CORPORATE

TAXATION
Russian Tax System
 RUSSIAN TAX SYSTEM

Tax system vs. The system of taxes and fees

Federal taxes
VAT
excises
PIT
CIT
mineral extraction tax
water tax
Fees for the Use of Fauna Objects and for the Use of Aquatic Biological Resource
Objects
stamp duty
tax on additional income from hydrocarbons

Regional taxes Local Taxes

Corporate tax on property Land tax

Gambling tax Personal tax on property
Vehicle tax Trade fee
 TAX PRINCIPLES

Russia’s Tax Code, Art. 3, Tax Fundamentals

1) Legality – taxes must be imposed by law
2) Ability-to-pay – taxes be imposed considering the payer’s actual ability to pay, taxes
should not to be burdensome
3) Non-discrimination – taxes should not to be discriminatory on ownership or the origin of
capital
4) Economic basis – taxes should not to be arbitrary
5) Economic uniformity – taxes should not to be impending the movement of capital or
financial assets freely
6) Legal certainty – all components of a tax must be clearly set out. All doubts should work
in favor of a taxpayer.

1) Simplicity
2) Efficiency
3) Equity What about the ability-to-
4) Stability
pay requirement to
indirect taxes?
 TAX PRINCIPLES

Universal tax principles in the world

Russian tax principles

correlate to these principles?
 CIT (1)

For Russian
companies and PE
Subject to CIT

profits income expenses

For foreign
companies
profits income

What about fairness?

Non-discrimination?
 CIT (2)

Subject to CIT

Operating Income
income exempted
(active)

Non-
operating
income
(including
passive)

Examples ?
 CIT (3)

Reciepts

Operating Non-operating Exempted

The sale of goods, Dividends Investments

providing of Interest Loans
services, works Penalties Earmarked
The disposal of Foreign exchange revenues
property rights gains others
others
 CIT (4)

Co has rented a stall to a watermelon seller

for one month.
In this case, income from renting a tent is
subject to non-operating income.

Example # 1
 CIT (5)

Co has received a car at no cost (on grant basis) from a

non-profit organization.
The market price of the car is 300,000 rub.
According to the non-profit organization’s tax data
residual value is 420,000 rub.

Co has to include 420,000 rub. into non-operating

income for tax purposes.

Example # 2
 CIT (6)

A natural person, shareholder, who owns a 40% stake in

Service LLC, donates a personal computer.

In this case, the cost of the computer is included in non-

operating income of Service LLC.

Example # 3
 CIT (7)

Service LLC, being the sole shareholder of Trust LLC,

grants a car to it free of charge.

The share of participation exceeds 50%, therefore, the

income of Trust LLC in the form of a car received at no
cost is not included into the tax base.

Example # 4
 CIT (8)

Outlay

Operating expenses Non-operating Exempted outlay

expenses
Material costs Interest Investments
Payroll Penalties (contributions to
Depreciation Foreign exchange capital)
Amortization losses Penalties for
others government
Loans
Amortization and depreciation are two methods of calculating
the value for business assets over time. Amortization is the
practice of spreading an intangible asset's cost over that asset's
useful life. Depreciation is the expensing a fixed asset as it is
used to reflect its anticipated deterioration.
 CIT (9)

Who must pay CIT?

1) Co – tax residents
1.1. residence approach – full tax liability – from all
sources
1.2. territorial approach – limited tax liability – from
domestic sources + remitted income
(2) Co – non-residents – from domestic sources
2.1. active income – PE
2.2. passive income and capital gains
 CIT (10)

Who are tax residents?

1) Incorporation standard
2) Effective control standard
(3)* Substantial economic activity standard
 CIT (11)

Who must pay CIT?

1) Co = legal entities
Economic double taxation

(2) Co = fiscal transparent entities – are not subject to

CIT
Trusts, funds, LLCs (S-Co), partnerships
No economic double taxation

What about individual entrepreneurship? Should we

uniform taxation of business and investment?
 CIT (12)

State A State B

Co A
P-ship
B
loan

P-ship is subject to
CIT P-ship is a pass-through
entity

Hybrid-mismatched entities
 CIT (13)

Who must pay CIT?

Foreign Co is subject to CIT

1) Subsidiary – CIT for profits (net income), CIT for
dividends
2) Branch as a fixed place – CIT for profits, branch tax
(USA, France)
3) Agent (PE) – CIT for profits
 CIT (14)

CIT

State A State B
CoA Subsidiary

Dividends
Distributive income
CIT

CoA branch

CIT

CoA agent
 CIT (14)

Timing rules -

Financial accounting vs. Tax computing

1) Financial accounting = tax

2) Financial accounting = tax

How to determine income and expenses for tax?

