24.11.08

November 21, 2008, legislators of Russia’s State Duma approved several amendments to the Tax Code in their second and third readings. The changes are designed to improve procedures for calculation and administration of VAT. In the second reading, the document was supplemented by corrections voiced by Prime Minister Vladimir Putin.

The amendment will decrease VAT from 24% to 20% starting January 1, 2009. The decrease will apply only to the taxes paid towards the federal budget (down from 6.5% to 2.5%).

Moreover, procedures for advance payment of profit tax will be changed starting November 28, 2008. Companies will be able to make advance payments based on actual profit rather than on the fiscal results of the previous quarter, as was done in the past.

Prime Minister Vladimir Putin pointed out that business must be given the right to pay income taxes based on the profits they actually received so that "business will not need to pay taxes on profits which appear on paper only, and regions won’t have to reimburse the overpaid taxes."

Putin commissioned Duma deputes to develop and pass an appropriate law in the shortest possible time so that this regulation would come in effect starting November 28, 2008.

Tax experts have pointed out that one reason for this reform is to draw companies back to Russia who have moved abroad to places like Cyprus. They assert point out that if government would lower VAT rates for holdings and financial companies to equal those used on Cyprus, even with different conditions for minimal participation term or volume size, or other criteria, - then it would indeed promote transfer of many business structures back to the RF.

At the same time, many are concerned that, although lowered tax rates are very positive news, in Russia it often remains news only. For example, standard VAT was also proposed to be lowered to 15% with no further actions. Moreover, Russia has a well-functioning system of delays and counterbalance: while some rates are lowered, others are made higher, or financial accounting is made more complicated.

Other amendments would double the tax deduction for purchasing a home, increasing it from one million to two million rubles, and may be applied to purchases made during 2008.

Users of simplified taxation will also receive some favorable news. Regional authorities will be allowed to lower tax rates for companies working on simplified tax system to a 5% minimum (currently – 15%).

The draft law also includes an amendment increasing bonus depreciation from 10% to 30% for capital assets with useful service terms of 3-20 years starting in 2009.

And finally, the head of the Ministry of Finance will be allowed to postpone for up to five years tax payments from companies with debt exceeding 10 million rubles.

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