February 2004

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

No significant developments were observed in February, with only a minimal amount of new legislation adopted.

Most of the time, the Duma was busy rejecting earlier bills, while no new bills were introduced. The reason is, partially, that the overall tendency in the new Duma is to wait for the Government to launch new tax legislation.

The Government, however, due to internal differences of opinion, has not introduced any of the bills expected this year. The Value Added Tax (VAT) and the Single (Unified) Social Tax (UST) reforms are the most contentious issues.

On February 26, a Government meeting was expected to review a series of tax-related bills and decide on a number of key issues, such as the introduction of VAT accounts and the reduction of UST. However, the Government's Business Advisory Council earlier in February recommended that the said issues should be removed from the agenda of the forthcoming Government meeting. The Prime Minister requested another review of the potential economic implications should VAT accounts be introduced.

However, now that the Government is dismissed, and the entire system of government ministries is expected to go through a major overhaul, while the idea of VAT accounts is still contended, their introduction before the end of this year is highly unlikely. The Ministry of Finance is considering a more liberal version of the proposal, including, e.g. more freedom in the use of such accounts, a reduction of the maximum VAT rate, etc. So, the only issue addressed on February 26 by the Government meeting was a set of measures aimed at improving specific taxation regimes for small business. The Government approved the overall concept and the TOR for drafting amendments to Articles 26.2 (Simplified Taxation System) and 26.3 (Imputed Income Tax) of the Tax Code.

The following amendments to Article 26.2 of the Tax Code were proposed:
- a gradual increase, every year, of the maximum income amount allowing an entrepreneur to opt for the simplified system;
- specific provisions on the use of the simplified system by certain categories of taxpayers;
- allowing taxpayers who switched to the simplified system after January 1, 2003 to change the object of taxation;
- provisions for taxable base determination when switching between the general and simplified taxation systems;
- provisions for VAT payment when switching between the general and simplified taxation systems, and the procedure for incoming VAT offset;
- a detailed description of the types of revenues to be included by an individual entrepreneur in defining the object of taxation.

The following amendments of Article 26.3 were proposed:
- clarifications concerning separate accounting and reporting of property, obligations and business operations by taxpayers combining operations eligible to imputed tax with other entrepreneurial activities which are not eligible;
- clarifications concerning the calculation of baseline yield adjustment;
- clarifications of the terminology used in Article 26.3.

Initially, the following schedule was set out in the TOR:
- August 2004, the drafting;
- October 2004, the draft to be considered by the Government meeting;
- November 2004, the draft to be introduced in the Duma.

However, the recent Government meeting decided that the Ministry of Finance, together with the Ministry of Economy, Ministry of Taxation, Ministry of Anti-Monopoly Policy, Ministry of Labor, and other appropriate authorities, should:
- by April 15, 2004: finalize the overall concept and the TOR, and submit them to the Government;
- by May 15, 2004: submit the draft federal bill to the Government.
As we can see, the deadlines for drafting and launching the bill were tightened.

It is worth noting that the Government has a limited amount of time for introducing tax bills, because any amendments to the Tax Code should be approved before the summer parliamentary recess to leave the Ministry of Finance enough time to project the next year's budget based on the new tax legislation.

The Ministry of Taxes was less active in February than in January. It adopted a limited number of regulations, the following two of them affecting MFIs in particular:
- A new Pension Insurance advance payment form and related Guidelines;
- amendments of the Instruction on filling VAT forms.

In a recent trend, the Ministry of Taxation has been canceling many of its guidelines concerning specific chapters of the Tax Code. In January, it annulled the Guidelines explaining the procedure of the UST calculation and payment, while in February, it called off its Guidelines on the application of the Tax Code chapters 26.2 (Simplified Taxation System) and 26.3 (System of Taxation in the Form of Imputed Income Tax). The former guidelines will be replaced by instructions for internal use. As a result, the Ministry of Taxation will be even less transparent; formerly, the Guidelines could be helpful in avoiding potential conflicts with the tax authorities, while now their tax authorities' perspective will be kept secret.

Adopted Normative Legal Acts

• RF Government Decree of 16 February 2004, No 84 "On amending the RF Government Decree of 2 December 2000, No 914"
  • The Government established new formats of the following:
    - the ledger of purchased items;
    - the ledger of sold items;
    - the receipt indicating VAT (schet-factura).
  • In addition, it changed the Rules of keeping the log of VAT-indicating receipts (both issued and received), and making records in the legers of sold and purchased items.
  • Of special interest are changes in the rules of reporting business-related travel costs; related receipts may be reported in the ledger of purchased items only if specific supporting documents - the 'strict reporting' forms - are provided.
• Ministry of Taxation Order of 27 January 2004, No BG-3-05/51 endorsing a new Pension Insurance advance payment form and related Guidelines
  Registered with the RF Ministry of Justice on 5 February 2004 Registration No 5528.
  Published in Rossiiskaya Gazeta of 10 February 2004, No 24.
  • A new Pension Insurance advance payment form and related Guidelines are provided. The form must be used by all employers.
  • The former method of calculation, and the Guidelines for filling the relevant form were annulled.
• Ministry of Taxation Order of 9 February 2004, No BG-3-03/89 amending the Ministry of Taxation Order of 21.01.2002, No BG-3-03/25, "On the approval of the Instruction on filling the VAT reporting form"
  
