Taxation in Russia

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The tax system of the Russian Federation (Lang ru ) is a complex of relationships between fiscal authorities and taxpayers in the field of all existing taxes and fees. It implies continuous communication of all its members and related objects: payers; legislative framework; oversight authorities; types of mandatory payments. The Russian Tax Code (Налоговый кодекс Российской Федерации) is the primary tax law for the Russian Federation. The Code was created, adopted and implemented in three stages. The first part, enacted July 31, 1998, also referred to as the General Part, regulates relationships among taxpayers, tax agents, tax collecting authorities and legislators, tax audit procedures, resolution of disputes, and enforcement of law. The second part, enacted on August 5, 2001, defines specific taxes, rates, payment schedules, and detailed procedures for tax calculations. It was significantly amended in 2001–2003 with additions like the new corporate profits tax section and the new simplified tax system for small business. The Code is subject to regular changes which are affected through federal laws. The Code is designed as a complete national system for federal, regional and local taxes but excludes customs tariffs. Rules and rates of regional and local taxation must conform to the framework established by the Code. Taxes or levies not listed explicitly by the Code or enacted in violation of its specific provisions are deemed illegal and void. The Russian tax system tends to use moderate flat or regressive tax rates. It is highly centralized for a federal state and relies heavily on proceeds from oil and natural gas corporations, who themselves are mostly state owned. In 2006 the tax burden on oil companies exceeded 45 percent of net sales (compared to 12 percent in construction and 16.5 percent in telecommunications). Rates for oil related taxes and tariffs, unlike regular taxes, are set not by the Tax Code but by government decree. The Russian Ministry of Finance estimated that revenues regulated by the Tax Code accounted for 68 percent of federal revenue in 2008 fiscal year, rising to 73 percent in 2010. Individuals pay an income tax (13 percent), land tax (0.3 percent of the land's cadastral plot which is calculated by a special formula) and vehicle tax (which is linked to the vehicle's engine power). Most small businesses are eligible for simplified taxation and can choose one of the following taxes: income tax (6 percent) or profits tax (35 percent) or unified agricultural tax (6 percent, farmers only) or tax on imputed income (calculated by a special formula, certain companies only). Corporate taxes for medium and large businesses include profits tax (20 percent), value added tax (20 percent), property tax (0 2 percent) and some other taxes like water tax and mineral tax.

Prior to enactment of the Code, Russian tax legislation was based on a patchwork of laws enacted in the last years of the Soviet Union (notably, the 1990 laws on personal and corporate income taxes), the 1991 law "On the framework of the tax system in the Russian Federation" and subsequent federal, regional and local laws and executive decrees; the underlying Soviet rules of accounting and business practices remained largely unchanged. Taxation in 1992–1998 was substantially decentralized: regional and local authorities were entitled to invent their own taxes, or could, on the contrary, create tax havens for "domestic off shores". In his February, 1995 presidential address Boris Yeltsin proposed to re centralize and streamline the tax system through a unified Tax Code. Yeltsin declared that the Code's objective was to promote investments in manufacturing, while at the same time fully collecting taxes, and specifically demanded abolition of arbitrary tax preferences and tax evasion. He admitted that the state had no clearly formulated approaches to important taxation problems—these had to be resolved in 1995–1996. One year later, Yeltsin reiterated the call to curtail "new techniques" of tax evasion and "regional self financing". He stated that the forthcoming enactment of the Code was only a start, that the government sponsored draft was incomplete and that the proposed rates were excessive. The only tax law enacted in this period and still effective in 2008 is the individual property tax (enacted in 1991, with amendments). Individual property tax is explicitly authorized by the Code but exists as a standalone law.

