a liability to contributions on these alternative remuneration schemes. In particular, all voluntary insurance premiums for the benefit of employees are now subject to contributions, thus blocking not only the more aggressive insurance schemes but also creating a considerable disincentive to employer contributing to private pension schemes.

Whereas the tax authorities impose interest on late tax payments of 0.7% per day, the Pension Fund charges 1% per day and is thus perhaps the most feared creditor in the Russian Federation. Naturally, enterprises in financial difficulty prefer to pay off any pension fund debt first, and fortunately the Pension Fund has considerably more flexibility than the tax authorities to defer debts or collect them instead from creditors of the enterprise.

ECONOMIC ANALYSIS

Impact of new Land Code on agriculture

Introduction In Spring, one of the most discussed topics in Russia is usually agriculture. And it is now a widely spread point of view that the problematic agricultural sector poses one of the main threats to future economic growth in Russia. Last year's national agricultural production declined by 8 % to 63.5 million tonnes (the lowest level for last thirty years). This year's estimates are not optimistic (70 million tonnes). Last year's grain imports declined by 35% to 2.3 million tonnes.

The decline of the agricultural sector is linked to two key issues: price disparity and land ownership. Between 1992 and 1994, industrial prices increased 1035 times whereas agricultural prices only increased 228 times. In 1989 one tractor was equal to 18 tonnes of wheat. In 1994 it was worth 40 tonnes of wheat. The main obstacle for further agricultural development is a current resistance to private ownership. While the adoption of a decree legalising private land ownership is an essential element of Boris Yeltsin's election platform, Communist leader, Gennady Zuganov, shares the traditional and strong belief in collective property (that is, most lands should belong to the state and foreign citizens should not be allowed private ownership of land - the so called "national leasing" concept).

Until a new federal land code is adopted, most of the Russian regions will remain reluctant to initiate land reform despite the recent Presidential decrees. One of the key obstacles for attracting foreign investments into the country is therefore unlikely to disappear in the near future.

Private agricultural enterprises At the beginning of the year, there were, in Russia, only 280,000 private farmers. They own only 6.1% of the total cultivated land in the country. Last year they produced 3 million tonnes of grain (4.7% of the total production of grain), 517 thousand tonnes of sunflower seeds (12.3% of the total production), 160 thousand of meat (1.7% of the total production), 596 thousand tonnes of milk (1.5%). More than half of the Russian farmers' plots of cultivated land do not exceed 20 hectares in size and only 8% of the farmers have more than 100 hectares of land. Relatively large farmer's households are operating in the regions of Astrakhan, Volgograd, Saratov, Orenburg, Amur and Altai.

State-owned agricultural enterprises

State-owned agricultural enterprises (SOE) are not necessarily inefficient. They need, however, to be restructured. Technical assistance is particularly required to improve the marketing of domestically produced foodstuffs and to strengthen production organisation. Russian agriculture also urgently requires the development of effective rural banking and credit systems, the establishment of a nation-wide management information system, and the implementation of an efficient social security system. Investments and technical assistance are also needed to acquire modern post-harvesting technologies and agroprocessing capabilities.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Click Contact Link or enter a text search 'Coopers & Lybrand' and 'Business Monitor'

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions