April 10 – 23, 2003
Newsletter
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· Taxes
Report of Ministry of Finance «On the Principal Tax
Reform Directions for 2003 – 2005» was published
Guidelines on tax on profit of foreign organisations are approved
Government has approved abolition of tax control over
large-scale expenses of natural persons
Government of the RF approved increasing tax deduction on
constructing or acquiring residential premises
· Taxes
p. 2
CONSECO Press / Issue 6 (314)Report of Ministry of Finance “On the Principal Tax Reform Directions for 2003 – 2005” was published
The report of the Ministry of Finance on principal tax reform directions for 2003 – 2005, which had been submitted to the Government for consideration before, was published on the official web-site of the Ministry. The document provides for principal directions and measures of the tax reform draft. These measures are aimed at achieving the main goal of the reform, i.e. at “completing creation of the tax system, which would meet the requirements of economic growth and financial stability”.
Reducing tax burden on branches of Russian economy is deemed to be the principal tax reform direction. The Ministry of Finance believes that this task can be fulfilled by introducing the following measures:
1. Reducing from 2004 VAT basic rate from 20% to 18%, while retaining the privileged rate (10%) for goods and services of social importance;
2. Immediate tax deduction from 2004 of VAT paid for fixed assets, before putting object into operation. Along with introducing this measure, VAT administration should be improved, the Ministry of Finance believes. In particular, the system of electronic VAT invoices and special bank accounts can be introduced.
3. Reducing from 2005 the effective rate of unified social tax. The unified social tax rate can be fixed at 26% (for remuneration up to 300 000 Rbs.), 10% (for salaries from 300 000 to 600 000 Rbs.) and 2%
(for salaries over 600 000 Rbs.). The Ministry of
Finance believes that this approach will provide
for a significant reducing of unified social tax due for companies with low salaries, which cannot use the regressive scale. Realization of this proposal shall bring to cutting in 2005 the rate of unified social tax by 5.7% (from 30.1% to 24.4%)
4. Further reduction and unification of VAT tax rate. The Ministry of Finance emphasizes that in case of favourable financial situation during 2005, unified VAT tax rate to the amount of 16% can be introduced in 2006.
Besides putting the above-mentioned measures in action, it is planned to finish in 2004 – 2005 implementation of tax reform measures, previously approved by the Government. Among these measures are the following:
· sales tax abolishment;
· reducing the number of regional and local taxes (in particular, abolishment of special duties to cover education and militia expenses, dog licence, parking fee and some others);
· reform of the property taxes system (inventories, expenses and intangible assets will be excluded from the object of enterprise property tax, tax privileges thereof will be curtailed, conditions for a move to real estate taxation will be created; with respect to personal property tax principles of appraisal of personal property will be revised, including shift to market appraisal of personal property and reduction of the maximum tax rate; with respect to land tax – the tax will be determined on the basis of cadastre value of a land plot; death and gift taxes will become federal taxes, while corresponding revenues will go to local budgets).
Read the full text of the document at the official web-site of the Ministry of Finance: http://www.minfin.ru/off_inf/371.doc
p. 2
CONSECO Press / Issue 6 (314)p. 2
CONSECO Press / Issue 6 (314)p. 2
CONSECO Press / Issue 6 (314)Guidelines on tax on profit of foreign
organisations are approved
The Ordinance of the Ministry for Taxes and Charges of 28.03 2003 №БГ-3-23/150 «On Approving Guidelines for the Tax Bodies on Application of Some Provisions of Chapter 25 of the RF Tax Code Pertaining to Peculiarities for Foreign Organisation Profit (Income) Taxation”
The Ministry for Taxes and Charges has not clarified for a long time its stand on taxation of foreign organisations. Considerable and comprehensive guidelines on tax on profit of foreign organisations were issued only one year and a half after abolishment of the well-known Instruction № 34. This delay was caused by last year’s substantial amendments to Chapter 25 of the Tax Code.
It is emphasized at the beginning of the guidelines that they are not a regulatory legal act and were issued exclusively for uniform application by the tax bodies of the Tax Code and double taxation treaties provisions. Nonetheless the guidelines can be very useful in disputes with the tax bodies because they clarify the official stand of the Ministry for Taxes and Charges.
We’ll make an overview of the most interesting provisions of the document, not going into detail: the document is rather large and includes comments on almost every article of Chapter 25, which applies to foreign organisations in one way or another.
Establishing permanent representation
The definition of permanent representation and its qualifying characteristics are considered in detail in the guidelines – these characteristics include: operations are effected via a division located separately or via other place of activity, operations have entrepreneurial character and are effected regularly. The guidelines also analyse the concept of “preparatory and auxiliary activities”, which are not considered as permanent representation provided they are performed in favour of the foreign organisation itself. An interesting example of these preparatory and auxiliary activities is given: distribution of promotional materials in the RF on behalf of a foreign organisation is generally considered as preparatory and auxiliary activity, but similar distribution, effected by a foreign organisation – an advertisement agency via its Russian division, can lead to establishing permanent representation, since such distribution is considered to be the organisation’s principal activity. A similar example is given for goods reserves storage on the territory of the Russian Federation: until these goods are stored for the purpose of demonstrating them to potential customers, these activity is considered as preparatory or auxiliary, but as soon as these goods are supplied on a regular basis, the activity related to goods storage is not deemed as preparatory or auxiliary.
The document considers different types of activities from the viewpoint of leading to establishing permanent representation – in particular, secondment of personnel, operating a construction site.
It is advisable to notice with respect to secondment of personnel, that this activity is best of all regulated by the tax legislation. while labour relations as well as administrative aspects lack any regulations.