Accrual method vs cash method
 CIT (15)

Cash method

In March, CoA shipped a batch of goods for CoB. The price

= 240,000 rubles. VAT =40,000 rubles.
In May, CoB paid 120,000 rubles including VAT 20,000
rubles.
In June, CoA and CoB off-sett of mutual obligations in the
amount of 12,000 rubles, inc. VAT 2,000 rbl.
In July, CoB transferred Rosneft shares worth 108,000 rubles
to CoA, VAT 18,000 rbl.
How to record if
Reference in tax accounting: accrual method is
In May = 100,000 rbl. applied?
In June = 10,000 rbl.
In July = 90,000 rbl.
 CIT (16)

Tax base

1) Tax base is monetary expression of profits

2) Tax base should be defined separately if a specific rate is
applied
3) Income in kind should be defined in market price
4) Profit is defined on the cumulative (accrual) basis
5) In the case of losses tax base is zero
 CIT (17)

Treatment of losses

Carrying onward of losses

- Time limitation – 10 years in Russia and not more
than 50% (until 2024)
- No time limitation

Carrying backward of losses

Capital losses might be offset against capital gains

 CIT (18)

In 2016, LLC received a tax loss of 100 million rubles.

In 2017, the company received a tax profit of 40 million
rubles (before loss carry forward).
In 2018, the company also made a profit of 100 million
rubles (before loss carry forward).
In 2017, only 20 million of the loss can be used (leaving
a taxable profit of 20 million rubles), and 80 million
will be carried over to 2018, and beyond.
In 2018, 50 million rubles of the loss will be used, and
30 million will be carried over to 2019 and beyond.
 CIT (19)

Tax rates (flat rate):

(1) Standard rate = integral rate - total 20% in Russia –
2% (3%) for federal government (federal rate) and
18% (17%) for regional government (regional rate);
(2) 0% - for IT companies
(3) 0% - for healthcare or educational entities,
agricultural producers
(4) Up to 13,5 % of regional rate
Specific rates : dividends (residents) 13%, (non-residents)
15%
Preferential zones - tax and customs incentives
High –tax vs low – tax jurisdictions
Harmful competitiveness
 CIT (20)

average tax rate (proportional approach) in Russia vs

effective tax rate (progressive approach)

Taxable income
Tax brackets Tax rates
200,001 - 35%
100,001 – 200,000 25%
0 - 100,000 15%

Total income – exemptions = gross income

Gross income – deductions = taxable income
 CIT (21)

What is expenses for tax purposes?

1) Tax base = taxable income minus expenses

2) Expenses should be documented and economically
justifies

Russian LLC’s expenses for CIT:

1) Costs of consulting services. Appropriate documents are absent
2) Costs of CEO’s voyage. Documents are available
3) Residual value of a vehicle transferred for another company
free of charge
4) Hotel accommodation cost related to employee’s business trip
to Paris. The bill is in French
 CIT (22)

LLC sold goods for 1,000,000 rubles

Raw materials – 200,000 rubles
Penalties for a supplier – 10,000 rubles
Salaries – 300,000 rubles
Social insurance contributions – 78,000 rubles
Depreciation – 122,000 rubles
Rental costs – 130,000 rubles

Interest income – 50,000 rubles

Losses in the previous year – 100,000 rubles

Tax rate – 20% Compute the amount of tax

 CIT (22)

Operating profit = 1,000,000 - 200,000 - 300,000 - 78,000 -

122,000 - 130,000 = 170,000
Non-operating profit = 50,000 rubles - 10,000 = 40,000
Total profits = 210,000
Taxable profits = 210,000 – 100,000 = 110,000
Tax amount = 22,000
 CIT (23)

Tax period = tax year = calendar year

Advance payments – each quarter or month

 VAT (01)

deduction
20%x 20% x + 20% y – 20% x

A B C
x + 20% x x + y + 20% (x + y)
input VAT output VAT

VAT liability = VAT output – VAT input

 SALES TAXES (02)

20%x 20% x + 20% y

A B C
x + 20% x x + y + 20% (x + y)
turnover tax

20% x + 20% y

A B C
x x + y + 20% (x + y)
sales tax
VAT MAP (03)
 VAT (04)

A mine sells iron ore to a smelter. The sale is worth €1000 and, if
the VAT rate is 20%, the mine charges its customers €1200. It should
pay €200 to the treasury, but as it has bought €240 worth of tools in the
same accounting period, including €40 VAT, it is only required to pay
€160 (€200 less €40) to the treasury. The treasury also receives the €40
and now gets €160 making €200 - which is the correct amount of VAT
due on the sale of the iron ore.

• Supply: €1000
• VAT on supply: €200
• VAT on purchases: €40
• Net VAT to be paid: €160
 VAT (05)

The smelter has paid €200 VAT to the mine and another €20 VAT on
other purchases, such as furniture, stationery, etc. So when the smelter
sells €2000 worth of steel it charges €2400 including €400 VAT. The
smelter deducts the €220 already paid on his inputs and pays €180 to
the treasury. The treasury receives this €180 from the smelter plus €160
from the mine, plus €40 paid by the supplier of tools to the mine, plus
€20 paid by the furniture/stationary supplier to the smelter.

