Case Study от компании PricewaterhouseCoopers:
задачи и решения победителей
Tasks
1. A foreign legal entity intends to purchase a Russian oil-producing business and asks you what taxes Russian oil-producing companies are subject to?
2. An accountant of the Moscow Branch of a German company that conducts commercial activity in Russia requested help in regards to deductibility of interest payable on a bank loan, which was granted to the company to finance its Russian operations in January 2003. The interest payable on the loan is 15% p. a. What amount of interest will be deductible for year 2003?
3. A foreign legal entity A intends to participate in a tender for oil well services contract to be awarded by a Russian oil company. Currently A does not have any presence or any other activity on the territory of the RF. The tax manager of A contacted you to set up a meeting to discuss the tax system in Russia and things he needs to understand/be aware of to prepare a competitive proposal.
What questions would you ask the tax manager of A?
What issues would you address with him in regard to taxation of the proposed activity in Russia?
4. An Italian construction company is planning to undertake a construction project in Moscow for 10 months. The person is charge of the project is a business person and is not much aware of tax issues. He calls you up and asks to clarify what the concept of a permanent establishment (PE) implies under the Russian rules and whether the proposed activities would create a PE of the Italian company in Russia.
5. A USA drilling company has signed a contract with a Russian client for provision of drilling services on the Russian territory. The manager in charge of the project asked you to clarify to him the concept of Russian VAT.
6. An accredited representation of a Singapore legal entity intends to purchase a vehicle for the office. What key tax issues would you discuss with the Accountant of the representative office.
7. Your friend would like to sell his apartment that was purchased in February 1999 for RUR for the amount of RUR 1 and would like to understand what personal income tax (if any) amount he would be liable for?
Solutions
A foreign legal entity intends to purchase a Russian oil-producing business and asks you what taxes Russian oil-producing companies are subject to?Lebedev Ilya
In accordance with Russian tax system there are 3 levels of taxation: federal, regional, and local. So the company’s taxation depends on the locations of its businesses and the nature of its operations. The information about main taxes that oil companies currently pay in Russia is summarized in the following table:
The Main Taxes, Paid by Oil Companies in Russia
Tax | Rate | Tax Base | Status | Comments |
VAT (value-added tax) | In 2003-20% (basic) In 2% (basic) | Value of imported goods, revenue from goods/services sold in Russia | Federal | VAT payable is the difference between VAT charged to customers and VAT paid to suppliers/customs for goods and services to be used for production purposes |
Export customs duties | Depends on the nature of exported goods | Amount of exported goods | Federal | Duties on oil are linked to oil prices and are regularly changed. As of October 2003 the export duty for oil is $ 33.8 per ton |
Excises | Natural gas-15% for sales in Russia/CIS, 30% - for export to other countries, motor oil-2440 RUR/t, gasoline-2190 RUR/t, super-gasoline-3000 RUR/t, diesel fuel - 890 RUR/t | Sales of natural gas in Russia and abroad, purchase of petroleum products in Russia and abroad | Federal | In 2004 excise rates for petroleum products will be increased, but natural gas sales will not be subject to excises |
Mineral Extraction Tax | 16,5% for crude oil and gas condensate (rates stated in the Russian Tax Code) | Amount of extracted mineral recourses in RF in accordance with a license for development of mineral recourses | Federal | The current tax rate for oil is a base rate of 340 RUR/t adjusted for oil prices and exchange rates. In 2004 the base rate will be increased to 347 RUR/t. In 2004 the tax rate for gas condensate will be 17.5%, for natural gas -107 RUR/1000 cub. m. |
Unified Social Tax | Max 35.6% | Wages, salaries and other similar payments | Federal | Tax calculations are based on payments to each employee and a scale of regressive tax rates |
Income Tax | 24% | Profit | Federal | Profit/Loss should be determined in accordance with tax rules |
Property Tax | Max 2% | Average annual value of fixed assets, intangible assets, inventories, deferred expenses | Regional | Tax rates are set by regional authorities and usually are different for different businesses |
A company also acts as a personal income tax agent, withholding the tax at the rate of 13% from salaries/wages payments.
An accountant of the Moscow Branch of a German company that conducts commercial activity in Russia requested help in regards to deductibility of interest payable on a bank loan, which was granted to the company to finance its Russian operations in January 2003. The interest payable on the loan is 15% p. a. What amount of interest will be deductible for year 2003?
