Global Tax Alert | 6 June 2013

Russia announces 2014 tax policy and planning for 2015-2016

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Russia’s Ministry of Finance recently published a draft of The Main Directions of Russian Tax Policy for 2014 and Planning for 2015-2016. This document provides the basis for the future development of tax legislation as well as for drafting a budget for the next financial year. This Alert covers the main tax policy objectives stipulated in the draft.

The Creation of an International Financial Centre in Russia

One of the most important decisions to be made in 2013 relates to the taxation of Russian Eurobonds. Current tax legislation envisages that a Russian company should not withhold profits tax when paying out interest income to a foreign bondholder. These provisions will cease to apply to Eurobonds issued from 1 January 2014.1 The document states that when developing new legislation the government should not restrict itself to fiscal objectives but should aim to stimulate the Russian financial system. Two possible directions of development are proposed:

  • Interest income of foreign companies that are not residents of tax-haven jurisdictions and are beneficial owners of income received from Eurobonds should be tax-exempt; or
  • A company paying out interest income on Eurobonds should act as a tax agent and should disclose information on the beneficial owners of the interest income from Eurobonds as a prerequisite for applying reduced profits tax rates stipulated in double tax treaties.

Currently the actual price of a transaction involving quoted securities is accepted for profits tax purposes if it is within the range between the minimum and the maximum transaction price of such a type of security. In the case of a transaction involving unquoted securities the actual price should not differ by more than 20% from the reference price.

Taxpayers should justify the prices applied and if they do not correspond with the market level of prices they should make changes in their tax accounting records. This process is time-consuming. The document proposes that the process of price justification should apply only to controlled securities transactions, while for other securities transactions the actual price will be used for tax purposes.

Creation of favorable tax conditions for investment activity

The document proposes the introduction of a new category of taxpayer, an investment project participant. These will be companies operating in the Far East Region, Trans-Baikal Territory, Buryat Republic or Irkutsk Region and carrying out investment activity there (subject to certain restrictions). The profits tax payable to the federal budget by an investment project participant is proposed to be fixed at 0% for the first 10 years. The regional authorities will be allowed to decide to reduce the profits tax payable to the regional budget to 0% during the first five years and for the following five years by up to 10%. If the regional authorities agree to provide such tax relief to investment project participants at a regional level, this will be one of the most significant tax benefits available under Russian tax legislation.

Offshore oil and gas activities

Legislation providing a special tax regime for the development of new offshore hydrocarbon deposits is being drafted. This should include amendments to legislation concerning profits tax, VAT, mineral extraction tax, assets tax, personal income tax and customs payments.

Taxation of trading activity

The document proposes that expenses arising from stock losses should be treated as deductible subject to a limit of 0.75% of sales revenue. It also proposes amendments to Article 154 of the Tax Code stating that bonuses or premia for fulfilment of certain contractual conditions (for example, for purchasing a certain volume of goods) decreasing the cost of the goods (works, services) do not decrease the price of those goods (works, services) which means that the VAT base should not be adjusted, except for certain cases to be mentioned in the supply agreement.

Mineral extraction tax (MET)

A special tax approach is being developed in relation to MET on the extraction of difficult-to-recover oil reserves. A new MET on gas formula will contain special coefficients to take into account: the level of gas prices on domestic and external markets, extraction conditions, and the stage of field development.

As part of a long-term strategy concerning the oil sector, the document proposes gradually decreasing the rate of export customs duty on oil and simultaneously increasing the MET rate on oil.

Real estate tax

One of the main objectives of the Government’s policy to be achieved before 2018 is the implementation of a real estate tax not only for individuals but also for companies. The real estate tax will be applicable to immovable property which belongs to a company by virtue of ownership based on economic jurisdiction and (or) operational management. The new tax will be calculated on the basis of the cadastral value of the immovable property. This tax is expected to be regional.

Tax avoidance involving tax havens

In order to combat tax avoidance involving the use of low-tax jurisdictions, the document proposes to amend legislation regulating controlled foreign companies and beneficial owners. It is expected that a model intergovernmental agreement on tax information exchange with offshore and low-tax jurisdictions will also be developed. This model agreement will serve as a basis for concluding numerous agreements in order to prevent the use of tax minimization schemes.

Endnote

1. Federal Law No.97-FZ of 29 June 2012.

For additional information with respect to this Alert, please contact the following:

EY (CIS) B.V., Moscow
  • Vladimir Zheltonogov
    +7 495 705 9737
    vladimir.zheltonogov@ru.ey.com
Ernst & Young LLP, Russia Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088
    julia.samoletova@ey.com

EYG no. CM3507