The Russian tax system is relatively new, and many tax concepts and issues that are standard in most market economies with longer taxation histories are just beginning to emerge in Russia. For that reason many concepts familiar to Western business people and tax specialists have yet to find their way into Russian tax legislation and practice. As new concepts are embraced by Russian authorities, they are in many cases applied differently than in the West, or in other countries with developing tax systems. The overhaul of a patchy tax system brought into existence by the rapid transition to the market economy in the early 1990s began in 1999 with the adoption of the first part of the Tax Code. Today, tax reform has largely been completed in terms of codification and elimination of multiple tiers of regulations. A new 13% flat rate for personal income tax, reduced corporate tax (from 35% to a 24%) and reduced VAT (from 20% to 18%) were introduced. The government plans to introduce certain anti-avoidance provisions (including controlled company legislation). In the meantime, guidance from the high courts lays out several anti-avoidance approaches, including the concept of unjustified tax benefits. The fiscal authorities are beginning to adopt these approaches and crack down on aggressive tax evasion. In doing so, they are beginning to use the substance over form approach.
Overall, this is a rapidly developing area. Certain other concepts are planned to be introduced, including profits tax consolidation and a significant upgrade of transfer pricing rules to bring them more in line with OECD guidelines.
Administration of the tax system
Taxes, duty and fees are enacted by law and may be changed only by new legislation. The Federal Tax Service, which is responsible for collecting taxes, is subordinate to the Ministry of Finance, which has overall responsibility for collection of state budget revenues and for setting tax policy.
Other tax law enforcement bodies include, in particular, the Federal Agency for Economic and Tax Crimes under the Ministry of Internal Affairs, which is responsible for investigating tax crimes. Registration requirements Every legal entity must register with the tax authorities in its place of location, as well as in each location in which it has a branch, a representative office, other separate subdivisions, immovable property or transport vehicles. A foreign legal entity is required to register with the Russian tax authorities in each location in which it carries out activity through a subdivision (regardless of whether the activity is taxable or not) for a period exceeding 30 days continuously or cumulatively during a calendar year. Special registration requirements apply for foreign legal entities which (a) own immovable property in Russia, (b) own transport vehicles in Russia, (c) have movable property subject to taxation in Russia, (d) have opened bank accounts with Russian banks.
The Russian tax system provides revenues on three budgetary tiers: federal, regional and local. All taxes are legislated at the federal level, although regional and local authorities have the power to set (or reduce) rates and establish procedures for regional or local taxes. Lowertier authorities cannot grant concessions with respect to taxes governed by a higher authority (i.e., regional authorities cannot grant concessions on federal taxes). Major taxes currently payable by businesses and individuals in Russia:
• Profit tax
• Value-added tax (VAT)
• Excise taxes
• Personal income tax
• Unified social tax
• Mineral resources extraction tax
• Payments for the use of natural resources
• Water tax
• Property tax
• Transport tax
• Tax on the gambling industry
• Land tax
• Individual property tax
Apart from the taxes listed above, a company may be subject to certain obligatory pension and social insurance payments and pollution charges. Customs duty is governed separately by the Customs Code.
Taxes, duty and fees are enacted by law and may be changed only by new legislation. Bills are developed by the Federal Assembly's lower chamber (State Duma), then approved by the upper chamber (Federation Council) and signed into law by the President. The Russian legal system does not include case law, and each court ruling technically binds only the parties involved. Nevertheless, the Supreme Arbitration Court and Constitutional Court issue rulings and guidance for the consistent application of laws and compliance with the main constitutional principles, and this guidance plays an important role in defining the approaches of taxpayers and the fiscal authorities.
As of July 2007, Russia has signed and ratified 67 double tax treaties. These tax treaties are usually based on the OECD Model Treaty (although the UN Model Convention is also still applied by developing countries). Local Russian tax authorities generally do not have much experience in interpreting and applying double tax treaties. Withholding taxes on interest, dividends and royalties are typically reduced by tax treaties. Starting 1 January 2002, treaty benefits can be claimed by any entity or person provided that the tax residence certificate of the foreign company is available (no advance clearance is required to apply a treaty's provisions). Definitions of a permanent establishment in domestic law in most tax treaties are largely similar. However, the domestic definition does not require a place of business to be «fixed», unlike most treaties. Some tax treaties provide more favourable rules with respect to certain
types of tax deductions when determining the amount of business profits taxable by the Russian Federation (e.g., the German treaty allows for unlimited deduction of advertising expenses).
