Major Simplification Awaits VAT Refund Procedure

20.05.2009

Finance Ministry is drawing up proposals on reducing the period of VAT refund.  Currently the procedure takes from 4 months to half year with each negative VAT return (i.e. one with input VAT exceeding output VAT) subjected to compulsory in-house audit by tax authorities.
Procedure proposed by the Finance Ministry is expected to cut the VAT refund period down to 30 days. Though, taxpayer would have to pay for the acceleration: to get the refund before the tax audit is completed, taxpayer would be required to provide a bank guarantee for the amount of refund.
Thus, should on the basis of the tax audit findings tax authority consider taxpayer eligible for refund, the banking guarantee is withdrawn, otherwise the amount in dispute is recovered by the bank. From the cash-flow perspective the federal treasury will incur some losses but liquidity is expected to return to taxpayers much sooner which is of significance in the current recessionary environment.
With regard to the practice of selecting authorised banks to be accepted by tax authorities, the suggestion is justified that first and primary beneficiaries of the proposed VAT refund scheme will be large exporters of mineral resources.


Most Authorities Disagree with Proposal by Federal Tax Service to Introduce Financial Transactions Tax

Federal Tax Service has proposed a 0.5% tax on each transfer of funds between legal entities in consideration of goods, works, services, property and titles. The initiative may cost RUB1.3 trn to taxpayers.
It was also proposed that accelerated VAT refund should be rejected (although it has not been implemented yet – see above), special registration for VAT payers introduced, period for tax arrears recovery extended from one year to three and the current combined excise duty rate on tobacco replaced with a ruble one. Another proposal by the Federal Tax Service is that it is granted access to databases maintained by the Central Bank of Russia and the Federal Financial Monitoring Service on interbank settlements between companies and individuals.
The proposals seem so odious and harmful (which assessment has already been confirmed by the Finance Ministry and Economy Ministry) that possibly it is this very reaction that the Federal Tax Service is seeking. Probably most proposals have been made purposefully as a smokescreen to cover up implementation of the idea the Federal Tax Service is ultimately interested in, i.e. access to data on banking transactions by taxpayers.
Unified Social Tax Will Be Cancelled But Its Rate Will Survive For One Year
President of Russia made a statement of great importance for employers. He supported the idea of cancelling the unified social tax and replacing it with separate contributions payable by employers to the Pension Fund, Social Insurance Fund and Compulsory Health Insurance Funds.
The original plan initiated by the Ministry of Public Health and Social Development and Pension Fund provided for replacement of the unified social tax with insurance contributions as well as sharp rise in tariffs. It was proposed that the pension tariff should rise up to 26% (so that the whole current unified social tax is distributed solely to the Pension Fund), contribution to the Compulsory Health Insurance Fund – from 3.1 up to 5.1, contribution to the Social Insurance Fund should remain the same. Thus, general burden on payroll expenses would grow from 26% up to 34%.
In his statement the President of Russia stressed that transition to separate payment of insurance contributions was inevitable and was to be implemented immediately. Altogether, burden on payroll can be extended gradually as well through coordinating tariffs with employers’ capabilities. Finally, the rise in tariffs was postponed till 2011 while for 2010 the current burden of 26% was upheld. Regressive scale is cancelled and insurance contributions will be assessed on the basis of fixed rates until annual disbursements to an employee are as high RUB415,000. Thus, the tax regime in 2010 actually proves to be preferable for employers paying medium, high and extremely high salaries. Threshold is the monthly salary of RUB65,000 beyond which employer starts saving on social contributions.
We believe that rates and thresholds in 2011 a too remote issue to consider since these indicators may be affected by inflation along with other factors.

Federal Tax Service Believes That In Case of Year End Loss Interim Dividends Distributed Require Reclassification and Higher Tax Rates
Letter by the Federal Tax Service of the RF No. ШС-22-3/210@ of 19.03.2009
Federal Tax Service has turned its attention to companies which had excellent results in the first half year 2008 and distributed interim dividends but along with many others registered loss in the year end. In its letter the Federal Tax Service reminds that pursuant to Art. 43 of the Tax Code dividend is any income obtained by a shareholder when after tax profit is distributed.
Federal Tax Service believes that should taxpayer have loss in year end, dividends distributed from interim net profit in the first quarter, first half year or nine months may not be recognised year end dividends. Therefore they require reclassification: dividends distributed to legal entities should be considered shareholder’s non-sales income (and taxed in shareholder’s possession at 24%) while those distributed to individuals should be considered other income and taxed at 13% instead of 9%.
We maintain the opinion that as soon as related disputes are tried by courts, tax authorities will encounter a conflict with corporate laws which fail to provide for reclassification of dividends into other types of distributions to shareholders. Thus paying regard to the ambiguity of tax laws in respect of the issue being considered we expect new judicial practice to emerge.