Beluy Aleksey
According to the Russian tax laws and Double Tax Treaty between the Russian Federation and the Federal Republic of Germany of May 29, 1996, the Moscow Branch of a German company conducting commercial activity in Russia is liable to tax on profits in the Russian Federation.
The tax calculation procedure is stated in Chapter 25 of the Russian Federation Tax Code, the Treaty also containing some conditions. The Branch has the right to reduce its income by the value of the expenses pertaining to its commercial activity.
In particular, the Branch can deduct the amount of interest, payable on a bank loan granted to the company to finance its Russian operations from its income.
Clause 269 of the Russian Federation Tax Code and the Treaty state the methods of deducting the interest.
In accordance with the Russian, Tax Code, the maximum deductible amount of interest depends on the credit currency. This being so, first of all it is necessary to clarify the credit currency. And then, on this basis, the amount of deductible interest can be calculated.
Thus, if the credit was obtained in RUR the maximum deductible amount of interest is equal to the refinance rate of the Russian Federation Central Bank multiplied by a factor of 1.1. Considering that at the moment the refinance rate equals 16% p. a., the maximum amount of interest to be deducted is 16% * 1.1 = 17.6% p. a.
If the credit was obtained in some foreign currency the maximum amount of interest to be deducted equals 15% p. a.
In the case under consideration, the interest payable on the loan is equal to 15% p. a. In accordance with both Item 1 of Clause 269 and the Treaty, the Moscow Branch of a German company has the right to deduct the full amount of interest from its income.
Lebedev Ilya
In general case, the Russian Tax Code (Article 269) establishes 2 criteria for income tax deductibility of interest payments for Russian companies and permanent establishments of foreign legal entities (a taxpayer can select either of them):
a) Interest rates should not differ by more than 20% from an average interest rate for the similar loans that a company has been granted in the same tax period
b) Interest rates for loans in rubles should not be higher then 1.1 times interest rate of Russian Central Bank (18% per year as of January 2003) or 15% per year for loans in foreign currency.
In accordance with the Russian-German Tax Treaty permanent establishments of German companies in Russia have a right to deduct the full amount of interest paid, if only interest rates don’t exceed market rates for similar loans.
As a result, the German Branch is entitled to deduct all interest charged on a loan received in 2003, if it is able to confirm that 15% rate does not exceed rates on similar loans, given to other borrowers.
A foreign legal entity A intends to participate in a tender for oil well services contract to be awarded by a Russian oil company. Currently A does not have any presence or any other activity on the territory of the RF. The tax manager of A contacted you to set up a meeting to discuss the tax system in Russia and things he needs to understand/be aware of to prepare a competitive proposal.What questions would you ask the tax manager of A?
Lebedev Ilya
What are the duration of the project and frequency of services?
Who will perform the services (Russians or foreign workers)?
Will be any technical equipment brought to the country or purchased/leased in Russia? Will be any materials imported to or purchased in Russia?
Are there any plans to establish a representative office or appoint employees to act in the company’s interests in Russia?
What will be an approximate sum of the contract? How will the payments for services be made (goods exchange, financial instruments, etc)?
Is there a tax treaty between Russia and the country of A’s incorporation?
What issues would you address with him in regard to taxation of the proposed activity in Russia?
Lebedev Ilya
Import duties and other possible taxes (VAT, excises) on goods imported to Russia.
VAT (20%-2003, 18% -2004) will be levied on sales proceeds from services, performed on the territory of Russia (tax will be withheld from payments to A, if A is not registered as a VAT payer with Russian tax authorities).
Deduction of “incoming VAT” if any goods/services will be purchased in /imported to Russia by A (possible if A registered with Russian tax authorities)
Profit tax- if A’s activities in Russia will lead to the creation of a permanent establishment, A’s profits from operations in Russia will be subject to the Russian profit tax (24%). PE is not created, for example, if A’s activities in Russia are not regular or A only sends its personnel to work for a Russian company. There may be specific requirements regarding PE creation in a tax treaty between Russia and the country of A’s incorporation.
Unified Social Tax- if A’s activities will lead to the creation of permanent establishment in Russia and it will be making payments to its workers in Russia (both foreign and domestic)
Property tax- paid if any taxable assets (eg. fixed assets) will be created and will be on a balance sheet of A’s division in Russia. Maximum tax rate is 2% of an annual average value of taxable assets, the rate is set by regional laws.
A may be obliged to act as a tax agent (to withhold taxes at the moment of payments) for certain taxes (eg. personal income tax, VAT).
An Italian construction company is planning to undertake a construction project in Moscow for 10 months. The person is charge of the project is a business person and is not much aware of tax issues. He calls you up and asks to clarify what the concept of a permanent establishment (PE) implies under the Russian rules and whether the proposed activities would create a PE of the Italian company in Russia.Beluy Aleksey
The concept of a permanent establishment (PE) is very important for foreign legal entities which conduct commercial activity on the territory of the Russian Federation.
In accordance with the Russian tax laws, a foreign company is liable to tax on profits in two cases. First, a foreign legal entity receives income or gains from a source in the Russian Federation. Second, a foreign entity has a taxable permanent establishment in the Russian Federation.
Considering the fact that the Italian company is planning to undertake a construction project in Moscow, it is necessary to clarify if this activity can be qualified as a permanent establishment.
A construction site is a particular case of a permanent establishment on the territory of the Russian Federation.
Clause 308 of the Russian Tax Code both defines the concept of construction site and states the rules of determining the time of construction.
The activity of the Italian company can be qualified as a construction site according to Clause 308 of the Russian Federaton Tax Code because the company is planning to undertake a construction project. But the actual construction period is the most important factor.
In accordance with the Russian Tax Code, a permanent establishment is considered to be set up (образуется) since the time it starts regular activity related to contracted construction, mounting or assembling of its equipment.
But Clause 15 of the Russian Federation Constitution states that international agreements of the Russian Federation are of prior legal force. Clause 7 of the Russian Federation Tax Code states the same principle.
In this connection, we should consider the Double Tax Treaty between the Russian Federation and the Italian Republic of April 9, 1996.
According to Item 2 of Clause 5 of the Treaty, the permanent establishment includes a construction site or a construction, mounting or assembling object that exists for a period of more than 12 months.
In accordance with the Contract, the construction period of a project is 10 months. Thus, the activity of the Italian company cannot be qualified as a permanent establishment in the Russian Federation. It means that the Italian legal entity will only pay tax on profits in the Italian Republic as stated Item 1 of C 7 of the Treaty and Item 2 of Clause 309 of the Russian Federation Tax Code.
But it is necessary to note that if the actual construction period of the project is more than 12 months the Italian company will be liable to tax on profits in the Russian Federation.
Lebedev Ilya
The concept of a permanent establishment (PE) is explained in Article 306 of the Russian Tax Code. PE implies that if a foreign legal entity has a division (or a dependent agent) , that conducts commercial operations in Russia (excluding marketing, administrative, purchasing and other activities that don’t lead to sales of goods/services in RF or operations through a Russian independent agent), it is obliged to get registered with Russian tax authorities as a taxpayer, to submit tax declarations and financial reports, and to pay income and other applicable taxes in Russia in accordance with Russian tax laws (including international tax treaties). Taxable (at usual rate) income includes: profit from commercial operations in RF, profit from Russian property, other revenues of PE from sources in RF (dividends, royalties, interest payments, etc). PE is considered to be created from the beginning of developing natural recourses (or date of appropriate license) , conducting assembling, constructing, servicing of equipment, selling goods from Russian warehouses, rendering any other services in RF on a regular base. PE will be closed when the above mentioned activities are stopped. In general, construction works create a PE as soon as any preparation works on a construction site start (including sub-contracted works) or act of submitting of construction site to a contractor is signed, which date is earlier. PE is closed when act of construction works acceptance is signed (if after this date the works are continued or there is no act of acceptance, the date of PE closure is a date of actual completion of all contracted works). If construction works are temporally stopped, it usually does not close a PE. In accordance with the Russian-Italian Tax Treaty this construction project, if it lasts less then 12 months, will not create a PE and Italian company will not be subject to income tax in Russia, but it may be liable for other taxes such as VAT.
A USA drilling company has signed a contract with a Russian client for provision of drilling services on the Russian territory. The manager in charge of the project asked you to clarify to him the concept of Russian VAT.Lebedev Ilya
Value-added tax (VAT) is an indirect tax. It is a tax on added value of each stage of production and distribution of a product or service. VAT is applied to the added value that is created and sold in the course of the manufacture of goods, the performance of work, the provision of services, and the import of goods. It is a federal tax and it serves as a main source of revenues for Russian budget. The brief description of Russian VAT in general terms is presented below. In more details (including all exceptions/additions to general rules) VAT is described in Chapter 21 of the Russian Tax Code.
