Expert group on legislation

Russian law does not have statutory definitions of microfinance or microfinance institution, and different sources define concepts differently. To better advocate for changes that will support the development of microfinance in Russia, the RMC created the Expert Group on Legislation in the winter of 2003. Members of the RMC Legal Expert Group come from various types of microfinance organizations and state authorities. The Expert Group meets on a regular basis to discuss various legal aspects of conducting microfinance activity in Russia.

In this subsection you will find complete information on previous meetings, activity results, and plans of RMC Expert Group on Legislation.

The report on the Expert group meeting. 17 February 2003

The work aims of the Expert group

The RMC presented its own vision about the work aims of the Expert group:
The Expert group reflects the interests of various organisations within the microfinance sector, and the different points of view on possible solutions. It determines problems, which prevent the development of MFO, including the gaps and contradictions in legislation, which prohibit legal standards, and compares legal practices.
On the basis of the information collected, the Expert group suggests solutions for the improvement of the situation. They could be the following:
- To carry out more, thorough research; the preparing of projects for new normative acts or changes for the existing acts;
- To work on promoting the ideas of microfinance in state institutions;
- To carry out seminars, round tables etc. for the specialists of MFO;
- The exchange of experience amongst MFO;
- To publish textbooks, instruction manuals etc.
The RMC, having certain resources, assists in the realisation of suggested solutions.

The participants of the meeting approved the basic concept, and suggested to supplement possible problem solving strategies in the following ways:
- To organise meetings/discussions with state officials and authorities' representatives;
- To exchange court practice experience;
- To publish MFO court practice reviews;
- To prepare answers to the issues of practical activities and publish information on the web-site;
- To work out typical solutions for problematic issues and distribute them amongst MFOs;
- To organise e-conference for MFOs;
- To organise meetings of specialists for discussions of specific issues;
- To work together with the State Duma - to participate in the discussion of bills;
- To prepare, on behalf of the RMC, requests to the state authorities, ministries and other state institutions;
- To create a forum for attorneys/solicitors for the discussion of complex legal issues (the discussions are possible via e-mail).


The organisations from the following cities gave their agreement for participation in the attorneys' forum: Samara, Cheboksary, Moscow, Komsomolsk-na-Amure, Smolensk and Tver.
The first issue for information exchange: Appeals to courts in connection with the failure to return loans by individuals who are not entrepreneurs. The refusal to accept statements of claim by the tribunals and general courts. The participants of the meeting have their own experience in connection with this manner.

Different points of view were expressed concerning the problems in organising accounting in MFOs: is it necessary or not to prepare suggestions in order to change the accounting policy, taking into account the specific activities of MFOs. As a result of the discussion the participants agreed that this is a very difficult issue, which demands a thorough approach. At the moment MFOs are not ready to offer any acceptable, suitable decisions for everyone.

The approval of the work plan for the Expert group for 2003

The RMC suggested a work plan for the Expert group for 2003. According to this plan there will be a discussion of problems in the microfinance sector, research prepared by the RMC, meetings with state officials and authorities' representatives, and the preparation of suggestions for improvements in legislation.
The participants of the meeting discussed the project of the work plan and suggested the following:
- To approve the plan in general;
- To carry out a follow-up meeting in the second half of May. To discuss problems; to exchange experience concerning the compulsory carrying out of court orders, including the taking of possession of real estate. To invite a speaker representing the bailiff's office;
- To include into May's agenda the question about the possibility of exchanging credit histories. To invite a speaker to give a talk on "International experience in creating a bureau of credit histories". E.A. Sugako suggested the distribution of a law project on the "Bureau of credit histories". The participants expressed their interest in taking part in a discussion of the law project;
- Not to separate the expert group into smaller sub-groups according to the types of organisations: it is interesting to meet the representatives of different organisations. New approaches to the solutions of problems could be discussed during such meetings. The participants of the Expert groups could pass the information to other types of MFOs in their regions;
- Not to take off the agenda the possibility of carrying out the meeting outside Moscow - in some other region. It is necessary to return to this issue later;
- To discuss the topics for discussion for an autumn meeting of the Expert group in May.

