Tax system and administration
Russia’s current tax system is relatively new, and many tax concepts and issues that are standard in most market economies are just beginning to emerge in Russia. As these new concepts are embraced by the Russian authorities, they are often applied in a different way from in the West, or in other countries with developing tax systems. Today, tax reform, in terms of codification and the elimination of multiple tiers of regulations has largely been completed. The Russian Tax Code provides a summary of the general tax principles, the rights and obligations of the taxpayers and tax authorities, an outline of the taxes payable, and other provisions.
The government is planning to introduce certain anti-avoidance provisions (including CFC rules, the concept of beneficial owner, rules for determining corporations’ tax residence based on standard principles applied in international practice, and some amendments concerning financing structures). In the meantime, guidance from the higher courts lays out several anti-avoidance approaches, including the concept of unjustified tax benefit. The fiscal authorities adopted these approaches and are fighting aggressive tax avoidance. In so doing, they are beginning to take an approach that, at its core, involves the primacy of substance over form
Transfer pricing legislation
New transfer pricing legislation came into effect on 1 January 2012. In contrast to previous Russian transfer pricing rules, the new legislation is more elaborate and generally better aligned to the international transfer pricing principles developed by the Organisation for Economic Co-operation and Development (OECD). The main changes are the following:
- change in the list of transactions where the Russian tax authorities may place controls on prices for tax purposes;
- expansion of the list of related parties;
- burden of proof that prices in controlled transactions do not correspond to the market will rest with the Russian tax authorities;
- Introduction of the arm's-length principle as the fundamental principle of Russian transfer pricing rules;
- abolishment of the 'safe harbor' provision (20% deviation of controlled transaction prices from market prices that was earlier allowed);
- expansion of the list of information sources for determining market prices;
- formally introduction of functional analysis as a comparability factor;
- introduction of new methods for determining market prices, i.e. transactional net margin and profit split methods;
- introduction of requirements for reporting and transfer pricing documentation;
- introduction of special transfer pricing audits by the Federal Tax Service;
- introduction of penalties for non-compliance with requirements to maintain transfer pricing documentation and report certain transactions;
- introduction of unilateral and multilateral APAs for Russian companies registered as the 'largest' taxpayers.
Consolidated taxpayer regime
A new consolidated taxpayer regime is open to Russian groups effective 1 January 2012.
A group can comprise two or more Russian organisations where the direct or indirect equity interest of one member in the charter/share capital of the other members comes to at least 90%. All group members should meet the following requirements to establish and apply this regime in 2013:
- at least RUB 10 billion in total profits tax, VAT, excise tax, and MRET paid during 2011;
- at least RUB 100 billion in sales proceeds and other income in 2011;
- total cost of assets of at least RUB 300 billion on 31 December 2011.
Using this regime has several advantages. Firstly, transactions among members are not controllable under the new transfer pricing legislation (with the exception of transactions with mineral resources subject to MRET at a controlled percentage rate). Secondly, for the purposes of calculating profits tax, consolidation of members' profits and losses is possible.
An annual salary under RUB 568,000 (approximately EUR 14,200) per employee is subject to contributions at a consolidated rate of 30%. An additional 10% charge is imposed on an annual salary that exceeds RUB 568,000 per employee. Remuneration of foreign nationals temporarily staying in Russia is covered by pension insurance contributions at 22% at up to RUB 568,000 and 10% top up charge on remuneration paid in excess of this level. The only exception is made for HQS (with the respective work permit) and employees who have entered into a labour contract with a term of less than six months.