Taxpayers: Companies and individual businessmen, conducting business activities in Russia (including import operations). The special rules are developed to determine the place of a transaction.
Tax calculations: VAT is basically levied on the revenues from sales of goods and services in Russia and on the value of goods imported to Russia. Tax liability is a difference between VAT due from customers and “ incoming VAT” (tax paid to suppliers/customs authorities for goods and services to be used for production purposes). A taxpayer may use either cash or accrual methods to determine VAT payments.
Tax rates: The basic tax rate is 20% (will be reduced to 18% in 2004), 10% rate is used for food, books, medical items, goods for children
Tax period: VAT should be paid on a monthly base
Taxation of foreign companies: Foreign legal entities have a right to register as VAT payers. If they are not registered but their operations in Russia are subject to VAT, a VAT taxpayer in Russia has to withhold the proper amount of VAT from payments to the foreign entity and to pay the tax directly to the budget. Only registered taxpayers have a right for deduction of VAT paid for purchased goods/services.
An accredited representation of a Singapore legal entity intends to purchase a vehicle for the office. What key tax issues would you discuss with the Accountant of the representative office.Lebedev Ilya
It is advisable to discuss the following issues that will influence tax consequences of the transaction in question
a) Car origin (import customs duties have to be paid for foreign automobiles)
b) Engine power (will determine excise and transportation tax rates)
c) A place of car registration with Russian transportation authorities (will determine rates of property and transportation taxes)
d) Possibility of deducting/expensing/getting reimbursement of VAT paid
e) Cost and amortization for tax purposes
Your friend would like to sell his apartment that was purchased in February 1999 for RUR for the amount of RUR 1 and would like to understand what personal income tax (if any) amount he would be liable for?Beluy Aleksey
In the Russian Federation according to Clauses 208 and 209 of the Russian Federation Tax Code, a person who wants to sell his appartament will have to pay personal income tax. But in this case he can use property tax deduction as stated in Clause 220 of the Russian Federation Tax Code. The amount of tax deduction depends on the period of time during which the person was the owner of the apartment.
In the case under consideration the period of time is less than 5 years. It means that the maximum amount of tax deduction equals RUR 1,000,000. The person sells his apartment at the price of RUR 1,200,000. Consequently, the tax base is RUR 200,000 (1,200,000 – 1,000,000). In accordance with Clause 224 of the Russian Federation Tax Code the tax rate is 13%. So, the personal income tax is equal to RUR 200,000 * 13% / 100% = 26,000.
But the tax payer can calculate the personal income tax amount in another way. He can reduce his income by the value of his actual expenses, i. e., he can reduce his income by RUR 600,000 (spent on purchasing the apartment in 1999). He can also reduce his income by amount of his advertising expenses, overhead charges and other reasonable expenses required. In this case the tax base is RUR 1,200,000 – 600,000 minus other expenses. But other expenses are usually insignificant and can be ignored in further consideration. Then the tax base is RUR 600,000. Consequently, the personal income tax amounts to RUR 600,000 * 13% / 100% = 78,000.
It is obvious that the first version of calculating the tax is more profitable for the tax payer because it allows him to save RUR 78,000 – 26,000 = 52,000.
However, one more thing should be taken into account. Under the Russian Federation tax laws if a person sells his apartment, which he owned for more than 5 years, the amount of tax deduction equals the selling price of the apartment, i. e., RUR 1,200,000. And he does not have to pay the tax. Therefore, he should sell his apartment in February 2004 if he can wait.
But to use the property tax deduction, a tax payer has to file an application and a tax return at the end of the year he sells his appartment.
Lebedev Ilya
A person who sells his/her apartment in Russia is liable for personal income tax. Since the apartment has been owned by this person for less then 5 years (Feb.1999-Oct.2003), according to Article 220 of the Russian Tax Code s/he has a right to subtract from the sales proceeds either RUR 1000000 or the original costs of his/her property (RUR 600000). The difference is a taxable amount at the rate of 13% (for Russian tax residents) . In our case it is more advisable to subtract RUR 1000000. Then an income tax arising from this transaction will be equal to RUR (0000)*0.13=26000. (It is necessary to submit a tax declaration in order to get the above-mentioned deduction). It is possible to avoid paying this income tax if to sell property after February 2004 (in this case the taxpayer will be entitled to the deduction in the amount of RUR 1200000).