The discussion of the content and the working out of recommendations for the research on "The legal environment for the work of microfinance organisations in Russia. The analysis and recommendations for restructuring" prepared by the RMC.

The aim of the research is to assess the regulations of the existing Russian legislation, which is in need of changes in order to create the ideal legal environment for microfinance in Russia. This is why the process of assessment must begin with a clear understanding of the expected, ideal, legal environment. Further, the gaps, uncertainties and obstacles of the existing Russian legislation must be correlated with the ideal legal conditions.
The participants decided that prior to the determination of the general characteristics of an ideal legal environment, it is necessary to identify the micro finance and MFO. A unanimous opinion was not reached during the meeting. The participants agreed on the following issues: Microfinance activity relates to financial services (including loans) by using its own resources for the support of small businesses and for consumers' goals. Microfinance has social orientation. The amounts of the loans depend on the regions and on the level of development of an organisation. The most important thing in identifying an MFO is the difference in the conditions for loans from banks and other credit organisations. V.M. Pakhomov promised to share the identification of microfinance activity given by foreign specialists.

The development of organisations providing microfinance services.
There is no ideal type of organisation. MFOs must have the possibility to be created in several various forms: (1) the NKO form, which allows the inclusion of micro lending into the process as a fundamental type of work; (2) credit co-operatives; (3) special forms of non-banking credit organisations, which have licensees to carry out some types of banking, leading to micro lending and attracting savings from individuals; (4) real opportunities for commercial banks to take part in microfinance together with other organisations.
The majority of participants at the meeting of the Expert group are of the opinion that commercial organisations, which do not have licensees for carrying out banking activities, should not be allowed to carry out microfinance banking. It attracts additional attention from the Central bank and creates problems for all MFOs. L.V. Teterikova thinks that it is necessary to keep the basic possibility for any organisation to carry out microfinance banking as long as it is in some kind of legal form. It is not necessary to introduce direct prohibitions. It is possible that in the future MFOs will need to create commercial organisations.

Access to financial resources
The legislation should include the straightforward possibility to attract resources for loans from individuals and legal entities, credit from banks, and use them for lending (V.M. Pakhomov and V.G. Krasnov promised to share the replies from officials with different opinions regarding these issues). Bank credit must be accessible for MFOs, which do not have the possibility to provide securities. MFOs must have the opportunity to receive state support in the form of budget financing by taking part in competition.

Prudential and non-prudential regulation
Regulation is necessary for the MFOs themselves in order to provide financial stability. Regulation must be carried out by internal and external normative acts. The external regulation must be obligatory and recommended.
The extent of external regulation depends on the resources used for financing the work of MFOs. The strictest control is carried out if the finances of individuals (co-operatives) are used.
At the regional level the control (or rather co-ordination) is carried out by committees, which are created by the authorities. At the federal level the Ministry of Finance is the most suitable authority.
Microfinancing does not need licensing. V.T. Tagirova is of the opinion that microfinancing does not meet the criteria which are used for the determination of licensed activities.

Tax procedures
The tax rules must be clear and unambiguous. The micro finance organisations, as part of a non-commercial sector, must have the same privileges as other non-commercial organisations. Credit co-operatives which carry out their work only by using the private savings of their shareholders and distribute the received income amongst those shareholders, think that the existing tax procedures lead to double taxation: at first the received percentage income is taxed as an income of the organisation, and then as the income of individuals. In an ideal legal environment double taxation would not take place.

The integration of microfinance into a wider financial sector
MFO is a part of the financial sector. Microfinance activity must be regulated by special legislation. it is necessary to have a legislative definition of an MFO and microfinance activity in order to distinguish it from banking activities.
The "highly developed" MFO - non-commercial organisations must have the opportunity to receive a license for carrying out some types of banking activities.

