Russia
Valentina Akimova
Pepeliaev Goltsblat & Partners - Taxand
Russia
Valentina Akimova, of Pepeliaev, Goltsblat & Partners – Taxand, analyses what Russia has done to help taxpayers during the financial crisis, including the expansion of what expenses are deductible and a new system for securing VAT refunds
A package specifying and amending legislation on taxes and levies was adopted in late 2008 within the scope of tax incentive measures to tackle the financial crisis.
First of all, a significant cut in the corporate profit tax from 24% to 20% as of January 1 2009 should be mentioned. The measure was not envisaged by the Main Aspects of Tax Policy for 2008-2009, but, rather, was one of the anti-crisis measures aimed at reducing the corporate profit tax burden.
The maximum interest on debentures that may be booked as expenses for corporate profit tax purposes was also substantially increased.
The amendments also extended the list of other expenses deductible for corporate profit tax purposes.
From January 1 2009, contributions under voluntary personal insurance contracts that provide for reimbursement by insurers of the medical expenses of insured employees shall be included in expenses in an amount of not more than 6% of payroll expenses, instead of 3% under previous legislation.
Conditions were expanded to allow taxpayers include in their expenses costs for training arranged under main and supplemental vocational training programmes, vocational training and retraining for employees, as well as for individuals that are not the taxpaying companies' employees but that entered into an agreement with such companies obliging the individual to work for the taxpayer under an employment contract for at least one year. The respective costs will not be included in the tax base for personal income tax and unified social tax.
The list and amount of costs of medical and pension insurance of employees that may be booked as expenses were expanded.
Boost for R&D
From January 1 2009, an adjustment coefficient (1.5) may be used for the purpose of accelerated accounting for R&D costs.
To enhance development of natural resources, the procedure for deducting relevant expenses for tax purposes was specified, offering an opportunity for taxpayers to deduct relevant expenses under an accelerated accounting method.
The approach for formalising taxpayers' practices with respect to depreciation of fixed assets was revised in many respects. Numerous amendments to the Russian Tax Code governing depreciation and booking of depreciation charges as company expenses have come into force as of January 1 2009.
For fixed assets with a long useful life the amount of the so-called depreciation premium (that is, an option of booking certain costs incurred by the acquisition or creation of fixed assets as expenses of the current period before accruing the depreciation) was increased from 10% to 30%. Such a depreciation policy is designed to encourage capital investments in fixed assets. Companies will be able to write off and replace depreciated and obsolete fixed assets under the accelerated procedure. In this context, taxpayers will also be able to buy new hi-tech equipment with greater capacity, which would lead to higher quality and production volume and contribute to the growth in GDP.
Indirect taxes shake-up
From 2010, officials plan to introduce an accelerated procedure for VAT reimbursements. A taxpayer that by the end of a tax period is eligible to claim VAT for reimbursement (refund), may exercise this right from the time it filed a tax return without waiting for desk audit results. It is true that the conditions to exercise the right will be different. Taxpayers that hold significant fixed assets (RUB500 million ($16 million)), significant profits (RUB5 billion) and have operated for at least three years will be eligible to apply for the accelerated procedure for VAT refunds without fulfilling additional conditions. Other taxpayers will have to provide the tax authority with a bank guarantee in exchange for the right to the VAT refund.
Transfer pricing revamp on the way
The Russian Ministry of Finance promised to complete its work on the draft law on transfer pricing this year. It is expected to widen the scope of persons that fall under the concept of related persons, as compared to the existing rules. It will also specify the list of exceptional criteria to exert control over transactions to ensure compliance with market prices. The draft law is expected to lift controls over transactions between members of the consolidated group of taxpayers, as well as transactions of the taxpayer that allowed the prices applied during the relevant period to fluctuate substantially.
It is expected to broaden substantially the list of methods with which tax authorities will be able to determine market prices, while retaining the comparison with market prices as a priority method.
The Russian Ministry of Finance is also revising the draft law on consolidated groups of taxpayers. The establishment of a special procedure for calculating and paying corporate profit tax for consolidated groups of taxpayers will help create certain advantages for both the taxpayer and the state.
Use of consolidated financial statements on corporate profit tax and payment of this tax based in general on the financial performance of the consolidated group decreases the motivation of the members of such a group to apply transfer prices to cut these tax amounts. Accordingly, it decreases the negative effects inherent in the transfer of the tax base between the Russian constituent entities and municipalities. The draft law establishes the conditions to combine some tax administration procedures, as the reports will be submitted by one of the group members.
Consolidation of the tax base for corporate profit tax will offer some benefits for related companies (group members), such as the opportunity to consolidate profits and losses of different group members when calculating corporate profit tax.
Reimbursement of legal expenses on tax disputes
The imperfection of tax legislation, law enforcement practice and tax administration results in taxpayers often coming to court to seek protection of their economic rights. As tax disputes fall under the category of complicated cases, the taxpayer has to hire attorneys that specialise in this branch of law and assume significant expenses to pay attorney fees and other legal expenses.
The law requires the defeated party to reimburse the winning party for legal expenses. As the government is one of the parties to tax disputes, the taxpayer often encounters certain difficulties to get reimbursed for legal expenses when it has succeeded in obtaining protection of its rights in court.
Either state arbitration courts denied outright the winning company's claim to have the state reimburse its legal expenses, or the amount of reimbursement was extremely small and not commensurate with the real expenses assumed during the arbitration proceedings.
However, in April 2009 the Russian Supreme Arbitration Court issued a resolution upholding the ruling of a lower court for reimbursement of a taxpayer's legal expenses in their actual amount. Moreover, the amount of the reimbursement was quite significant.
When issuing this fundamental resolution, the Russian Supreme Arbitration Court proceeded from the premise that the court had to strike a balance between the rights of the parties to a dispute. When issuing a grounded resolution on changing the amounts to be collected as reimbursement of relevant expenses, the court may not decrease it arbitrarily, especially if the other party neither raises objections nor submits evidence of excessive expenses with due consideration of the value of legal expenses in the relevant region and the data of statistical agencies about market prices for legal services. Without such evidence, the court may on its own initiative rule for reimbursement of expenses within limits that, in its opinion, are reasonable, only if the claims obviously go beyond the reasonable limits.
At about the same time, the Russian Supreme Arbitration Court issued a resolution upholding the ruling of a lower court on reimbursement of legal expenses incurred by the tax authority. The taxpayer lost the main dispute with the tax authority and the latter lodged a claim for legal expenses.
Good effect
These two resolutions should have a positive impact on law enforcement and judicial practice in such disputes. The express position of the Russian Supreme Arbitration Court should result in tax authorities approaching the decision-making process more diligently. The number of groundless resolutions should decrease. In turn, the taxpayer should take more considered decisions on whether to go to court or not if the claims of the tax authorities are lawful. The state arbitration courts should provide solid arguments for their decisions to reduce the claims of the party for reimbursement of legal expenses.
Valentina Akimova (v.akimova@pgplaw.ru) is a partner of Pepeliaev, Goltsblat & Partners - Taxand