01.08.05

The most interesting disputes between the deputies and the Ministry of Finance were centered on VAT. The deputies didn’t like one of the conditions of the amendments introduced: - the transfer of all taxpayers to the “accrual” method. But, the deputies approved the new legislation immediately and unanimously on the second reading of the government version. This application of the “accrual” method means that a company must pay VAT after delivering goods to a buyer, not after receiving payment for it. The new legislation will come into force starting January 1st, 2006.

Another provision in the new VAT legislation comes from the deputies’ broken promise to never allow the taxation of advance payments, a promise the President of the Russian Federation also made. Advances were renamed in the legislation as “partial payments.” The Deputy Minister of Finance noted that after taxpayers are converted to the new “accrual” method, it will be “technically difficult” to avoid paying taxes on advance payments.

A provision on requiring cash VAT payments on barter operations was also approved. It will come into force January 1st, 2006, with one exception: collective farmers who barter their crops for fuel will be exempt from these cash payments until 2007. There are also more positive moments in the legislation – from now it will be possible to offset VAT quickly on capital transactions. No longer will the taxpayer have to wait for construction to be completed to receive their tax deduction. Moreover, for exporters there will be a new “application” process for VAT repayment.

As they were asked to do, the deputies enacted an excise tax on methylated spirits and derivative products. At the same time, a new loophole was introduced to exempt companies that use these products in their production processes, so as not to bankrupt the companies. For the tobacco industry, it was proposed that taxes should not be calculated based on the net price, because tobacco companies can manipulate their figures and lower their own taxes. However, the Duma, after indexing several rates, decided to keep the current scheme of charging a fixed amount in rubles plus a percent of the price of the cigarettes.

The deputies then turned to the taxation of small business. The threshold for eligibility for simplified taxation was raised, but only slightly; starting January 1st, 2006 simplified taxation could be used by companies with yearly sales of less than 20 mln. rubles (now 15 mln. rubles). Some other considerations for small business were made: the threshold to qualify for the Simplified Tax System will be indexed yearly according to inflation starting January 1st, 2007; the list of deductible expenses will be expanded; entrepreneurs without employees may pay a fixed tax according to the “patent” system. Local Authorities will determine the “patent” rate for each of 58 areas of business activity.

There were also some amendments to the Civil Code. These amendments reduce the statute of limitations on small transactions from 10 to three years. From now on, any claims concerning privatization deals occurring more than three years ago have no legal basis. The statute of limitations will not be reduced for tax evasion, however. In reality, there are no standards for “good faith” in Russia.