  • The instruction on filling VAT forms was amended, due to the introduction of new reporting forms to be used in 2004.
  • Organizations and individual entrepreneurs relieved from VAT by Article 145 of the Tax Code should file a VAT report only when they issue an invoice with a VAT amount indicated. Formerly, the Ministry of Taxation insisted that they submit VAT reporting forms on a quarterly basis, regardless of the nature of their transactions.
• Ministry of Taxation Letter of 6 February 2004, No 24-1-10/93 "On reporting to tax authorities the fact of opening (closing) bank accounts, in accordance with Article 23 of the Tax Code"
  • The letter explains that corporate taxpayers (including subsidiaries) opening or closing bank accounts have to report it only to their local tax authorities within 10 days.
  • This letter cancels the previous letter of 02.06.2002, No MM-6-09/922, obliging organizations to report any opening or closing of their bank accounts to all tax authorities keeping their records, including the agencies at the location of their main office or subsidiaries, and at the location of their real estate or vehicles subject to taxation.
• Ministry of Taxation Letter of 17 February 2004, No 04-2-06/127 "On the taxation of amounts paid as reimbursement of business travel costs"
  • The letter cascades to subordinate offices the Ministry's official position concerning the taxation of amounts paid as reimbursement of business travel costs.
  • The following reimbursed amounts, as well as per diem, are not included in the employee's taxable income, provided that the related costs have been actually incurred and properly documented:
    - travel to and from the destination, to and from the airport or the railway station at the point of departure, destination or transfer; luggage transportation costs;
    - airport charges, commissions;
    - rent of accommodation, costs of communication, costs related to the issue and registration of business travel passport, visa costs;
    - costs of buying local currency or cashing checks at the bank in the country of destination.
  • The amounts of per diem exempt from individual income tax are defined by the RF Government Decree of 8 February 2002, No 93 (e.g. 100 Rubles per day in Russia).


Banking

On 11 February 2004, the Government met to discuss its new Strategy for the Banking Sector Development in 2004- 2008. Deputy Minister of Finance A. Ulukayev made a presentation. The draft Strategy Paper includes a number of provisions relevant to MFIs.

The Government decided:
- to approve the new Strategy for the Banking Sector Development in general;
- to instruct the Ministry of Finance to finalize the draft Strategy Paper, in consultations with the Ministry of Economy, the Federal Commission on Securities, the Ministry of Anti-Monopoly Policy, the Central Bank, and the Association of Russian Banks;
- to provide, by 15 March 2004, the final version of the Strategy Paper, the implementation plan, and a list of proposed of bills to be adopted in the first six months of 2004.

Measures adopted in February to facilitate SME credits are of special interest. Firstly, the Government established a mechanism of providing SME credit guarantees through the Russian Development Bank. Secondly, the Central Bank made it easier for banks to open local offices for lending to SME and individuals.

Adopted Normative Legal Acts


• RF Government Decree of 1 March 2004, No 118, endorsing the Rules for providing government guarantees through the Russian Development Bank to facilitate SME credits (including agricultural credits) by Russian banks in 2004
  • The Government will provide SME credit guarantees through the Russian Development Bank.
  • Credits secured by the Government guarantees may only be used for the following purposes:
    - to make credits to regional banks to fund their lending to SME;
    - to make credits directly to SME.
• RF CB Instruction of 16 January 2004, No 110-I, on Banking [Prudential] StandardsRegistered with the RF Ministry of Justice on 6 February 2004 Registration No 5529.
  Becomes effective on 1 April 2004.
  
  • The new instruction lifted seven of the existing ratios;
  • Some other ratios were lowered, for instance:
    - the Instant Liquidity Ratio (N2) lowered from 20% to 15%;
    - the current liquidity ratio (N3) is lowered from 70% to 50%.
  • Banks must calculate their ratios at the end of each work day.
• The Central Bank operational instruction of 30 January 2004 No 15-T "On opening bank accounts with credit institutions"
  • Legal entities and individual entrepreneurs wishing to open a bank account are no longer required to provide documentary proof to the credit institution of being registered as contributors to state non-budgetary funds.
• RF CB Instruction of 14 January 2004, No 109-I "On the procedure which the Bank of Russia must follow in making decisions regarding the registration of credit institutions or licensing their banking operations"
  Registered with the RF Ministry of Justice on 13 February 2004, Registration No 5551.
  • The Instruction establishes the procedure which the Bank of Russia must follow in making decisions regarding the registration of credit organizations or licensing their banking operations. The Instruction is designed to forward a number of objectives of the RF Banking Development Strategy.
  • It creates new possibilities for supervision: now the Bank of Russia can request information from founders concerning the finances and activities of individuals who can influence, either directly or indirectly, decision-making by the founders of the credit institution in question.
  • A bank applying for a license to be able to capture individual deposits must meet the criteria set out in the federal law on deposit insurance.
  • The Instruction also aims to simplify banking regulation and to remove unnecessary administrative barriers.
  • Credit institutions and their branches are allowed to open 'credit and cash offices' (a structural division of the institution) for lending to SME and individuals.
  • Credit and cash offices are only allowed the following operations:
    - lending money to SME and individuals;
    - recovering the loans;
    - providing cash services to organizations and individuals.


Accounting and reporting

Adopted Normative Legal Acts


• Letter of the Russian Social Insurance Fund of 5 February 2004 No 02-18/07-773 "On the method of calculating sick leave and maternity payments."
  • The Fund provides 11 practical examples of how sick leave and maternity payments cam be calculated.
• Letter of the Russian Social Insurance Fund of 29 December 2003, No 02-18/06-8422
  Published in the supplement to Uchet. Nalogi. Pravo.- Official Documents of 18 February 2004, No 6.
  • The letter explains how the Social Insurance Form (Form 4-FSS RF) should be filled.
  • The form must be submitted on a quarterly basis, stating the progressive total, no later than the 15 of the month following the fiscal period, to the local office of the Fund.
  • The form is provided in two copies, one copy is filed with the Fund, and the other one is marked by the Fund as accepted and returned to the insurer.