Russian Federation: Analysis 4/96 - New Regulations On Foreign Currency / Withholding VAT Offsettabl

Last Updated: 5 September 1996
In this issue of Analysis, we discuss the new regulations issued by the Central Bank on foreign currency, review the impact of the State Tax Service's statement concerning withholding VAT and review recent accounting developments



The Central Bank of Russia has recently issued new regulations on currency control. These are not least inspired by the alleged massive capital flight which has been taking place over the last six years. Many of the regulations currently in force are modified versions of those laid down by the predecessor of the Central Bank, the State Bank of the USSR. Currency regulations are, together with tax legislation, a major determinant for the behaviour of companies and many business decisions are often initially currency-driven. In this article, we will give a brief overview of recent changes in currency control legislation.

Currency control

Penalties for infringing the currency laws are harsh and may even lead to the confiscation of the unlawfully transferred amount. The agency responsible for currency control operates independently from other controlling authorities, such as the tax inspectorate, but has equally extensive investigation powers.

180 day rule

A provision that has been bothering Russian and foreign businesses for a very long time is the 180 day rule. According to this rule, payments that are outstanding longer than 180 days require approval of the Central Bank. This includes payments for imports, exports and also loans. As a result of this, intercompany loans outstanding longer than 180 days may be routed through a bank, a so called `back-to-back bank loan': a loan from a bank is not subject to approval.

In-kind financing

Recently, the Central Bank softened the 180 day rule in some respects. Payment by Russian residents for imports may now be deferred for more than 180 days, without Central Bank approval being required. This means that a foreign company is now able to deliver goods on an ongoing basis to its Russian subsidiary without receiving payment within 180 days. This type of in-kind financing could in the past only be structured as a contribution to the charter capital. Intercompany loans are, however, still subject to Central Bank approval if they are outstanding longer than 180 days.

Import passport

Reporting requirements for foreign currency payments have been tightened. Payments for imports must be documented by a so-called `import passport', which must confirm the actual import of the goods which are being paid for. In the past, large amounts of cash were channelled out of the country as payment for fictitious imports which never took place. Under the import passport system, the importer's bank can be held responsible to reimburse the payment if the import does not actually take place within the appropriate period.

Administrative obligations

In addition to the above, the Central Bank has recently published a list of transactions which are "exempt" from prior Central Bank approval. As suggested by the wording, all payments which are not explicitly mentioned in this list and cannot be categorised a 'current transaction' are subject to Central Bank approval. If a payment is "exempt" from Central Bank approval, this has to be explicitly mentioned in the payment transfer order. Banks are obliged to control the correctness of such statements and to report to the Central Bank on foreign currency payments. Failure to report, or non-timely or incorrect informing of the Central Bank can lead to confiscation of the amount transferred.

Russian currency legislation describes commercial banks as "agents of currency control". As a result of the administrative obligations imposed upon them, banks are indeed likely to become more focused on compliance and on avoiding penalties, than on facilitating payments.


Russia recently signed Article VIII of the Charter of the International Monetary Fund. President Boris Yeltsin has signed a decree to implement the article which aims to accomplish full convertibility of the rouble. A new procedure for setting the rouble exchange rate has been put into place. The official rate is now issued on a daily basis and is the average of the bid and offer rates on the Moscow Interbank Currency Market during the previous day.

Currently, proceeds from sales in roubles must be received by a foreign legal entity in a so-called "T" account and cannot be converted into foreign currency. Broadly only dividends and income from the sale of shares and other securities, received in an "I" account can be exchanged into foreign currency and repatriated. The next step may be to permit rouble amounts on T-accounts to be converted into foreign currency and transferred abroad. The above mentioned presidential Decree expresses such an intention, but so far no concrete steps have been taken to put this into practice.

Withholding tax offsettable

The State Tax Service has finally confirmed that VAT, withheld by Russian enterprises from payments to foreign suppliers which are not registered in Russia for tax purposes, is creditable as input VAT for the Russian enterprise.

In order to qualify for the credit, the following conditions
must be observed:

  • VAT must actually be paid out of the funds transferred to the foreign supplier;
  • VAT must be physically paid to the budget before it can be credited as input VAT;
  • As with normal VAT, credit will be allowed on the condition that the goods purchased or the services performed are eligible for inclusion in the "cost of production".