Experience in protecting interests of the MFO in tribunal courts "Court decisions on the issues of tax payments on income, VAT and property tax". A talk given by M.R. Ovchiyan
The supervising representatives of the state authorities are of the opinion that if the organisation pays tax on its income it means that it is involved in commercial entrepreneurial activities. If the co-operative carries out commercial activity by giving loans it means that this is a banking activity. If it carries out banking activities without a license it means that it is breaking the law and is subject to criminal investigation.
Checks by the tax police took more than two months. We protested against the decision made half a year after the checks began, and this decision was overturned. On a different issue: In principal, the court decision was the following: a co-operative, which does not carry out commercial activity, should not pay tax on income (this was concerning the activity up until 2001).
On the issue of refunding VAT for technical assistance: The co-operative took a suit out on refunding VAT for purchasing goods and acquiring services for the technical assistance programme in 2000. The first court they dealt with has refused to refund VAT. The co-operative complained, and the appeal court agreed with the demands of the co-operative. The second court of appeal returned the case to the first court. The decision has not yet been made.
Conclusions: It is better not to argue with the supervising authorities, but to be friendly with them. If problems arise then refer to the court - we gained more respect that way. It is difficult to explain your opinion to the court. It is very important to get the organisation's accounting in order and deal with documentation correctly. The percentage must be considered as an income of the main activity.

"Arbitration practice of the credit consumers co-operative, which carries out its work by using only the private savings of its members". Talk given by E.V. Ovchinnikova.
For 8 years up until 2001 we did not pay tax on our income. When the Tax Code of the RF was passed our position became less straightforward. The most important is to keep internal documentation in correct order. It is very important that the Tax Code limits the rights of tax authorities on how long they can spend carrying out the checks. Before they would carry out the checks constantly. Now we have the possibility to demand that the checks are completed within two months. There are many problems connected to the fact that there is no accountancy system for private savings.
E.V. Ovchinnikova presented a package of documents related to arbitration practice. These documents will be used by the RMC for research preparation.

"The simplified system of taxation". Talk by Anatoly Nikolaevich Melnichenko, the head of the Taxation Department for small businesses, The RF Ministry for Taxation. A.N. Melnichenko gave a short overview of the simplified system of taxation. He answered questions and gave the participants a written commentary of separate issues.

Answers given orally:
Question: According to Article 271 of the RF Tax Code on outside generated income, the date upon which the income is received is considered to be the date when the debtor is announced, or the date when the court decision for fines, penalties and other sanctions for breaking promissory notes comes into force. How do we determine the date for receiving the income in this case by using the simplified system of taxation?
Answer: According to Article 346.17, in the simplified system of taxation, the date of receiving the income is considered to be the date when the money appeared in the bank account or in the safe.
Question: Can the commercial organisation established by one legal entity be transferred to the simplified system of taxation?
Answer: It is not possible.
Question: If the tax authorities have already confirmed the right of such an organisation to be transferred to the simplified system of taxation, what would this organisation expect in the future?
Answer: After our explanations this organisation must return to the general procedure and pay all taxes.
Question: If the organisation has notified the tax authorities about transferral to the simplified system of taxation, but has not received any reply, can it be allowed to transfer to the simplified tax system?
Answer: Yes, it can, if the chosen taxation subject is given in the application.
Question: Can a non-commercial organisation, with branches, be transferred to the simplified system of taxation?
Answer: Yes, it can. We use a formal approach in these cases - it is not allowed to be transferred to the simplified system of taxation, if an organisation has branches and representative offices (as they are identified in the Civil Code of the RF), that are given in the constituent documents.
Question: If a non-commercial organisation was established by 3 individuals and 3 legal entities, can it be transferred to simplified system of taxation?
Answer: I do not know. We have not considered this question yet.
Question: When should we expect answers and additional explanations?
Answer: We have many enquiries concerning VAT, founding members and minimal tax. We are preparing a report to the Russian President by the 1st of September. It is possible that changes additions will be introduced to Chapter 26.2 of the RF Tax Code. In particular, it is possible that it will be allowed to transfer, to the simplified system of taxation, those who pay the tax on imputed income and those who buy a patent. It is also possible that the 15 million limit will be raised and the simplified system of taxation will replace local taxes. It is not planned to raise rates.