May 2003

This material is provided for information purposes only under a grant from USAID through Development Alternatives Inc. and the Russian Microfinance Center. Development Alternatives Inc. and USAID shall not be liable for any damage to any organization's property due to any use of explanations, conclusions and interpretations of effective legislation contained herein.
Author: LEGEM PERFERRE
Edited by: Russian Microfinance Center

RF Tax System

In May, the Russian Government launched a number of bills in the State Duma which would reform the tax system. Since then, the discussion of the options for tax reforms has shifted from the Government to the Duma.

State Duma deputies who oppose the Government bills (where one major change is lowering VAT from 20 to 18 per cent, in addition to the repeal of the sales tax two years ago), submitted alternative proposals concerning the tax reform. They included the following options for lifting the tax burden:
- a unified VAT rate of 15 percent, plus a repeal of all VAT benefits (proposed by N.N.Gonchar);
- lower VAT from 20 to 16 percent, while keeping the sales tax (G.V.Boos and others);
- lower UST (Unified Social Tax) basic rate: from 35.6 to 30 percent, instead of lower VAT (A.D.Zhukov, M.M.Zadornov, and others).

The plans to lift the sales tax in 2004 caused most of the debates. Deputies from Moscow, St.Petersburg, and Moscow Oblast, where more than 50 percent of all sales tax revenues in the country are collected, strongly objected to the repeal of this tax. The conflict between the federal government and these regions was resolved only due to presidential intervention; the Russian President first expressed his support of the government proposal in his Budget Statement to the State Duma, and then held a separate meeting on this issue with Minister of Finance A.L.Kudrin and Moscow Mayor Yu.M.Luzhkov.

Finally, the Duma Committee on Budget and Taxes recommended that the Duma should adopt, in first reading, the government-sponsored tax package and the bill proposed by the deputies on lowering UST rate in 2005. The first reading of these bills is scheduled for 11.06.03. The recent practice has been that government bills are considered by the Duma very promptly, before the end of the spring parliamentary period (given that the Government will design the 2004 federal budget based on the new legislation). For this purpose, the Duma is expected to make a decision to extend its spring parliamentary period.

Adopted Normative Legal Acts:

• Federal Law of 22 May 2003 No 55 -FZ "On amending articles 217 and 224, Part Two of the RF Tax Code"
  Published in Rossiiskaya Gazeta of 27 May 2003 No 99.
  Effective on 28 June 2003.
  • The procedure for calculating the taxable amount of interest on individual bank deposits is changed. The interest income exceeding the amount based on the RF CB rate is taxable at 35 percent (The current RF CB rate is 18 %.).
  • Currently, interest income exceeding ? of the RF CB rate is taxable. The new law is expected to encourage individuals to deposit their savings with banks.
• Constitutional Court Ruling of 14 January 2003 No 129-O "On reviewing the constitutionality of article 349 of the RF Tax Code, as requested by the Arbitration Court in Orlovskaya Oblast"
  Published in Rossiiskaya Gazeta of 3 June 2003 No 105.
  • The Constitutional Court ruled unconstitutional the provision of Tax Code article 349 which allows imposing sales tax on the sale of goods and services by individual entrepreneurs in exchange for cash.
  • This provision of article 349 will be invalidated on 1 January 2004. Until then, the Constitutional Court ruling allows arbitration [commercial] courts to decide in favor of taxpayers in their disputes with tax authorities.
  • Therefore, microfinance institutions do not have to pay sales tax on the interest received from cash loans issued to individual entrepreneurs for business purposes. However, given that the Ministry of Taxes and Levies has not yet made an official statement on this issue, it is likely that taxpayers will have to appeal to court in case of disputes.

• "On amending article 21 of the RF Tax Code"
  • In 2004, VAT rate is lowered from 20 to 18 percent.
• "On amending articles 21, 22, 25, 26, 26.2, and 26.3 of the RF Tax Code, and some other legal acts on taxes and levies"
  • Excise rates are indexed.
  • The tax legislation is amended pursuant to the repeal of the sales tax on 01.01.04.
• The State Duma members proposed alternative tax bills, including
  • "On amending the RF Tax Code" (proposed by N.N.Gonchar)
    • A single 15-percent tax rate is established under this bill. In addition, most of the current tax benefits are repealed including VAT-free lending.
    • It also repeals the taxpayer's right to recover export-related VAT (the excess VAT paid can be set off as payment of other taxes).
    • Electronic format of invoices is legalized.
    • All taxpayers are supposed to use accrual method of calculating their taxable base.
    • A unified procedure for VAT deduction is introduced for capital construction investment.
• "On amending Articles 158, 164, and 165, Part Two of the RF Tax Code, article 4 of the Federal law 'On amending Part Two of the Tax Code', and article 20 of the RF Law 'On fundamentals of the RF tax system'" (proposed by G.V. Boos and others).
  • Under this bill, on 1 January 2004, VAT rate is lowered from 20 to 16 percent.
  • The sales tax is preserved.
• "On amending article 241 of the RF Tax Code" (proposed by A.D. Zhukov, M.M. Zadornov, V.M. Reznik, and S.I. Shtogrin).
  • On 1 January 2005, the maximum UST rate will be lowered from 35.6 to 30 percent, with a change of regression scale.
  • The bill was adopted in its first reading.