Tax returns and payments
Companies are required to file tax returns with the tax authorities on a monthly, quarterly or annual basis, depending on the particular tax and the company's line of business. Some taxes (i.e., profits tax, property tax, unified social tax, etc.) are paid in monthly, quarterly or annual installments, with a final adjustment made when annual tax returns are submitted.
Companies may choose to calculate profits tax either monthly (with payment of monthly advance payments calculated based on the actual profits received) or quarterly (with payment of equal monthly advance payments calculated based on profits received during the previous quarter). The final payment for the year is due by 28 March of the following year. The quarterly and annual returns should be filed within the same deadline as the payment due dates.
The tax authorities do not issue tax assessments to enterprises. Instead, the company must pay the amount of tax indicated in the tax return.
At present, taxpayers can challenge decisions and other actions (or failure to act) of tax authorities either with a superior tax office, or in court. From 2009, an appeal to a superior tax office will become mandatory before the matter may be brought to court.
In accordance with the general provisions of the Tax Code, income received by a foreign legal entity and not attributed to a permanent establishment (PE) in Russia is subject to withholding income tax in Russia (to be withheld at source). Withholding income tax rates are as follows:
• 15% on dividends and income from participation in Russian enterprises with foreign investments;
• 10% on freight income;
• 20% on some other income from Russian sources, including royalty and interest;
• 20% of revenue or 24% of margin in relation to capital gain (from the sale of immovable property located in Russia or shares in Russian subsidiaries where the immovable property located in Russia represents more than 50% of assets). Taxation of the margin (rather than the gross amount of income received from the above sales) can be applied only if proper documentary support of expenses is available.
Tax should be withheld by the tax agent and paid to the budget within three days of the date when the income was paid out.
Income tax withholding rates may be reduced under a relevant double taxation treaty, whose provisions may be applied based on confirmation of tax residence, to be provided by a foreign company to the Russian tax agent prior to the date of payment (no advance permission from the Russian tax authorities is required).
Tax returns are desk-audited by the tax authorities upon their submission. In addition, the tax authorities have the right to perform regular field audits of companies. Field audits should not last for more than two months (in some cases it may be extended to four months—for example in audits of «major» taxpayers or taxpayers that have several separate subdivisions— or extended to six months in exceptional cases), and may cover only three calendar years prior to the year of the audit. Once the tax period is audited, the tax authorities may not audit the same period again, except when a taxpayer is reorganized or liquidated, or the respective tax audit is performed as part of a superior tax office's review, or if a taxpayer has filed an amended tax return with a reduced amount of tax due.
The law covers a variety of tax violations and establishes penalties for each particular type. Underpayment of taxes may result in a fine equal to 20% of the underpaid taxes (can be increased to 40% if intent can be proved). The late filing of a tax declaration carries a penalty of 5% to 10% of unpaid tax per each month of delay in submitting the tax declaration. A number of fixed fines are imposed on a taxpayer for failure to register with the tax authorities or a failure to supply them with the required information, etc. Failure to withhold tax may result in a fine of 20% for the tax agent.
Interest for late payment is charged at a rate calculated as 1/300 of the Central Bank of Russia's re-financing rate (10% per annum from 19 June 2007) per day. The amount of underpaid tax and late payment interest may generally be collected by the tax authorities without the consent of a taxpayer or a court. However, collection of penalties requires the ultimate consent of the taxpayer or a court ruling.
Advance tax clarifications and advance pricing agreements
Taxpayers have a right to apply to the Ministry of Finance or the tax authorities for clarification of Tax Code provisions. If a taxpayer follows such clarifications (issued individually or placed in the public domain with respect to similar facts and circumstances), it will be relieved of fines or late tax payment interest. However, it is difficult and time consuming to obtain these clarifications. According to draft amendments to the Chapter I of the Tax Code, taxpayers will be able to conclude advance pricing agreements (APAs) with tax authorities on the pricing methodology that they can use. No APAs are available at present.