Over the past year, Parliament has adopted several laws amending the Tax Code regarding the taxation of legal entities. This article examines the most significant tax innovations expected in the corporate sector in 2020 which concern corporate income tax, transport and land taxes and changes in tax administration rules.
Federal Law 79-FZ on the Ratification of the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting recently entered into force. Once the ratification procedure has been completed, the convention will enter into force in Russia, introducing changes to the taxation procedure for transactions with counterparties from a large number of countries that have concluded double tax avoidance agreements with Russia.
The Federal Tax Service recently approved a form of inquiry which it will use to request information from legal entities regarding their beneficial owners in order to, among other things, identify tax evasion schemes. For the purposes of the law, 'legal entities' means not only Russian legal entities, but also foreign legal entities, including those that perform economic operations in Russia and interact with Russian clients.
The basic value added tax (VAT) rate recently increased from 18% to 20%. The new rate will apply to all goods, works and services which are sold, performed or provided from 1 January 2019. In addition, several estimated tax rates have also been amended. As entities are expected to reflect the increased VAT rate in the price of their goods, economists predict a rise in prices associated with the increase in early 2019.
The Federal Tax Service recently began publishing information concerning the various obligations of Russian taxpayers (ie, legal entities) and their financial reporting on its website. This practice is new in Russia, as such information was previously classified as tax secrets and, by virtue of the Tax Code, could not be disclosed. This development is useful not only for Russian taxpayers, but also for foreign companies choosing Russian counterparties.
In January 2019 a new law will come into force enabling the tax authorities to request client-related documents from auditors which constitute 'auditing secrets'. This law marks the end of years of struggle by the tax authorities to gain access to audit documents. Although these changes carry no significant risks for bona fide taxpayers, the business community is concerned that the authorities may be able to request auditors' documents and opinions on related services, such as accounting and tax consulting.
The Federal Tax Service (FTS) recently issued a letter providing an extensive explanation of the tax authorities' application of the beneficial owner of income (BOI) concept. This concept was previously referred to only in the international tax treaties between Russia and other states, but has recently been actively implemented into Russian tax legislation. In this regard, the FTS's letter is of great interest, as it summarises the approach of both the courts and the tax authorities with regard to resolving BOI issues.
The Ministry of Finance recently issued an important clarification regarding the taxation of a foreign parent company's property rights to a trademark as a contribution to the charter capital of its Russian subsidiary. Previously, there had been ambiguity surrounding this issue due to the competing provisions of the Tax Code with regard to the procedure for imposing value added tax on contributions to a company's charter capital and transactions involving property rights to trademarks.
A new law, which will enter into force in 2019, will introduce significant changes to the special procedure for imposing value added tax (VAT) on services provided in electronic form by foreign companies that have no branch or representative office in Russia. Foreign organisations that provide services in electronic form to Russian buyers are advised to register for tax accounting in Russia as VAT payers, as Russian counterparties will likely refuse to purchase electronic services from parties that fail to do so.
At the end of 2017, a number of amendments to the Tax Code came into force which significantly increased the scope of information and documents that Russian divisions of some international companies must submit to the tax authorities. Russian companies and foreign companies subject to taxation in Russia must now provide a notice of participation in an international group of companies and so-called 'country information'.
The legislature is in the process of adopting a number of tax benefits intended to stimulate the development of innovative companies and marquee investments in Russia. A new law has expanded the list of expenses that can be excluded from taxable profits. Further, recently passed draft bills have introduced a new investment tax deduction and determined the terms for enforcing the concessionary income tax rates available to investors implementing large investment projects in certain areas.
Article 54.1 of the Tax Code recently came into force. It introduces new rules and definitions regarding legitimate tax optimisation and aims to clarify what is considered legitimate optimisation and what is considered tax evasion. Further, the new rules require the tax authorities to use a less formal approach when assessing the reasonableness of a tax benefit and strive to understand the economic intent of the relevant taxpayer's operations.
Russia recently signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), which was developed to implement Action 15 of the BEPS Plan. Ratification of the convention will be a serious step towards implementing the measures envisaged in the BEPS Plan, which will change the existing double tax treaty system and have a significant impact on the functioning of international groups of companies in Russia.
The Federal Tax Service recently issued a notification entitled On Identifying the Circumstances of an Unjustified Tax Benefit, which summarises the law enforcement practice associated with assessing the validity of a tax benefit in disputes relating to bad-faith contracting parties. The notification will contribute to the reduction of companies' tax risks relating to an assessment of the validity of their tax benefit when dealing with contracting parties.
Under certain conditions, a company may have a controlled indebtedness, for which the accounting of expenses for profit taxation purposes should be made according to the special rules regarding so-called 'thin capitalisation' stipulated in Article 269 of the Tax Code. Recent changes to the thin capitalisation rules aim to strengthen the barriers that prevent the outflow of capital abroad to the foreign companies of multinationals doing business in Russia.
The procedure for transferring previous years' losses to future tax periods for the purpose of calculating corporate income tax has changed substantially for 2017. Previously, only losses incurred during the 10 years preceding the relevant tax period could be recognised consecutively. As of January 1 2017, the procedure for carrying losses forward has changed and the 10-year limitation on the carrying forward of losses has been abolished.
During 2015 and 2016 the dispute between taxpayers and the tax authorities regarding the exclusion of multinational enterprise groups' Russian subsidiaries from the requirement to pay corporate income tax on so-called 'intra-group expenses' came under scrutiny. The Russian courts have traditionally treated the actions by affiliated companies in this regard liberally. However, in 2016 Russian court practice began to change in favour of the tax authorities.
The State Duma of the Federal Assembly recently passed a new law introducing significant changes to the taxation of foreign companies selling software and internet services in the Russian territory. The so-called 'Google tax' will require foreign companies providing services in electronic form and selling content online to Russian consumers to register with the Russian tax authorities from January 1 2017.
In May 2019 an interstate agreement was concluded within the framework of the Eurasian Economic Union, under which it was agreed to introduce a system to enable certain categories of imported goods to be traced. Now, Russia has launched an experimental version of such system, which will remain in place until 31 December 2019. Among other things, the system is expected to lead to a reduction in the level of record falsification in the market and better control the payment of taxes.
The Duma provides certain incentives to encourage businesses to operate in Russia. For example, it recently passed a law which permits Russian exporters and Russian subsidiaries of foreign companies that provide services to foreign clients and other companies within such client's groups to deduct the full amount of value added tax for these services. The new law, which was drafted in response to the digital economy, will increase competition in the outbound services market.