Governmental draft law to materially amend the Russian Tax Code: issues of tax administration and taxation of transactions inside the country

Pepeliaev Group advises that the Russian Government has prepared a draft law to amend the Russian Tax Code (the “Tax Code”) with respect to the implementation of individual areas of tax policy.

An extensive draft law amends the provisions of both the first and the second part of the Tax Code. We advise of the possible amendments in the administration of taxes and in taxation of transactions inside the country.

Tax administration

The draft law provides that when a tax authority identifies arithmetic mistakes in a tax return (calculation) such tax return (calculation) is deemed not filed. The list of arithmetic mistakes will be approved of the Russian Federal Tax Service upon agreement with the Russian Ministry of Finance. A taxpayer will be obliged to eliminate the identified mistake within five days and then the tax return will be deemed filed on the date of its initial filing.

The reasons for toughening the rule which has been in force for more than 20 years that a tax authority cannot return a tax return are specified in the explanatory note: a simplified procedure is introduced for correcting calculation mistakes without the need to prepare clarifications and documents. It is also specified that one more reason is to fight fly-by-night companies, but it is unclear how the new procedure allows such goal to be achieved.

A power of attorney for representing companies and individuals in tax authorities will have to be drawn up in the form of an electronic document signed by the principal’s enhanced qualified electronic signature or notarised or certified in accordance with an equivalent procedure.

The certification procedure equivalent to notarisation is in force only for individuals in special circumstances, such as military service, medical treatment, etc. (article 185.1(2) of the Russian Civil Code). This procedure cannot be applied to businesses. Owing to the fact that the possibility remains to represent a company in a court under a power of attorney certified by the signature of the CEO without the specified formal requirements being met, doubts arise whether the toughening of requirements for tax-related power of attorneys are justified. The draft law simplifies the procedure for paying interest assessed on the amount of tax paid in excess. Such interest will be paid without the taxpayer's application - solely based on the decisions of the tax authority to refund the amount of tax paid in excess and/or to refund the remaining amount of interest.

VAT

A gap in the law is eliminated owing to which it was impossible to apply zero VAT rate with respect to fishing and harvesting other live aquatic resources in an exclusive economic zone. Article 147 of the Tax Code is planned to the supplemented with a new clause establishing instances when Russia is recognised as a place of sale of goods in the form of aquatic biological resources harvested in the exclusive economic zone of Russia and/or goods produced from such resources.

Services for the transportation of biological resources harvested in an exclusive economic zone are still not considered as supplied in Russia, which does not correspond to the principles of a unified economic space, economic justification of tax, equality of taxation and equal competition.

Profit tax

The uncertainty is eliminated with respect to tax exemption in case of a free-of-charge transfer between the participant and subsidiary (article 251(1)(11) of the Tax Code). In addition to the property, the exempted items include property rights (for example, debt claims).

On the one hand, now the assignment of rights to a third party (for example, the right to claim payment under a contract) will be exempted from tax. However, the proposal leaves unclear the classification of assignment of rights if the debtor is the subsidiary itself and, where rights are assigned, the obligations should terminate because the creditor and debtor become the same entity. A position exists that such transfer is impossible from the civil law standpoint, and, depending on the approach, either a set-off occurs with the obligation to make a monetary contribution, or the debt is forgiven, or a novation takes place. The amendments do not mention the forgiveness of debt as an exempt transaction.

In addition, the range of items of free-from-tax transfer also includes an indirect participant of the company (the current version of the provision includes only a direct participant). This means that now, the receipt of property or property rights from a ‘grand-parent’ company (including a foreign one) will not be taxed. Such amendment is included in the draft law further to the proposal of business associations.

The amendment will allow taxpayers to be released from formalising, as civil law requires, transfer transactions between vertically integrated companies. However, the fact that this measure is attractive does not eliminate the risk of its application: for example, it is unclear how the transferring party will book the value of the transferred, as from the formal standpoint it cannot increase the value of investments in the capital of the receiving party.

The parallel effect of the customary rule on ‘free-of-charge’ transfer, on the one hand, and the newer exemption of contributions to property, on the other hand, also remains unclear (article 251(1)(3.7) of the Tax Code). The amendments allow booking as expenses the contribution to property when calculating profit from sale of membership interests (shares), which favourably sets such contribution apart from a free-of-charge transfer.

The amendments have retroactive effect: they cover the relationships that arose from 1 January 2020.

If the retroactive effect for the exemption of the transfer of property rights can be called a necessary clarification of the law, then the reasons of a favourable attitude to the transfer of property between a ‘grand-parent’ company and its ‘grand-subsidiary’ are still unclear.

The following changes are proposed with regard to depreciation:

• the depreciation of intangible assets created as a result of research and development with respect to which the taxpayer applied investment tax deduction, has been excluded;
• the forming of the depreciated value of intangible assets has been clarified similarly to the depreciated value of fixed assets;

Customary for crisis situations, thresholds of interest rates have been reduced for loans in roubles and foreign currency (article 269(1.2) of the Tax Code); also temporary specifics of calculation of controlled debt have been introduced again.

A benefit has been clarified with respect to the sale of shares of Russian companies: tax at the zero rate applies to the sale of shares of a Russian company in the assets of which immovable property does not exceed 50%, or to the sale of circulating shares of an economic innovation sector, irrespective of the composition of the assets of the Russian issuer.

The possibility to apply investment tax deduction has been expanded. The deduction can be used with respect to expenses on research and development.

Personal income tax

The list of compensations and other payments exempted from taxation has been clarified, the specifics are established with respect to tax exemption of income from the sale of items of real estate purchased under shared construction agreements.

MET

The consequences are determined with respect to the termination of the status of RIP participants and the withdrawal from agreements with taxpayers who are residents of a Priority Social and Economic Development Area further to a court decision in connection with the breach of material conditions of agreements.

The procedure for assessing the value of precious stones mined has been changed.

Property taxes

• the procedure of taxation of destroyed vehicles has been established: the tax does not accrue from the first day of the month in which the vehicle was destroyed;
• the procedure has been improved for tax authorities to consider documents received from taxpayers;
• the personal property tax base is determined only based on cadastral value.

Insurance contributions

• The list of payments not subject to personal income tax paid by the employer in favour of employees has been synchronised. Insurance contributions do not accrue on such payments either;
• The conditions have been clarified for releasing from contributions and payments associated with the compensation of expenses of an individual under a civil law agreement.

What to think about and what to do

We recommend monitoring any further developments in the draft law and believe that it may be subject to additional amendments in the future.

Help from your adviser

Pepeliaev Group’s lawyers are ready to assist in analysing possible consequences related to the adoption of the proposed amendments for your business and in preparing a position with regard to the draft law which can be brought to the notice of the participants of the legislative process through business associations.