Companies operating in Russia, or looking to expand their business there, need to be aware of several accounting and tax regulatory changes which could impact their enterprise.
Federal Laws 335-FZ and 350-FZ are amending parts one and two of the Russian Tax Code, specifying – in particular – new rules for accounting for, and payment of, VAT. Some amendments came into force on 1 January this year; the remainder come into force on 1 January next year.
This year's amendments include changing the procedure for allocating input VAT related to VAT exempt sales. VAT on goods and property rights bought for making solely non-VAT-able transactions cannot be claimed as input credit, but instead should be included in the acquisition of goods and property rights. The 5% rule will now apply to indirect expenses only.
Zero VAT for the re-export of goods was introduced on January 2018. This clarifies the situation for businesses that export finished goods made of raw materials imported under the customs procedure of inward processing. Law 350-FZ also cites the documents required to justify the application of zero VAT for goods exported by international mail.
This same law gives an option not to apply zero VAT to certain transactions, including goods exported under the export customs procedure and the supply of services related to transporting these goods. The new rule establishes a corresponding obligation to pay VAT at the rate of 10 or 18%.
From 1 January 2019, foreign providers of electronic services will have to pay VAT on these e-services that are deemed supplied in Russia by foreign suppliers to legal entities and individual entrepreneurs registered with the Russian tax authorities. Such services include the sale of computer programs via the Internet; storage and processing of information on the Internet; the sale of electronic books, graphic images and music via the Internet; Internet advertising services; services involving the posting of offers to sell goods and property rights on the Internet; maintaining a commercial or personal presence on the Internet, and providing access to Internet search engines and statistics on Internet sites.
Foreign companies that are VAT-registered must calculate VAT at 15.25% on the value of electronic services supplied and must submit a VAT declaration, and independently pay VAT on a quarterly basis. Russian companies and private entrepreneurs can offset input VAT charged by a foreign company, provided they submit the correct paperwork for proof of purchase.
Also, with effect from 1 January 2018, sale of scrap and waste of ferrous and non-ferrous metals is subject to VAT. Before the above amendments, these operations were exempt.
New legislation entitles taxpayers to an investment deduction from the profits tax. This applies to taxpayers who acquire or upgrade (including extension, further equipping, reconstructing, and retooling) fixed assets. The law contains a list of taxpayers who are not entitled to the investment tax deduction. It includes, in particular, organisations applying profits tax concessions (participants of regional investment projects, residents of special economic zones, etc.) The investment tax deduction allows taxpayers to deduct from profits tax the costs of acquisition or upgrading (including extension, further equipping, reconstructing, and retooling) fixed assets. Investment tax deduction is an alternative to depreciation. Taxpayers have the right to choose whether to apply the investment deduction or to accrue depreciation.
Russian legal entities pay tax on their worldwide income (credit relief is available for foreign tax paid, up to the amount of the Russian tax liability that would have been due on the same amount under Russian rules).
The maximum CIT rate for all taxpayers in the Russian Federation has been set at 20%. In the period 2017 through 2020, a new allocation proportion applies: 3% of CIT revenues is allocated to the federal budget, whereas 17% is allocated to the budgets of the relevant constituent regions (in 2016 the allocation proportion was 2% and 18%, respectively). Individual Russian constituent regions may bring their CIT rates down to 12.5%; thus, the total minimum tax rate may be reduced to 15.5%.
Foreign legal entities pay tax on Russia-source income derived through a PE at 20% and are also subject to withholding tax on income from Russian sources not related to a PE (at rates varying from 10% to 20%, depending on the type of income and the method used to calculate it).
Salary taxes and contributions
Russian residents are taxed on their worldwide income. Non-residents are taxed only on Russian-source income. Each individual must file a tax return. A flat rate of 13% applies to Russian residents on most types of income and a 30% rate applies to Russian-source income of non-residents. The employment income of highly qualified foreign professionals is taxable at a rate of 13%, rather than the 30% rate that would otherwise apply. From 2018, deemed income of Russian tax residents from beneficial loans - where the interest rate on loans made in foreign currency is lower than 9% - received from affiliated parties is taxed at 35%. An employer is required to make pay-related contributions for pension, social and medical insurance.
Russia has adopted a three-tiered approach to transfer pricing documentation – the local file, master file and Country-by-Country report. Russia has committed to the automatic exchange of information under the Common Reporting Standard starting from 2018, with 2017 being the first reporting period. Non-Russian financial institutions are required to report certain information to the tax authorities on Russian account holders on an annual basis.
There is also an increase of controlled transactions' thresholds. For Russian related entities, the threshold rises from 1 billion roubles to 3 billion roubles, and the threshold for cross-border transactions becomes set at the level of 60 million roubles.
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