September 2003

This material is provided through the support of the US Agency for International Development (USAID) and the Department for International Development (DFID) under agreements with the Russian Microfinance Center and Fund "FOR A." This review is for information purposes only. Neither the authors of this review nor the Russian Microfinance Center shall 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

The most important developments in the sphere of taxation were the Ministry of Finance and the Ministry of Taxes initiatives to improve tax administration. The ministries are currently drafting a bill aimed at improving VAT collection. The following measures are proposed:

1) introduce special accounts, and pay VAT from these accounts (hereinafter, VAT accounts);
2) introduce a data transfer and processing system to capture information on VAT from electronic invoices executed and received (hereinafter - electronic VAT-invoices).

The VAT accounts are expected to work as follows:
- in addition to their settlement accounts, all taxpayers must open separate VAT accounts;
- every time goods or services are purchased from a VAT payer, the amount of tax will be transferred by a separate order from the buyer's VAT account to the seller's VAT account, while the price of the goods or services (minus VAT) is transferred between the respective settlement accounts.
- the only way a taxpayer can use the money in its VAT account is to transfer it to another VAT account or to the state as VAT payment. The money in a VAT account cannot be transferred to any settlement account.
- VAT amounts paid can be refunded or recognized as expenses only if they have been transferred between VAT accounts.
- credit institutions must submit their VAT account statement to tax authorities on a monthly basis.

The proposal is to introduce VAT accounts on 1 July 2004. Although the proposal on VAT accounts has not yet become a parliamentary bill, the Government has already projected in the 2004 federal budget an additional revenue of RUR 30 bln this measure is expected to generate.

As to electronic VAT invoices, taxpayers will be obliged to report to the tax authorities electronically, on a monthly basis, their VAT invoices issued and received. Consequently, tax authorities will have available to them all financial and business information of the taxpayers, including goods and services purchased, their providers and suppliers, buying prices, etc.
Electronic invoices are not expected to be introduced before 1 January 2005, because MTL needs to acquire hardware and software for the system to work.

In addition to VAT accounts and electronic invoices, the Ministry of Finance and MTL propose tougher tax control by amending Part One of the Tax Code. In particular, the following was proposed:
- to oppose 'money transfer pricing' through redefining guidelines for market price determination, and broadening the range of entities considered mutually dependent;
- to allow tax authorities to collect tax penalties through charge-offs, unless a taxpayer has appealed the decision to impose a penalty (currently, only the tax arrears and related fines can be charged off, while the penalty is collected through a court ruling);
- to expand the tax authorities' power to conduct tax inspections: the inspection would cover 5 years of the taxpayer's operation, rather than 3 years it may currently cover; in addition to inspection visits and office reviews, prompt tax inspections will be permitted.
- to extend from 4 to 5 years the period original records and documents must be kept.
Some of these proposals were submitted to the State Duma back in 2001 as governmental bills, but have not been considered yet.

These proposals by the Ministry of Finance and MTL were discussed at a Government meeting on 2 October 2003, and generally approved. The Government instructed the Ministry of Finance and MTL to draft relevant bills jointly with the Central Bank and other ministries concerned and submit them to the Government before 1 December 2003.

In September, the State Duma focused mainly on the first reading of the 2004 projected Federal budget, so it did not consider tax bills (the same Committee on Budget and Taxes is responsible for the budget and tax legislation in the Duma).

The normative legal acts issued by the MTL in September are largely technical and do not apply to MFIs.

Banking

We mentioned in the August review that a group of Duma deputies launched a bill to set up the Federal Bureau of credit histories affiliated with the Bank of Russia. Although the Government and the Central Bank made negative comments on the bill, the Duma Committee on credit institutions and financial markets recommended adopting it in its first reading.

Two more related bills were introduced in September. One, drafted by MP V.Tarachyov, amends the laws "On Banks and Banking" and "On the RF Central Bank." According to the amendment, banks are required to submit to the Central Bank only the information on their delinquent borrowers, rather than all borrowers. Tarachyov's bill, just like the other bill drafted by a group of MPs, proposes to set up the credit bureau under the Bank of Russia.

The Association of Russian Banks was involved in the drafting of the third bill submitted by MP I. Grachyov.The critical difference between Grachyov's bill and the two other bills is that Grachyov sees the would-be credit bureaus as commercial companies that focus on collecting credit histories as their main operation.

In addition, the Government promises to introduce its own proposal before the end of the year. The latter document, according to its authors, will define the legal status and procedures of credit bureaus conceived as competing commercial companies, while their establishment is for the market participants to decide upon.

Currently, the governmental bill is at the stage of obtaining the necessary endorsements.

Normative Legal Acts pending before the Duma

• The Federal bill amending the Federal Laws "On Banks and Banking" and "On the RF Central Bank."
  Introduced by MP Tarachyov.
  • A credit institution must report its delinquent borrowers to the Central Bank every time a delinquent borrower fails to resolve the issue with the creditor within 45 days, and the amount of outstanding obligation is at least
    - RUR 10,000 for individuals, and
    - RUR 100,000 for legal entities.
  • The Central Bank is then obliged to share this information with any bank on request.
  • A repeated failure to report its delinquent borrowers to the Central Bank within the required time period is suggested as an additional ground to withdraw a bank's license.
• The federal bill "On the Bureaus of credit histories."
  Submitted by MP I. Grachyov
  • The bill regulates the establishment and operation of bureaus of credit histories.
  • A bureau of credit histories may be established as a joint stock company or a limited liability company, provided:
    - its equity is at least RUR 50 million;
    - the share of each participant does not exceed 20% of equity stock.
  • Any credit agreement must therefore contain a clause that the borrower agrees to have its record shared with a credit bureau.
  • The bodies authorized to supervise over credit bureaus are the Central Bank, self-regulated organizations established in the financial market, and Federal executive authorities.

• Federal Law of 1 October 2003 No 129-FZ amending Article 7 of the Federal Law "On Protecting Legal Entities and Individual Entrepreneurs in the Context of State Supervision ( Oversight)"
  Published in Rossiiskaya Gazeta of 2 October 2003 ¹ 198.
  • The amendment prohibits scheduled inspections of small businesses before they have been operating for thee years.
• RF Government Decree of 16 September 2003 No 577 amending RF Government Decree of 17 May 2002 No 319"
  Published in Rossiiskaya Gazeta of 23 September 2003 ¹ 189.
  • After 1 January 2004, state registration of individual entrepreneurs and farmers will be performed by the MTL.

• The proposal is to lift the requirement of notarization of mortgage agreement when real estate is used as collateral.
• The authors of the bill believe that it helps to reduce time and costs of small businesses involved in legalizing their collateral when real estate is used as such. Currently, they have to pay at leas 1.5% of the collateral value for notarization.
• The Government and the Central Bank made negative comments on the bill; they believe that the proposed measure should be extended to cover all participants of civil law dealings.