The new ruling is of crucial importance to foreign companies which supply services or grant licences to Russian enterprises. Under an amendment to the VAT law which was published on 9 April 1996, payments to foreign legal entities for certain "professional" and other services or for patent and licence arrangements, author's rights or similar rights are subject to VAT if the recipient of the services has a "place of economic activity" in Russia. Typically, such foreign entities are not registered in Russia and withholding VAT applies.

The subject of withholding VAT was discussed in some detail in a recent issue of our Tax Alert - 7/96 - which can be obtained from Lisa Hoess on 095 232 5511. For discussion of specific VAT and other related issues, contact Lioudmila Mamet on 095 232 5602


In a concerted series of measures during the first half of 1996, the Duma, the Ministry of Finance, the President and the State Tax Service have finally removed for most companies the most significant difference between Russian and Western accounting with effect from 1 October 1996.

In late 1995, when the Ministry of Finance issued Order No. 115 on 1995 annual financial reporting required the accruals basis, confusion reigned as taxpayers had already chosen their revenue recognition policy at the beginning of the year, and auditors were insisting that for financial reporting purposes, the accruals basis was required.

Some believed that two reports would be required from auditors, one on the financial statements prepared under the cash basis of recognising revenues and the other on the accruals basis. Many prepared their 1995 financial statements on the (traditional and tax based) cash basis.

Many firms, including ours, concluded that a qualified opinion was necessary if the company had followed the cash basis in its financial statements, but expressed the qualification in such a way that it was clear to the reader that this did not mean tax regulations had been breached.

Now that the state bodies are coordinating their regulations, a distinction is developing between financial and tax reporting. It is clear that financial reporting is becoming more clearly directed to shareholders than to the tax authorities, and should cover all the divisions and branches of a legal entity. Details of how Russian companies should consolidate the operations of subsidiaries and branches, including those overseas are still awaited, and indeed whether the auditors' report should be given on consolidated financial statements including separate legal entities, Russian or foreign, is still unclear.

Recent developments applying to 1996 are as follows:

Order No. 10 of February 1996 on Regulations for Accounting contains the amended balance sheet and profit and loss contents for 1996 financial reporting, the latter having been revised significantly - for example we now see the profits tax change stated separately on this page, nearly all expenses are on the accruals basis, and the less numerous non tax-deductible expenses which still go to account 81 are treated as uses of profit on this page after tax for the year. Taxes other than those on profits can still be declared and paid on the cash basis, but would be accrued for in the financial statements.

Expenses which are subject to "norms" for tax deductibility purposes are now charged to the profit and loss account rather than treated as use of profit. They must be included in sub accounts so that they can be readily identified and added back for tax purposes.

Financial statements must be in the Russian language and currency, although no mention is made of inflation accounting, and must be accompanied by a report from the 'executive body'; disclosure of accounting policies, analysis of certain balance sheet figures, and a cash flow statement are required. Offsetting assets and liabilities, profits and losses, is only allowed when the regulations permit, and the concept of estimation is introduced, and (as before) stocktaking appears to be required each year.

Order No. 31 of 27 March 1996 expands on the content of each of the categories in the new forms, and for example requires that sales will in future be shown net of VAT and excise taxes.

Presidential Decree No. 685 published 23 May deals with the changes to the taxation system and contains provisions for the accruals basis to be applied to sales and for profits tax to be applied from the earlier of two dates:

  • The date of receiving funds for the goods
  • The date of shipping the goods

This is a difference from the normal accruals concept, which has no doubt been introduced to discourage companies from making advance payments, and it will probably be successful in that aim. It provides for the additional profits tax liability resulting from the change to the accruals basis for tax accounting to be paid in 11 monthly instalments over the period from 1 February 1997.

Chief accountants at companies will need to calculate the extra profits taxes arising from the changes, but keep it in a separate general ledger account until the transitional adjusting payments are due commencing 1 February.

More detailed explanation of the new requirements is definitely required later in the year to assist chief accountants in the interpretation of the changes. Maintaining accounts to facilitate both tax calculation and financial reporting will continue to be difficult but certainly foreigners should find it much easier to understand Russian companies' financial statements in future.

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.

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