DECREE NO. 1215: COLLECTION OF PERSONAL INCOME TAX AND SOCIAL FUNDS
2. An individual who earns income from sources other than a single employment (when income tax and social fund contributions should be accounted for by the employer) must generally file an annual tax declaration and settle the liabilities for himself. Compliance with this rule, however, has proved to be low, and the Decree now significantly extends the scope of the withholding principle: tax must be withheld and social contributions accounted for in respect of all payments made to individuals, including bank transfers and cash payments in respect of payment documents, for example promissory notes. A decision must be made whether or not to withhold tax and, if applicable, to make social fund contributions when making any payment to individuals, irrespective of whether the payor is a legal entity or also an individual himself.
3. Presidential Decree No. 1215 of 18 August 1996 was officially published in Rossiyskaja Gazeta on 22 August 1996. It states that the new withholding principle should be applied "in accordance with the legislation of the Russian Federation". Unofficially, a Government official has commented that in order to apply the Decree, amendments must first be made to the existing legislation and the Decree does not therefore have immediate effect. The Duma might not necessarily pass the necessary amendments, but if only amendments to Instructions are required, implementation will be much more straightforward. In response to the negative reaction from the business community, the Ministry of Finance issued a press release confirming that all existing concessions and exemptions will be honoured.
PERSONAL INCOME TAX
4. In order to withhold the correct amount of tax, the payor must know the annual income of the individual to date, but this is clearly impractical in most cases. According to current practice, tax is being withheld at the lowest rate of 12%, but if this approach is applied under the new regime, it will still often lead to the under-deduction of tax. In other tax jurisdictions, tax is often required to be withheld at the highest rate, but repayments at the end of the year are then usually forthcoming. In Russia, a credit is usually given against future liabilities. Probably, no tax will need to be withheld from payments which are exempt altogether, but where income is exempt within certain limits (for example, where an individual receives a housing allowance or sells property), a problem will arise. If an individual receives a promissory note or security that cannot be split, it is not clear how the withholding mechanism could be operated.
SOCIAL FUNDS
5. As far as contributions to the social funds are concerned, these are calculated and paid by the employer on the basis of the gross income of an employee. The use of the word "withholding" in the Decree does not seem appropriate in this respect, and may lead to the belief that the Decree refers to the employee's pension contribution, but it is assumed that the basis of calculation remains unchanged.
LOANS TO EMPLOYEES
6. When an employer grants a loan to an employee, the interest thereon is deemed to be taxable profit of the enterprise. The rate of interest is that charged to the employee, or the CBR re-financing rate (currently 80% per annum), if greater. The provision seems particularly targeted at schemes whereby an employer lends funds interest free to an employee, which he places on bank deposit at a high rate of interest. Neither the loan or interest is subject to personal income tax or social fund contributions and the scheme therefore used to represent a significant saving for the employer. The new rule does not appear to apply, however, if the company issuing the loan is not subject to Russian profits tax or is not the employer of the individual - the variant of the above scheme which involves the employer depositing funds directly with the bank may well survive. However, there is also an indication that interest will be included within the taxable income of an individual at some date in the future.
DECREE NO. 1212: RESTRICTIONS ON USE OF BANK ACCOUNTS AND CASH OPERATIONS
7. Decree No. 1212 aims to prevent taxpayers with arrears from using more than one bank account for settling these tax liabilities, so helping to ensure that money is not being deviated for purposes other than the payment of those arrears. The Decree does not, however, introduce any new confiscation procedures. Furthermore, banks and credit institutions are required to inform the tax authorities within a month about all current bank accounts held by an enterprise.
8. The Decree enters into force on the day of its official publication, 22 August 1996. It applies to all Russian legal entities and foreign legal entities, with the general exception of banks and credit institutions, which have tax arrears (hereinafter: "payment defaulters"), as well as to their representations and branches if these are separate taxpayers. (This is usually the case if the subdivision has a separate bank account and is located in a different region than the 'Head Office' so that local and regional tax liabilities arise). The Decree applies to representative offices which carry out "economic activity" - a very broad term which is likely to include most offices.
UNDISCLOSED TAX ARREARS
9. According to current legislation and practice, "arrears" include amounts of tax which remain unpaid after the payment date specified in respect of a tax declaration (in case of self-declared taxes) or the tax assessment, has expired. Since penalties for non-compliance with the Decree could be severe, enterprises may wish to be conservative in assessing whether or not the Decree applies to them, or alternatively seek confirmation from the tax authorities that they do not have any tax arrears. Unpaid taxes established during the course of an audit by the tax authorities should not result in the application of penalties, although the arrears would then need to be paid in order to prevent the application of the regime in future.