Supply: €2000
VAT on supply: €400
VAT on purchases: €220
Net VAT to be paid: €180
€180 (paid by the smelter) + €160 (paid by the mine) + €40 (paid by the
supplier to the mine) + €20 (paid by the supplier to the smelter) = €400
or the correct amount of VAT on a sale worth €2000.
 VAT (06)

Taxpayers in Russia:
1) Organizations
2) Individual entrepreneurs

1) Natural persons in the case of import VAT

Exercise:

CoA sells a product worth 100 rubles inc. VAT to CoB.

CoB sells the same product to CoC for 160 rubles inc. VAT. VAT rate
20%.

Compute VAT to be paid

 VAT (07)

Answer:

CoA sells a product worth 100 rubles inc. VAT to CoB.

CoB sells the same product to CoC for 160 rubles inc. VAT. VAT rate
20%.

Output VAT
160 * 20/120 = 26,6

Input VAT
100 * 20/120 = 16,6

OR
(160 – 100) * 20/120 = 10
 VAT (08)

Answer:

CoA sells a product worth 100 rubles inc. VAT to CoB.

CoB sells the same product to CoC for 160 rubles inc. VAT. VAT rate
20%.

Output VAT
160 * 20/120 = 26,6

Input VAT
100 * 20/120 = 16,6

OR
(160 – 100) * 20/120 = 10
 VAT (09)

Subjects of tax are:

(1) the sale of goods (works, services), property rights in the territory of
the Russian Federation, including free transfer;
(2) import of goods into the territory of the Russian Federation
(import);
(3) construction and installation works for the company’s consumption;
(4) transfer of goods (works, services) for the company’s needs, the
costs of which are not deductible when calculating corporate income
tax.
 VAT (10)

Exercise:

Company A donated a fixed asset with a residual value of 10,000 rubles

to company B. Company B sold the asset for 6,000 rubles (excluding
VAT).

Calculate the VAT liability for both companies using the standard rate
 VAT (11)

Answer:

CoA
10 000 * 0,2 = 2000

Co B
6 000 * 0,2 = 1200
 VAT (12)

The place of the VAT transaction – fiction

the concept of origin vs. the concept of destination

(a) The place of immovable property – for VAT transactions with

immovable property
(b) The physical place of work – for VAT transactions with movable
property (repair)
(c) The physical place of the providing of services – for VAT services
in culture, tourism, education, healthcare, sport etc.
(d) The place of economic activities – for VAT license transfer,
consulting, lawyer’s accounting, audit, research etc. services
(e) The place of a seller – others
 VAT (13)

A Russian consulting company consults a foreign company

on transfer pricing rules in accordance with Russian tax
legislation.

The place of VAT services is the place where the foreign

company carries out.
Therefore, the Russian Federation is not a place of VAT
services.
 VAT (14)

The due moment for VAT base arising is the earliest of the
following dates:

(1) Shipping day

(2) Payment day

The company ships products to the buyer on January 25,

payment is made by the buyer on February 7. The earliest
of these dates, January 25, is recognized as the moment of
VAT base arising.
 VAT (15)

VAT rates:

0 % - export

10 % - food, goods for kids, healthcare items, books,

newspapers

20 % - standard rate
 VAT (16)

«Google» tax

E-commerce

B2C – VAT must be paid by a foreign seller

A foreign company must register in tax authorities and
then it must file a tax return

B2B – VAT must be paid by a withholding agent

Russian Co must pay VAT as an agent and file a tax return

PE of foreign Cos should be treated as domestic Cos

 PROPERTY TAX (01)

Taxes on property:
1) a single tax for both companies and natural persons or
different taxes;
2) a single tax on both immovable including land plots
and movable properties or different taxes.
Taxes on property transfer are distinct taxes.

1) Corporate tax on property

2) Transport tax
3) Induvial tax on property
4) Land tax
 PROPERTY TAX (02)

Corporate property tax is a regional tax.

Regional legislator determines the tax rate within the

limits set by Russia’s Tax Code, the procedure and terms
for paying the tax, the specifics of tax base, and tax
incentives.

Taxpayers:
- Domestic Cos
- Foreign Cos
 PROPERTY TAX (03)

1) real estate accounted for on the balance sheet as fixed

assets (both domestic and overseas assets) – tax base
is determined as an average balance value a year;
2) immovable property in the Russian Federation, if the
tax base is determined as cadastral value – tax base is
determined as cadastral value.

Example
Co has taxable fixed assets which residual value is
7,000,000 on January 1; 12,000,000 on February 1;
11,000,000 on March 1; 10,000,000 on April 1.
Count an average balance value for three months.
 PROPERTY TAX (04)

Answer
Average balance value = (7,000,000 + 12,000,000 +
11,000,000 + 10,000,000) : 4 = 10,000,000

The tax base is defined as cadastral value for:

(a) administrative and business centres and shopping
centres and premises;
(b) commercial premises for offices, retail facilities, public
catering and consumer services etc.
 PROPERTY TAX (05)

The tax must be paid quarterly through advanced payments.

Tax year is a calendar year