• RF CB Regulation of 1 April 2003, No 222-P "On the procedure of bank transfers between individuals in the Russian Federation"
  Published in the supplement to Uchet. Nalogi. Pravo.- Official Documents of 14 May 2003. No 18.
  Becomes effective on 1 July 2003.
  • The Regulation addresses bank transfers between individuals inside Russia, made in the Russian currency, which may or may not involve opening a bank account.
  • Individuals are defined as private citizens, and their bank transfers covered by this act are those which are not related to any entrepreneurial activity.
  • The following forms of bank transfers can be used by individuals: payment order, letter of credit, check, collection.
  • A procedure is established for transfers from a corporate bank account to a number of individual accounts in one bank (examples include the transfer of employee salaries to their plastic cards). The transfer can be made in a single payment order by the payer, with a list of recipients attached. Either the paying organization or its bank provide the list of recipients to their respective bank. When an organization pays salaries to its employees by a bank transfer, it is required to provide, at the same time, a payment order for the payment of income tax of the said individuals.
  • The Regulation also establishes requirements for banks related to accounting and reporting effected bank transfers between individuals.

• Federal Law of 22 May 2003 No 54-FZ "On the use of cash registers in cash and/or card payments"
  The text of the law is published in Rossiiskaya Gazeta of 27 May 2003 No 99.
  Effective on 28 June 2003.
  • The new law requires all organizations and individual entrepreneurs to use cash registers in all cash transactions (including card payments), both with organizations and individuals. In contrast, the current law "On the use of cash registers in cash transactions with individuals" mandates the use of cash registers in transactions with private individuals (members of the public). Therefore, the new law applies to microfinance institutions when they provide services for cash.
  • The law gives a list of organizations and individual entrepreneurs allowed to accept cash without cash registers (including market sellers, news stands, lottery tickets, etc.). The use of cash registers may be avoided when cash transactions with the public are reported on special forms established by the RF Government.
  • The law lists requirements to the types of cash registers which may be used in Russia:
    - only those types and models which are on the State Register may be used;
    - this equipment must be registered with the local tax authority where the organization or individual entrepreneur are recorded as taxpayers.
    - the equipment must be in good order and duly sealed;
    - it must have fiscal memory and it must be used in the fiscal mode.
  • The use of cash registers will be supervised by the tax authorities and the police. The RF CB will supervise their use by credit institutions.

• RF Government Decree of 7 April 2003 No 263 "On the approval of the rules for mandatory civil liability insurance of vehicle owners"
  Published in Rossiiskaya Gazeta of 13 May 2003 No 87.
  Becomes effective on 1 July 2003 at the same time with the introduction of mandatory civil liability insurance of vehicle owners in Russia.
  • The rules define typical terms and conditions for mandatory civil liability insurance of vehicle owners.
• RF Government Decree of 7 May 2003 No 264 "On the approval of insurance tariffs for mandatory civil liability insurance of vehicle owners, on the structure of such tariffs and their application by insurers in the determination of insurance premium"
  Published in Rossiiskaya Gazeta of 13 May 2003 No 87.
  Becomes effective on 1 July 2003.
  • The basic tariff rate for cars owned by private individuals is established at RUR 1,980 per year, and for those owned by organizations at RUR 2,375 per year.
    - The basic rates can be adjusted both ways by using increasing or decreasing factors.
  • The maximum insurance premium under a mandatory insurance agreement cannot exceed three basic rates adjusted to the territory of prevalent use of the vehicle, and if the factor of traffic tickets for violations is applied, it should not exceed five basic rates.
• RF Government Decree of 7 May 2003 No 265 "On amending the Russian Government acts pertaining to mandatory civil liability insurance of vehicle owners"
  Published in Rossiiskaya Gazeta of 13 May 2003 No 87.
  Becomes effective on 1 July 2003.
  • The Decree amends the Russian Government's normative acts related to mandatory civil liability insurance of vehicle owners. In particular, the Traffic Rules now require all drivers to carry their insurance policies with them while driving.