We would like to draw your attention to the upcoming valuable updates in Tax legislation.

Below we have placed a short overview of the hottest issues already occurred in Russian tax environment and some to be introduced in the nearest future. Respectively, these incentives are proposed either to overcome consequences of the financial crisis, or to realize the next step of the long-term policy of stabilization and modernization of the Russian tax system.

We would like to stress that the below topics have influence on almost all spheres and types of business.

1                    New transfer pricing rules

Recently, the Deputy Finance Minister has announced that the Draft law (published at the official web-site of the Ministry of Finance of the RF) is agreed with the Russian Ministry of Economic Development and Trade and other authorities in order to be introduced to the Russian Government, with preliminary come-in-force date either in the mid-2010 or in the beginning of 2011, as the latest. This Draft Law most likely will be adopted together with Law on consolidated taxpayers.

At the present moment article 40 of the Russian Tax Code is used for the purpose of the transfer pricing control. However, in the process of its application it has such lacks and problems as restricted number of related parties, lack of information about market prices and tax control in the event of a 20% deviation from own average prices with insufficient base.

New Transfer Pricing Rules will expand and at the same time will determine more precisely the list of controlled transactions and the parties to be subject to control:

New controlled transactions

New criteria of dependent parties

Transactions between related parties in case: -         value of transaction exceeding 1 billion rubles a year; -         subject of transactions is taxable by mineral extraction tax calculated at the ad valorem rate; -         party to transaction is  taxpayer of unified tax on imputed income or unified agricultural tax Foreign-trade transactions in case: -         subject of transactions is oil and oil products, ferrous and non-ferrous metals, precious metals and stones; -         party to transaction is located in the low-tax jurisdictions (as of the list of the Russian Ministry of Finance) or if the transaction’s beneficiary is located in the abovementioned states (territories).

-         direct or indirect participation of a person / entity by itself or together with related parties (more than 20%); -         subsequent participation with over 50% interests; -         founder, trustee and beneficiary of a foreign trust.

In addition to the three existing transfer pricing rules (1-3), the Draft law introduces new methods (4-6):

1.     Comparable Uncontrolled Price method;

2.     Resale Price method;

3.     Cost Plus method;

4.     Product processing sale price method;

5.     Comparable Profits Method;

6.     Profit Distribution method.

Along with official source of information the Draft Law provides for the new sources of information which may be used to determine the market price:

§     Stock exchange prices and quotations;

§     Customs statistics;

§     Information in publicly accessible publications and data systems;

§     Opinion of an independent appraiser.

Besides that, the New Rules update the tax control procedures by covering the following:

§      Notifications on controlled transactions;

§      Detailed description of transactions upon the tax authority’s request;

§      Specific tax audit conducted by the Federal Tax Service;

§      A fine (40% of the tax assessed) and interest may be imposed.

Basing on the Draft Law it may be concluded that the main existing principle will remain – a transaction price is deemed a market one unless proved otherwise. The positive element of the amendments is the symmetrical adjustment rule – if a tax base for one party of the transaction is increased, another party may reduce its tax base correspondingly. As the negative issues we should note lack of instructions of application of some provisions of the Draft Law, as well, as unclearness of some points.  

2                    Simplified vat refunds

The Draft law regarding new simplified procure of VAT refunds has been accepted by the Russian State Duma in the first reading, and it is expected to come into force on January 1, 2010.

These amendments provide for refund of VAT based solely on the taxpayer's tax return irrespective of completion of an in-house tax audit of the tax return.

Such procedure will be available for the following categories of taxpayers:

§       Major taxpayers;

§       Taxpayers having (i) depreciable assets valued for not less than 500 million rubles and (ii) revenue for the previous year exceeding 5 billion rubles. Not less than 3 years must have elapsed since the registration of such taxpayers before the filing of the VAT return in question;

§       Taxpayers presenting a bank guarantee to the tax authorities for the amount of refund claimed. Thus, if afterwards, the tax authority recognizes a VAT refund made to a taxpayer as unjustified, the bank would be obliged to pay the underpaid VAT to the tax authority.

The general procedure proposed for the receipt of an accelerated VAT refund is as follows. If a taxpayer has tax arrears before the budget the tax authorities will decrease the amount of VAT claimed for refund in the return accordingly. Further, within the next 5 days the tax authorities have to inform the taxpayer on their decision. The day after the decision is made they should send a tax refund order to a territorial body of the federal treasury.

The territorial body of the federal treasury should pay out the amount of VAT refund to the taxpayer within the next 5 days and should inform the tax authorities on that. If the tax authorities exceed the time limit for the refund of VAT a penalty for each day of delay is to be charged.

3                    Bona-fide taxpayers

“Bona-fide taxpayer” and “due circumspection” terms are the hot issue due to the recent (August – October 2009) court practice, especially in the Moscow Region.

These court decisions have declared new approach to the issue, namely:

§       Stricter requirements on suppliers' credibility check;

§       Failure to check credibility of the supplier in accordance with the new requirements may lead to dis-allowance of tax benefits, independently to the fact whether the reality of transactions and expenses are questioned;

§       Wider determination of business risks (tax consequences arising because of counterparty).

In this context companies are recommended to implement (or upgrade the existing, if any) internal regulations on checking and approving suppliers such as:

§       Requirement of document from the subcontractor (extract from the State Register of Legal Entities, orders on appointment of the General Director and the Chief Accountant, Powers of attorney together with copies of passports, seal and signatures' masters, etc.);

§       Check of publicly available official data and mass media data regarding the subcontractor;

§       Other criterions check considering the existing court practice and governmental bodies' clarifications and recommendations.

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We hope the information above is helpful for you.

For more information on ALRUD Tax practice please visit our Web-site

or contact directly the Head of the Tax practice Maxim Alekseyev [email protected].

Please note: This is a Newsletter and should not be considered as a ground for making a decision regarding a particular transaction. All the information for this Newsletter was taken from the open sources.