PAYMENT DEFAULTERS - USE OF ONE BANK ACCOUNT
10. Payment defaulters are obliged to identify one bank account as a "payment defaulter's bank account". The bank must be informed within 3 days, and the account must be registered as such with the local tax authorities, within one week after the Decree has entered into force. The effective deadline for registration is thus 29 August 1996, although according to the Decree, the method of registration must be laid down by the State Tax Service within two weeks and this has not yet been done. The tax authorities have the right to deny registration of a bank account if it has no funds.
11. All incoming rouble funds, as well as rouble funds currently deposited on other accounts, should be deposited in the "payment defaulter's bank account", except for:
- funds designated to provide payments of the first or second priority as defined in article 855 of the Civil Code (civil liability claims for harm to life or health, payments of aliments, salary and authors rights)
- funds provided from the budget (subsidies)
12. The time frame within which the transfers from other accounts to the payment defaulter's bank account must be completed should be agreed with the local tax authorities. When the transfer is actually made, the tax authorities should be informed accordingly. Banks are allowed not to execute payment transfer orders which contradict the Decree. The CBR is instructed to prepare, within a week of the publication of the Decree, an order forbidding banks from making such transfers. Penalties will be laid down for banks and certain senior banking staff for violation of the rules.
REPORTING OBLIGATION ON BUSINESS PARTNERS
13. If a payment defaulter's purchases or sales with one specific enterprise exceed US$ 100,000 per accounting year, the defaulter must present, together with the annual accounts, a form indicating the full name and place of registration of the other party, the bank accounts involved, and the main place of economic activity of the other party. Non-compliance with this provision or giving false information, may result in a penalty equal to the amount of the transaction. This will, however, only apply from April 1997 when the 1996 accounts are submitted to the tax authorities. The result of this will be stricter control over tax compliance with respect to payments received by foreign suppliers from Russia for goods and services.
ACTING THROUGH AGENTS RESTRICTED
14. Payments may no longer be made and received by an agent through his bank account on behalf of his principal - only the principal's bank account may be used. In addition to this, the agent can only receive his remuneration or commission after the amount of the transaction (apparently including the commission) has been transferred to the bank account of the principal. If an agent carries out a transaction in his own name but for the account of his principal, amounts received by the agent must be transferred to the principal's bank account within three working days. The agent is allowed to withhold his commission from this payment. These provisions appear, however, not to apply if the agent acts as a representative of the purchaser rather than of the seller.
RESTRICTION ON CASH OPERATIONS
15. The Central Bank is instructed to prepare an Instruction according to which cash can only be withdrawn from the current account or the budget subsidy account of an enterprise. Cash may be withdrawn to cover the payment of salaries, business trip expenses or "economic necessities". It is not clear what the latter term includes, but is likely to be restrictive, although both the banks and tax authorities may have some discretionary power in determining its scope.
16. Cash payments in exchange for promissory notes or reimbursement of advance payments received may only be made if the money involved has first passed through a bank account, i.e. it is no longer possible to make this type of payment out of cash received from such operations. If the provisions are violated, the tax authorities or Federal tax police may levy a penalty equal to the amount unlawfully transferred.
PENSION FUND: RATE OF LATE PAYMENT INTEREST
17. The Decree also purports to set the rate of interest for late payment of contributions to the pension fund at 0.3% per day. This contradicts the rate set by an earlier law (Federal Law of 8 July 1996 No. 88-FZ), which set the rate for 1996 at 1/300 of the refinancing rate of the CBR, and the Pension Fund itself confirmed this basis as effective from 24 July 1996. On the basis of the new refinancing rate of 80% per annum, this results in an interest rate of less than 0.3% per day, and is therefore preferable when compared to the Decree.
CONCLUSION
18. Both Decrees introduce far reaching measures to increase revenue collection but fail to provide sufficient clarity as to how to apply these rules. It therefore remains to be seen to what extent they will be enforced, but the potential exposure to draconian penalties makes it impossible for banks, enterprises and individuals to adopt a 'wait-and-see' approach. All enterprises will need to review cash circulation procedures and, if applicable, the issue of loans to employees. Enterprises with tax arrears face significant restrictions on the use of more than one bank account, together with intrusive reporting requirements on significant business partners.
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