The guidelines introduce a new approach to determine secondment of employees as activity not leading to establishing permanent representation. Actually the guidelines provide for requirements, which do not allow the tax bodies to consider these activities as performed via permanent representation. Here is the list of these requirements:
· The seconding organisation must not render any other services, except for secondment of personnel;
· The seconded personnel must be employees of the seconding organisation;
· The acceptance acts must relate to secondment of personnel but not to other services;
· The invoices must relate to compensation of expenses of the seconding company pertaining to the seconded personnel’ activities. It is admissible that the accepting organisation makes payments to the personnel with further netting;
· The contract must set the price for the secondment taking into account that this price is calculated only on the basis of the hours worked;
· The difference between the profit of the seconding company under the contract and salary expenses thereof (including travel and accommodation
expenses) must not exceed 10%, otherwise this activity should be inspected for symptoms of permanent representation.
With respect to construction site, where the term of its operation is of crucial importance, the guidelines consider various situations related to transferring the site to the contractor, interrupted work resumption, sub-contractor participation (including sub-contractors interconnected with the contractor) and others.
The guidelines also provide for a definition of “dependent agent”, which is new to Russian tax legislation and was previously used only in double taxation treaties.
Defining the object of taxation and the tax base for permanent representation
The guidelines emphasize that Chapter 25 of the Tax Code only provides for peculiarities for defining the object of taxation, income and expenses of a foreign organisation operating in Russia via permanent representation. With respect to other issues they are regarded as ordinary taxpayers and must observe the general provisions of Chapter 25. In particular, the guidelines remind foreign organisations of the necessity to include non-operating income into taxable income, which is not directly mentioned in Art.307 of the Tax Code, where the definition of the object of taxation is given. It is also stressed that the requirement to perform tax accounting and the general rule of possible application of cash basis of income calculation is applied to foreign organisations in full.
With respect to income of the permanent representation, the guidelines provide for an interesting provision. The guidelines state that “calculating income related to permanent representation is based on principles fixed in double taxation treaties, which state that income of the permanent representation must be equal to income of an independent and separate enterprise engaged in the same or similar activities under the same or similar conditions”.
The guidelines point to the fact that only the part of income of foreign organisation, which relates to permanent representation, is subject to tax on profit – while the total amount of income of foreign organisation received from sources in Russia can be quite different. In particular, an example of licence payments is given. Licence payments to a foreign legal entity are only taxable if rights or proprietary valuables, which remuneration is paid for, are related to the permanent representation of the foreign legal entity. The guidelines clarify that such relation exists if the corresponding licence rights object was created by the staff of the permanent representation or obtained through the permanent representation. Transfer of rights to a Russian legal entity does not entail establishment of permanent representation and consequently is not regarded as taxable income received from permanent representation.
Another interesting example in the guidelines relates to licence payments: according to the guidelines, permanent representation can arise from permanent rendering services on the territory of the RF, such as: staff training upon transfer of software rights and supporting the software. In these cases, the tax is levied only on the part of income, which relates to permanent representation (rendering services by the division’s staff); paying for the licence itself is not considered as related to permanent representation in this situation.
The guidelines remind us of the fact that the computation method for calculating the base for tax on profit is not applied any longer (it was established by the revoked Instruction № 34 of the Ministry for Taxes and Charges). This opportunity was retained for a case, where foreign organisation performs preparatory and auxiliary activities for the third persons, and this activity entails establishing permanent representation.
The guidelines often draw the tax bodies’ attention to cases, where a double taxation treaty provides for a different procedure of taxation comparing to the procedure envisaged in Chapter 25 of the Tax Code. In particular, it deals with cases where:
· The treaty provides for a more favourable order of expenses deduction (in particular, full deduction of advertising expenses and interest)
· The treaty contains provisions for non-discrimination of residents of the respective state against RF residents (in particular, if such a provision exists, dividends are taxed at the rate of 6% and not at 15%).
Taxation of income not related to activities in Russia
A large section of the guidelines is dedicated to taxation of income received from sources in Russia – in particular, dividends, interest, proceeds from intellectual property rights and others. The complete list of these types of income is set in article 309 of the Tax Code and the last item of the list points to “other similar income”. The guidelines clarify what this “other similar income” stands for – it is all other types of income, except for the types, directly named in article 309 as not related to sources in Russia. In particular, this income includes extra income from selling goods in Russia by a Russian organisation on the consignment basis. Thus, income related to entrepreneurial activity in the RF is calculated as a difference between invoice price and sale price. Attention should be paid to the fact that this type of income was subject to taxation under the former Instruction № 34 – the tax bodies did not forget about it.
Application for avoiding double taxation
The guidelines consider submitting documents by a foreign organisation to the tax agent to enjoy the avoidance of double taxation under a double taxation treaty. According to the guidelines, the list of these documents does not include the certificate of state registration of a foreign company abroad, excerpts from trade registers and similar documents, as they do not certify that the organisation is a tax resident of its state. The document must be issued by the authorised body, which is directly named in the double taxation treaty or by another body empowered by this authorised body. In case of any doubt about the authorised body the taxpayer shall apply for information to the Department of international tax relations of the Ministry of Taxes and Charges.
Since the date of enactment of Chapter 25, these documents may have a voluntary format. At the same time the confirmations issued under provisions of Instruction №34 are still valid. The Ministry for Taxes and Charges reminds foreign organisations of the fact that submitting filled-in blanks to the tax bodies and obtaining prior approval not to withhold the tax are no longer mandatory.
The guidelines also consider other issues related to application of double taxation treaties, which makes them more useful and worth studying.