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Interest on Debt Obligations in Russia: Changes in Tax Accounting, 2015
Alinga Consulting Group was founded in 1999 by a small, international team of professionals that had been working in the Russian market since 1992. As foreign investment has increased demand for professional accounting and audit services, and as growing companies now require outstaffing and HR documentation services, Alinga has kept pace with a range of solutions for business in Russia. As a member of such organizations as AmCham Russia, AEB, and the Moscow Audit Chamber, Alinga takes customer service as seriously as it takes the accuracy of its services.
Interest on Debt Obligations in Russia:
Changes in the Tax Code of the Russian Federation (hereafter, the Tax Code) with regard to the recognition of interest on debt obligations are naturally associated with the growth of the exchange rate and the increase in the key rate of the Central Bank of the Russian Federation in the second half of 2014. These events have led to negative consequences for companies, a significant share of whose liabilities consists of borrowed funds. In our view, the second reason for the changes was state control over transfer pricing.
In this article, we review the changes that the legislature introduced to Article 269 of the Tax Code regulating the procedure for recognizing interest in tax accounting. The changes were introduced by two laws:
1. Revenue and expenses on debt obligations
Transactions with independent companies
As a consequence of the changes introduced, the regulations in Article 269 of the Tax Code now define not only the regulations of recognizing interest on debt obligations in expenses, but they also regulate the procedure for their recognition in the lender’s revenue.
Separately, it is worth emphasizing that setting interest rates with regard to expenses (revenue) beginning from 2015 is now stipulated only for controlled transactions and controlled debt. If a transaction is not controlled and/or debt is not controlled then the interest calculated on the basis of the actual rate under the contract (IRfact) is recognized as an expense (revenue) on the debt obligations. Thus, from 2015, the entire amount of calculated interest on debt obligations received from independent companies can be recognized as expenses.
2. Revenue and expenses on controlled transactions
If a debt obligation of any type arises as the result of a transaction that is recognized as controlled in accordance with the regulations of Section V.1 of the Tax Code, then the expenses (revenue) are subject to rate setting. As an expense (revenue), the taxpayer has the right to recognize the amount of interest calculated on the basis of the actual rate (IRfact), but taking into account the provisions of Section V.1 of the Tax Code and unless otherwise stipulated by Article 269 of the Tax Code. In the situation under consideration, unless otherwise is stated in Clause 1.1 of the Article 269 of the Tax Code. On a controlled transaction, a taxpayer has the right to:
The value ranges are established in Clause 1.2 of Article 269 of the Tax Code. If a debt obligation is recorded in rubles, then the value ranges will be the following (Table No. 1):
*KR – key rate of the Central Bank of Russia, RR – refinancing rate of the Central Bank of Russia.
If a debt obligation is recorded in a foreign currency, then calculation of the value range is carried out on the basis of interbank benchmark rates. For example, London’s interbank rate LIBOR is the rate on which London banks reciprocally credit each other to maintain current liquidity. Rates are calculated for clearly stated periods: one or two weeks, one or two months, and so on up to one year. Thus, the value ranges on debt obligations in a foreign currency will be the following (Table No. 2):
Analyzing the information stated above, we can conclude that as a general rule the amount of interest calculated on the basis of the actual rate IRfact, taking into account the provisions of Section V.1 of the Tax Code (Clause 1 of Article 269 of the Tax Code), can be recognized as expenses (revenue) in the form of interest for borrowers and lenders in the context of a controlled transaction. Consequently, the taxpayer must verify whether the rate IRfact used under the debt obligation corresponds with the market rate using the methods established in Article 105.7 of the Tax Code.
However, the taxpayer initially is able to not be governed by the rules of tax regulation on transfer pricing contained in Section V.1 of the Tax Code. In this case, for accuracy in using an interest rate, the taxpayer is presented the opportunity to contrast the actual rate IRfact with the established maximum values. In this case, expenses (revenue) in the form of interest will be recognized under the following scheme (Table No. 3):
It is also worth noting the fact that according to Clause 1.3 of Article 269 of the Tax Code, the particularities of using interest rates are stipulated on the basis of which IRmin and IRmax are determined:
3. Changes with regard to setting interest rates on controlled debt
New rules for the goal of calculating the maximum amount of interest for debt obligations that fall under the definition of controlled debt are valid in the event that the obligation:
а) is expressed in a foreign currency
b) came into existence before October 1, 2014
It is worth noting that the new rules have retroactive effect and are valid for the period from July 1, 2014 through December 31, 2015. The following is stipulated by these rules:
4. Briefly on debt obligations coming into existence before January 1, 2015
Transition provisions are not provided for by the laws through which the changes were introduced to Article 269 of the Tax Code that took effect on January 1, 2015. In connection with this, officials at the Ministry of Finance believe (Letter No. 03-03-06/1/69460 of January 13, 2015) that for debt obligations coming into existence before January 1, 2015, already in 2015 it is necessary to apply the new rules even if before 2015 expenses were accounted for on the basis of comparable conditions.
As a small “bonus” from the legislature, borrowers are presented the opportunity to recalculate the maximum amount of interest on debt obligations in rubles accounted for in expenses upon calculating profit tax for December 2014. Changes having retroactive effect allow taxpayers to set interest rates for December 2014 on the basis of the refinancing rate of the Central Bank of the Russian Federation raised by a factor of 3.5.
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