The Government of Russia presented the first official draft of Part One to the State Duma in February 1996, four months prior to the 1996 presidential election; Part Two was presented in April 1997. Deputy Minister of Finance Sergey Shatalov promoted the bill. After more than a year of refinements, the Duma passed the bill in the first hearing (due process requires three stages, or hearings) on July 19, 1997. In June–October the Duma accumulated over 4,500 proposed amendments to the bill, making further progress impractical. In October 1997 the Duma and Government clashed over the federal budget for 1998 fiscal year, and the Government recalled the bill to appease its adversaries. When this stage ended, the Duma refused to come back to the old bill; Yury Luzhkov, major opponent of centralized tax collection, declared that "the tax code is already dead. It stinks". The Duma restarted the process, inviting competing drafts to be filed by January 31, 1998. By the deadline the Duma had received ten alternatives, as well as the new government version; this time sponsored by Minister of Finance Mikhail Zadornov and his deputy Mikhail Motorin. They made it clear that any alternative draft would face veto by the President, at the same time incorporating ideas from the competing drafts. On April 16, 1998 the Duma finally chose the Government draft over the alternatives with a 312 to 18 vote. Enactment of the Code was hastened by the imminent 1998 Russian financial crisis. Sergei Kiriyenko, appointed Prime Minister in April 1998, included the Code in the government's anti crisis package. Yeltsin threatened to impose the Code by decree if the Duma failed to quickly enact it. On July 16, 1998 the State Duma discarded budget balancing proposals, but approved the third, and final, hearing on Part One; the next day it was stamped by the Federation Council and finally signed into law by the President on July 31, 1998 (to become effective on January 1, 1999 with certain exclusions). It was officially published in Rossiyskaya Gazeta on August 6. Anti crisis actions failed, and on August 17, 1998 Russia defaulted on its government bonds.

While Part One was instrumental in re designing day to day relationships between taxpayers and the state, it did not address specific taxes; thus, in 1999–2000 taxpayers still paid multiple taxes with the old rates. Part Two, implemented under Vladimir Putin (enacted in August 2000, effective January 1, 2001) promulgated a flat 13 percent personal income tax rate, and replaced various social contributions with a unified social tax (UST). In 2001 collection of personal income tax increased by 26 percent (adjusted for inflation). Tax compliance improved; an estimated one third of previously untaxed jobs were added to the tax rolls, although economists cannot separate the effects of tax rates from those of general economic recovery and improved law enforcement. A commitment to abolish sales based taxes was reflected in the abolition of the municipal housing tax (2000) and, eventually, the road tax and retail sales tax (2003). To offset the resulting drop in municipal revenue, Putin temporarily increased corporate profit tax rates for 2001 to 35 percent (43 percent for banks); the framework of profit taxation had yet to be redefined.

As it is going to be discussed in the upcoming paragraphs, it is needed to define clearly the word tax and levy. According to the Russian Tax Code, a tax is a mandatory payment collected from both organizations and individuals. This payment is non refundable and compulsory, obtained by transferring their monetary resources. The purpose of taxation is to fund governmental and municipal activities, leveraging rights of ownership, economic jurisdiction, or operational management. Whereas a term levy could be understood as a mandatory payment required from both organizations and individuals. It is a prerequisite for state authorities and local government bodies to perform specific legally significant actions, such as granting rights or issuing permits (licenses) to the payers of the levy.

All regional and local taxes in Russia are asset related: property tax, vehicle tax, land tax and tax on gambling businesses. These taxes are assessed and paid in re. Exact rates are set by regional (property, vehicles, gambling) or municipal (land) legislators within the Code's framework. Land tax is the only local tax in Russia: its rates are set by municipal authorities (excluding the federal cities of Moscow and Saint Petersburg, where the rates are set by city legislators). The maximum rate is 0.3 percent on lands zoned for agriculture, housing and dachas, and 1.5 percent on other lands. Forest reserves and bodies of water are exempt. Land values are periodically assessed by land registrars and kept substantially below market prices. Unlike corporate property tax, land tax is paid by individual taxpayers. Corporate property tax, or tax on fixed assets, is assessed on year averaged book value of fixed assets excluding land (which is subject to land tax). Radioactive waste storage facilities, space satellites, church property and other itemized assets are specifically exempt from taxation. The maximum rate is 2.2 percent; regional authorities can vary rates depending on types of taxpayers and assets. This provides a method to establish disguised individual preferences, which are outlawed by the Code. Vehicle tax is levied annually on owners of motor vehicles and trailers, ships, and aircraft. Commercial ships and aircraft operated by transportation companies, agricultural, military vehicles and ambulances are exempt. The Code establishes maximum rates tied to engine power. Rates increase steeply with increasing horsepower. For example, in 2009 fiscal year the city of Moscow levies 700 roubles on a 100 h. p. passenger car, 2400 roubles on 120 h. p., 12,000 roubles on 200 h. p. and 45,000 roubles on 300 h. p. Taxation does not depend on emission levels. Tax on gambling businesses is paid by registered gambling outlets at a flat rate per each table, slot machine or bookmaker's cash desk. The Code provides both minimum and maximum rate limits (1:5 ratio), thus prohibits establishment of tax free gambling. For example, one slot machine is taxed at 1,500–7,500 roubles a year, and one table at 25,000–125,000 roubles a year. From July 1, 2009 gambling in Russia is banned, except in four specially designated gambling areas in remote regions. Online gambling is banned.

The set of specific federal and regional corporate taxes outlined above (i. e. regular CPT, VAT, UST and property tax), which by default is mandatory for all corporate taxpayers and registered individual entrepreneurs, is known as General taxation system. Three alternative tax systems replace the above taxes with a simplified procedure:

Imputed taxation applies to specific, typically small business, activities involving trading with general public in cash: small retail and food service outlets, hotels, repair shops, taxi companies, etc. Imputed tax, uses rates set by local authorities (per square meter of shop space, per vehicle etc.) All eligible businesses use imputed taxation. The law is also mandatory for eligible parts of larger corporations, even if they are individually insignificant. For example, a cafeteria of a large steel mill is usually considered a subject of imputed tax and the mill must account for it as a separate taxable unit (the core business remains on terms of general taxation system). Simplified taxation system applies to small businesses with annual sales less than 60,000,000 rubles. Banks, insurers, foreign companies and certain other professions and businesses are not eligible. The average number of employees in the firm should not exceed 100 during the year and total assets should not exceed 100,000,000 rubles to be eligible. Unified tax is levied either on gross receipts at 6 percent, or on profit before income tax at 15 percent; the choice of either option, is made by the taxpayer. Simplified system prescribes a specific set of accounting rules, thus gross receipts and gross margins of eligible businesses are, usually, higher than they would be under general accounting and taxation systems. An eligible business can elect either simplified or general taxation system at will with certain timing restrictions, which are usually once a year in December. If the business loses eligibility at any time during the year, it continues operating under simplified system until the end of the year, and then it must recalculate its tax obligations under general taxation system from the moment it became ineligible. The system does not allow taxpayers to pass prepaid input VAT to their customers; such customers who are VAT payers are unable to refund any VAT paid downstream. As a result, businesses engaged in B2B transactions prefer general taxation. Taxation system for agriculture (including animal farms and fisheries) uses a flat unified tax levied at 6 percent on gross margins, with its own unique set of accounting rules. There are no limitations on size of the business as long as at least 70 percent of its income is generated by sales of its farm produce. VAT exemptions outlined in special frameworks apply only to VAT on domestic sales. VAT on imports is payable by all importers regardless of their tax framework. Likewise, the insurance premiums payable to Pension Fund of Russia are not considered part of UST and are payable by all employers. Finally, a Product sharing agreement framework applies to a very limited list of joint state private enterprises, typically in oil extraction.

Foreign individuals present in Russia for 183 days in a year or more are treated as residents for tax purposes and are taxed at common 13 percent rates. If they are present in Russia for less than 183 days, they are subject to 30 percent income tax (15 percent for dividends). Wages and salaries paid to foreigners in Russia are subject to standard UST tax. Foreign tourists cannot recover VAT on purchases made in Russia. Branches of foreign legal entities are subject to general taxation. Foreign companies can elect to use either Russian or their homeland accounting systems. Cash transfers between a branch and overseas head office and back are not subject to withholding tax and are not considered taxable income or deductible expenses. Payments to foreign companies that have no permanent establishment in Russia are subject to withholding tax at 10 percent on lease payments, 15 percent on dividends and 20 percent on all other payments other than payments for imported goods. These rates can be reduced through bilateral tax treaties. Russian subsidiaries of foreign legal entities are treated as domestic taxpayers; unlike branches of foreign companies, cash transfers between subsidiary and its parent may be subject to withholding tax; cash transfers from parent to subsidiaries may be considered taxable income. Transfers and repayments of loans do not trigger immediate tax effects. A special thin capitalization rule penalizes subsidiaries of foreign shareholders if, instead of remitting after tax dividends, they elect to pay interest on loans from shareholders. The Code effectively forces these companies to reclassify excessive interest into non deductible dividends. Deductibility of royalties and service fees remitted from Russia to foreign companies is frequently disputed by tax authorities and has been subject of high profile cases against subsidiaries of PricewaterhouseCoopers, Procter & Gamble and SABMiller.

Russian Taxation System faces a great criticism from both businesses and opposition parties on a regular basis. However, recently, with the deepening crisis, key structural organizations started to express their dissatisfaction with the current tax system as well. For instance, in December 20, 2015, Sergey Katyrin, President of the Russian Chamber of Commerce and Industry, proposed changes to existing tax regime through the Russian Gazette: