4Annex 1.
An Overview of Legislation Adopted in 2005 in the Sphere of Tax Regulation 1
In 2005, the reforming of tax legislation continued, its priorities, as before, being the need to decrease the tax load, and also to bring into order and to further improve tax legislation, including tax administration. During the year, some amendments were made to Part One of the Tax Code (RF TC), and to almost all the chapters of Part Two.
As the most significant changes in the tax sphere, there can be pointed out the amendments and alterations introduced to Part One of the Tax Code concerning the granting to tax agencies the right to extrajuducial recovery of mandatory payments and fines, as well as those introduced to Part Two of the RF Tax Code, Chapter 21 "Value Added Tax", Chapter 22 "Excises", Chapter 25 "Tax on profit of organizations", Chapter 26.2 "Simplified system of taxation", Chapter 26.3 "System of taxation in the form of single tax on presumptive income for some types of activity", and Chapter 28 "Transport Tax".
Besides, written explanations of the empowered bodies concerning some issues of applying tax legislation are discussed here.
Extrajuducial Recovery of Mandatory Payments and Fines by Tax Agencies
The most important changes in the part of improving tax administration were introduced by Federal Law No. 137-FZ, of 4 November 2005, "On making amendments to some legislative acts of the Russian Federation, and recognizing as null and void some provisions of legislative acts of the Russian Federation in connection with the implementation of measures designed to improve the administrative procedures for settling disputes", which is to come into force from 1 January 2006.
The Law has introduced a uniform administrative procedure for compulsory recovery, from juridical persons and individual entrepreneurs, of mandatory payments and sanctions to the budget.
In accordance with the existing version of Part One of the RF Tax Code, tax agencies do not have the right to recover fines by sending to the bank, where the accounts of a taxpayer or a tax agent have been opened, a letter of collection (or encasement), for the necessary monies to be written off the accounts of a taxpayer or a tax agent and transferred to the corresponding budgets (or off-budget funds). The new Law has considerably expanded the rights of tax agencies. Now tax agencies, beside forfeits and arrears of taxes and levies, can also recover fines. Moreover, they have been granted the right to recover tax sanctions from organizations and individual entrepreneurs independently, without petitioning to a court of justice, within the established limits.
For these purposes, Chapter 14 "Tax Control" of the RF TC has been augmented by Article. 103.1, which regulates the recovery of a tax sanction on the basis of a decision made by a tax agency. The Article consolidates the right of tax agencies on their own, without appealing to a court of justice, to recover sanctions from organizations and individual entrepreneurs in the event of the size of a fine imposed on an individual entrepreneurs not exceeding 5,000 roubles for each tax within a given tax period, and that of a fine imposed on an organization - 50,000 roubles for each tax within a given tax period.
Appropriate changes have also been introduced in Article 114 of the RF TC, which regulates the application of tax sanctions. Prior to the changes, it was stipulated in Item 7 that tax sanctions were to be recovered from taxpayers only by judicial proceeding. According to the new wording of the Item, a tax sanction is to be recovered from a taxpayer
1 The overview was prepared with assistance from the Legal System Consultant Plus.
on the basis of a decision made by the director (or deputy director) of a tax agency in the procedure established by the Code, in the event the amount of a fine imposed on a taxpayer - individual entrepreneur not exceeding 5,000 roubles for each unpaid tax within a tax period, and (or) other violation of legislation on taxes and levies; and a fine imposed on an organization - 50,000 roubles for each unpaid tax within a tax period, and (or) other violation of legislation on taxes and levies. In the event when the amount of sanctions imposed on the aforementioned taxpayers is in excess of these limits, or in the event of a physical person, who is not an individual entrepreneur, being brought to responsibility, the amount of a fine is to be recovered by judicial proceeding in accordance with the RF Tax Code.
The new Article 103.1 of the RF TC also envisages the administrative procedure for settling disputes. In the event of an appeal against the recovery of a tax sanction having been submitted to a superior tax body (or to a superior official), the execution of the aforesaid decision is to be suspended. In the event of this decision having been appealed against to an arbitration court, its execution can be suspended in the procedure established by the legislation on arbitration procedure of the Russian Federation.
It should be noted that the new recovery procedure implies that a juridical person or an individual entrepreneur will have an unconditional right to appeal against the decision of a tax agency to a superior body or to an arbitration court. Thus, Item 3 of Article 101 of the RF TC has been augmented by a norm stipulating that such a decision, made by a tax agency, must specify the period during which the person being brought to responsibility for the commitment of a tax violation will have the right to submit an appeal against the aforesaid decision to a superior tax body (or to a superior official), or to a court of justice (or an arbitration court), and also contain stipulations concerning the procedure for submitting such an appeal, and other necessary information.
Besides, the Law has introduced a single administrative procedure for compulsory recovery of arrears from the payers of contributions to mandatory pension insurance.
According to Federal Law No. 167-FZ of 15 December 2001 "On mandatory pension insurance in the Russian Federation", the correctness of the computation and payment of contributions to mandatory pension insurance is to be controlled by tax agencies in the procedure established by legislation of the Russian Federation that regulates the operation of tax agencies. At the same time, the right to recover arrears of insurance contributions, forfeits and fines, in the event of the amount due to be paid by an individual entrepreneur being no more than 5,000 roubles, and by a juridical person - no more than 50,000 roubles, has been granted to territorial agencies of the RF Pension Fund, to be based on the decisions made by these agencies. If the amount due to be paid is in excess of the aforesaid amounts, or if the insured person is a physical person who is not an individual entrepreneur, the recovery is executed by territorial agencies of the RF Pension Fund by judicial proceeding.
For the purpose of introducing a uniform administrative procedure for the recovery of arrears of insurance contributions, forfeits and fines, it has been established that the tax agency must send to an appropriate territorial agency of the RF Pension Fund the information concerning the amounts of arrears accumulated by payers of the contributions to mandatory pension insurance, as well as the documents confirming the fact of such arrears having been accumulated, within two months from the day of detecting the arrears.
The Single Standard for Taxpayer Services and the Regulation for the Interaction with Taxpayers
One of the goals of improving tax administration consists in making the administration procedures convenient and transparent for taxpayers, as well as creating the most appropriate conditions for them to easily perform their duties relating to the payment of taxes and levies. To achieve this goal, tax inspectorates must provide services to taxpayers in accordance with uniform standards and strictly comply with the established timelines.
Thus, by Order of the RF Federal Tax Service (FTS) No. SAE-3-25/422, of 2 September 2005, the Single Standard for providing taxpayer services was approved. It should be noted that this documents has introduced no new norms - it only contains a reference table, listing all the procedures that tax agencies are obliged to implement with regard to taxpayers: the definition of the service to be provided, the exact timelines for its provision, the documents to be composed in this connection, as well as references to those legislative acts and other normative acts by which these forms and timelines have been introduced.
Resulting was the greater ease for a taxpayer to search for necessary information in tax legislation: in respect to each action, the Single Standard specified the grounds for a given procedure to be performed, its timelines, and the resulting document to be issued to the taxpayer.
The Single Standard is subdivided into six sections, which are as follows:
• registration of taxpayers and the keeping of taxpayer records;
• services associated with the submission of tax declarations and other documents, as well as access to the information concerning the activities and incomes of citizens;
• the provision of information concerning settlements with budgets;
• services pertaining to the registration of controlling and cashier equipment (CCE);
• services pertaining to the issuing of permits, licensing, expert's estimations and registration of gaming businesses;
• information services in respect to all areas of taxpayer activity. Each of these sections contains a list of specific services (or procedures) to be performed by tax agencies in respect to taxpayers.
Another document, aimed at improving the efficiency level of organizing the interaction with taxpayers, is the updated Regulation for the organization of work with taxpayers, payers of levies and contributions to mandatory pension insurance, and tax agents, approved by Order of the RF FTS No. SAE-3-01/444, of 9 September 2005.
The Regulation for the organization of work with taxpayers encompasses five areas of activity:
• the organization of personal meetings with taxpayers;
• the organization of acceptance, registration and issue of documents by departments responsible for the interaction with taxpayers;
• the procedure for verifying taxpayers' computations of taxes, levies and contributions to mandatory pension insurance, as well as the specific features of applying this procedure;
• the organization of information services;
• the specific features of organizing the interaction with taxpayers for officials employed at territorially isolated sites by the interregional tax inspectorates subordinated to the RF FTS.
The new Regulation does not differ in any fundamental way from its older version adopted in 2004; however, a number of noteworthy changes should be mentioned.
1. The procedure for submitting reports. Tax declaration forms are changed frequently, and it often happens so that, by the moment a tax declaration is due to be submitted, the RF Ministry of Finance will have introduced new changes. Previously, a tax inspector could refuse to accept a tax declaration if its form was different from the established one. As a result, such a declaration was returned to the taxpayer without having been registered, which was fraught with a fine to be imposed for a failure to submit it in time, because the taxpayers had no proof of the declaration having been actually submitted. This situation is in direct conflict with the RF Tax Code: by Item 2 of Article 80 of the RF TC it is forbidden to refuse the acceptance of tax declarations on any grounds, and all reporting documents must be accepted, with the date of submission to be marked on it.
In the new Regulation, this conflict has been eliminated: a tax inspector no more has the right to decide whether such reports may be accepted or not; in any event, they have to be rejected. At the same time, the rule was introduced, in accordance with which a tax agency is obliged to register any postal correspondence it receives. And if the form of a declaration differs from the established one, a notification must be send to the taxpayer concerning the necessity for the declaration to be submitted in the established form.
2. Verification of computations. The new Regulation had increased from three to five days the period during which a tax agency is obliged to correct, in a taxpayer's individual account, the error that has arisen at the former's fault.
3. The informing of taxpayers concerning the status of their settlements with the budget. The Regulation has been made compatible with the new powers granted to tax agencies, which are to control not only the payment of taxes and levies, but also the contributions to mandatory pension insurance. The period for preparing the certificates concerning the status of settlements with the budget has been somewhat changed. If the request for such a certificate is submitted by a taxpayer in person, the period remains as before - 10 days from the day of the request being received; if the request was sent through a postal service, the period is extended to 12 days. Also changed have been the periods for the consideration of written applications by taxpayers - physical persons and other payers, if they submit their reports through telecommunications channels. Under the previous Regulation, the period of preparing a reply to the request by a physical person without any additional verification, or to the requests of payers who send their reporting documents through telecommunications channels, was 15 days. In accordance with the new Regulation, the period for replying to all categories of persons is 30 days from the day of the request being received.
The Procedure for Excluding Organizations from the Single State Register of Juridical Persons (SSRJP)
By Federal Law No. 83-FZ, of 2 July 2005, "On the introduction of alterations in the Federal Law "On State registration of juridical persons and individual entrepreneurs" and to Article 49 of the Civil Code of the Russian Federation", the procedure has been established for a juridical person, which has in effect terminated its activity, to be excluded from the Single State Register of Juridical Persons (SSRJP) by decision of the registering agency. The registering agency has the right to exclude a juridical person from the Register if, during twelve calendar months, it has not been submitting the reporting documents envisaged by legislation, and has not been conducting operations on at least one of its bank accounts. The mandatory condition for the effectuation of the exclusion procedure is the publication of the decision concerning the forthcoming exclusion, within three days from the making of such a decision, in those press organs where the information concern-
ing the State registration of a juridical person is to be published. Simultaneously with the decision concerning the forthcoming exclusion, the information concerning the procedure and timelines for the submitting of applications by the non-operating juridical persons, creditors or other persons, whose rights and lawful interests are influenced by the exclusion of the non-operating juridical person from the SSRJP, must be published, with the address to which the applications can be sent. The applications are to be sent within a period of no later than three months since the date on which the decision concerning the forthcoming exclusion was published.
The RF FTS, by Order No. SAE-3-09/591, of 16 November 2005, "On the organization of the work of tax agencies relating to the exclusion of a juridical person, that has terminated its activity, from the Single State Register of Juridical Persons", approved the procedure for organizations that have terminated their activity to be excluded from the SSRJP. In accordance with this document, the departments for in-house verification are obliged, on a quarterly basis, to compile the lists of such organizations, which have not been reporting to the tax inspectorate during the specified period. To the banks where the settlement accounts of the organizations to be excluded are kept, requests concerning their operations are to be sent. If no operations have been effectuated, or the tax agency has no information concerning the settlement accounts, the department for in-house verifications must issue a statement entitled "On the presence of the indicia of a non-operating juridical person", on the basis of which the decision concerning the exclusion of the organization from the SSRJP will be made. The statement is sent to the tax agency's structural subdivision at the location of this juridical person, which performs the functions in relation to the State registration of juridical persons. The latter is to prepare a draft decision concerning the forthcoming exclusion and to effectuate the publication of the aforesaid information. In the event of no applications having been submitted by this organization, or its creditors, or other related persons within three months from the decision's publication, the tax agency makes the entry in the Single State Register concerning the exclusion of this organization from the SSRJP.
The tax on profit of organizations
A great number of amendments have been made to Chapter 25 "Tax on profit of organizations" by Federal Law No. 58-FZ, of 6 June 2005, "On the introduction of alterations in Part Two of the Tax Code and some other legislative acts of the Russian Federation on taxes and levies". The Law has altered the composition of incomes and expenditures, further specified some notions, and augmented the previously existing rules for determining the tax base by new provisions. Since it is not possible to discuss all the changes in this overview, we are going to point out some of the most significant ones.
The Law introduces a number of changes to be applied to the legal relations that have arisen from 1 January 2002.
From the list of non-realization incomes and expenditures regulated by Article 250, the differences in rates arising when the value of securities denominated in foreign currencies is reevaluated are excluded.
Simultaneously, the procedure for determining the financial result when securities are withdrawn has been changed (Article 280), in particular the rules for determining the amount of expenditures. The purchase price of a security denominated in a foreign currency (including the cost of its purchase) is to be determined by the exchange rate established by the RF Central Bank as of the moment of this security being taken on discount. Previously, the value of property was to be determined by the official exchange rate estab-
lished by the RF Central Bank as of the date of the ownership right being transferred as a result of purchase, and (or) as of the last day of a reporting (or tax) period (the date of reevaluation).
For those taxpayers that have reevaluated their securities, a simplified procedure for recalculating their tax liabilities is established. Organizations have the right to decrease (or increase) the amount of profit, calculated as the difference between the realization (or withdrawal) price and the purchase price of a security, with taking into account the expenditures associated with its purchase or realization, by the amount of positive (or negative) balance resulting from such a reevaluation in the part corresponding to the securities that have been realized. When securities are realized at a loss, the amount of which is determined as the difference between the realization price and the purchase price, with taking into account the expenditures associated with its purchase or realization, an organization has the right to decrease (or increase) the amount of the tax base of the profits tax by the amount of positive (or negative) balance resulting from such a reevaluation in the part corresponding to the securities that have been realized.
Also, the definition of "national legislation" is presented, to be applied in accordance with Item 3 of Article 280 of the RF TC when determining the criteria for recognizing a security being circulated on the organized market. National legislation is understood as legislation of the state on the territory of which the circulation of the securities is taking place (the effectuation of civil-legal transactions entailing the transfer of the ownership right to securities, including outside of the organized securities market).
The Law contains a large number of norms regulating the legal relations that have arisen from 1 January 2005.
Out of the list of non-realization incomes received from shared partnership in other organizations, the income allocated to the payment for additional shares to be placed among the organization's shareholders (or participants) (Item 1 of Article 250).
Articles 251 and 252 of the RF TC are augmented by new provisions regulating the actions of taxpayers when property is being transferred. In the event of reorganization of a juridical person, the value of property, of property and non-property rights with money value, and (or) of the obligations received (or transferred) in the legal succession procedure during reorganization of juridical persons, which have been purchased (or created) by the companies being reorganized prior to the date on which the reorganization has been completed, are not to be taken into account when determining the tax base (Item 3 of Article 251). It has been established that for purposes of applying the Chapter "Profits Tax", the expenditures of newly created or reorganized companies are to be recognized as the value (or residual value) of property, of property and non-property rights with money value, and (or) of the obligations received (or transferred) in the legal succession procedure during reorganization of juridical persons, which have been purchased (or created) by the companies being reorganized prior to the date on which the reorganization has been completed. The value of property and of property rights with money value is to be determined on the basis of the tax accounting data and documents of the transferring party as of the date on which the ownership right to the aforesaid property and property rights are being transferred.
From January 2005, targeted funding means are to include property, in particular in the form of monies received in order to create the Russian Fund for Technological Development, as well as other sectoral and intersectoral funds designed to finance research and development and registered in the procedure envisaged by Federal Law No. 127-FZ, of 23 August 1996, "On science and on government policy in the sphere of science and technol-
ogy" (Subitem 14 of Item 1 of Article 251 of the RF TC). Previously, a similar norm was applied only to not-for-profit organizations.
Article 259 has been augmented by the provision concerning the right of an organization, which is receiving previously used fixed assets as a contribution to its charter (or joint stock) capital, or in the legal succession procedure during reorganization of juridical persons, to determine the period of the aforesaid fixed assets' useful life as the period equal to their useful life as determined by their previous owner, diminished by the number of years (or months) during which the previous owner has been exploiting this property.
Organizations now have the right to record, as part of their other expenditures, the cost of services provided by the extradepartmental security agencies under the law-enforcement agencies of the Russian Federation, as established by legislation of the Russian Federation (Subitem 6 of Item 1 of Article 264 of the RF TC). In order to avoid different interpretations, Subitem 48 of Item 1 of Article 264 RF TC has been amended to the effect that the expenditures relating to the upkeep of the premises of public catering enterprises are to be to recorded as part of other expenditures only in the event they have not been recorded as part of the expenditures associated with the use of servicing facilities.
Article 265 of the RF TC has been augmented by some new provisions. Non-realization expenditures are now to include the expenditures in the form of interest paid as a result of the arrears of tax and levies having been restructured, in accordance with the procedure established by the RF Government. Taxpayers will also be able to record, as their justified expenditures, the costs of their activity which is not directly related to production and (or) realization, the expenditures in the form of a bonus (or discount), paid (or granted) by the seller to the buyer as a result of certain terms of a contract having been fulfilled, in particular those relating to the volume of purchase, as well as expenditures in the form of targeted deductions from lotteries in the amount and in the procedure envisaged in legislation of the Russian Federation.
Beginning from the year 2005, any indebtedness to a taxpayer that has arisen due to sales of commodities, or performance of work, or rendering of services, will be recognized as dubious debt in the event when this indebtedness has not been redeemed within the timelines established by a contract, and is not secured by a pledge, surety, or bank guarantee (Item 1 of Article 266). Previously, as dubious debt any type of indebtedness was recognized, which was not secured by a pledge, surety, or bank guarantee.
A different subdivision of expenditures into direct and indirect ones has been envisaged in the new version of Article 318 of the RF TC. The Article is augmented by a norm that allows taxpayers to determine on their own in their accounting policy for purposes of taxation the list of direct expenditures associated with production of commodities (or performance of work, or rendering of services). The list of costs that were previously placed in the category of direct expenditures is now recognized only as a recommendatory list. Additionally, as part of costs that can be classified as direct expenditures, there have been specified the costs of mandatory pension insurance contributions (the financing of both the insured and the funded components of labor pension), charged on salaries.
Taxpayers engaged in production activity may on their own determine the procedure for distributing their direct expenditures on work in progress (WIP) and the product completed in a current month (or work performed, or services rendered), with due regard to the actual costs corresponding to the actual product (or work performed, or services rendered), having consolidated this principle in their accounting policy for purposes of taxation.
The rules for recognizing non-realization expenditures as such have also been made clearer. It has been specified that non-realization expenditures are to be included in the 472
expenditures of a current tax period in the same procedure as established for indirect expenditures (Item 2 of Article 318 of the RF TC). It is determined that taxpayers rendering services have the right to diminish, by the full amount of their direct expenditures executed within a reporting (or tax) period, their income from production and realization within a given reporting (or tax) period, without distributing it to their residual work in progress (Item 2 of Article 318 of the RF TC).
Besides, the Law under consideration contains a number of norms, to come into force from January 2006.
A taxpayer's incomes will be determined not only on the basis of source documents and tax accounting documents (Item 1 of Article 248 RF TC), but also other documents confirming the taxpayer's received earnings.
In Article 252 of the RF TC, documented expenditures are understood as costs confirmed by documents formalized in accordance with legislation of the Russian Federation. As stipulated by the introduced changes, documented expenditures are now to be understood also as costs confirmed by documents formalized in accordance with the traditions of business turnover applied in the foreign country on whose territory the aforesaid expenditures have been executed, and (or) documents that confirm the executed expenditures indirectly, including by a customs declaration, an order concerning a business trip, or a report on the work performed under a contract.
From the year 2006, the norms regulating the procedure for recording the relations between lessors and lessees, as well as the actual costs of a leaseholder that have made certain improvements to the leased property, are also to come into force.
It has been established that, when determining the tax base, expenditures in the form of capital investments implemented as unalienable improvements of the leased property made by a leaseholder are not to be taken into account (Subitem 32 of Item 1 of Article 251). With due regard to Article 623 of the RF TC, unalienable improvements can be made with a lessor's consent, as well as without such a consent. The new provision in the Code is of importance, primarily, to a lessor of property who has not given consent to improvements to be made, because finally it is to the lessor that the property will be transferred after the termination of the lease contract, without the obligation to redeem the expenditures.
In the new version of the RF TC, one more object for depreciation has been envisaged: capital investments in leased fixed objects, implemented in the form of inalienable improvements.
Article 256 has been augmented by a provision according to which capital investments in leased fixed objects, implemented in the form of inalienable improvements made by the lessee with the lessor's consent, are also to be recognized as depreciable property.
Capital investments, whose value is redeemed by the lessor to the lessee, are to be depreciated by the lessor in the procedure established by Chapter 25 of the RF TC; capital investments made by the lessee with the lessor's consent, whose value is not redeemed by the lessor, are to be depreciated by the lessee during the period of the lease agreement, based on the amounts of depreciation calculated on the basis of their useful life, which for leased fixed assets is to be determined in accordance with the Classification of Fixed Assets approved by the RF Government (Article 258).
At the same time, by Article 259 of the RF TC, the highest acceptable amount of expenditures to be made in the form of depreciation deductions is established. A taxpayer has the right to include in the amount of expenditures, made within a reporting (or tax) period, the costs of capital investments equal to no more than 10% of the fixed assets' initial value (with the exception of fixed assets received on a gratis basis), and (or) the costs of
construction being completed, or additional equipment, or modernization, or technical renovation, or partial liquidation of fixed assets, the amount of which is to be determined in accordance with Article 257 of the existing Tax Code.
The depreciation deductions on property in the form of capital investments in leased fixed assets, which are depreciable in accordance with the aforesaid Chapter, are to be started by the lessor from the 1st day of the month following the month during which this property was placed into operation, but not before the month during which the lessor effectuated the redemption to the lessee of the cost of the aforementioned capital investments, and by the lessee - from the 1st day of the month following the month during which the property was placed into operation.
In Article 254 of the RF TC, a new type of costs is specified - the value of production stock, instead of the value of material assets: the value of production stock in the form of production surplus revealed during an inventory, and (or) of property received as a result of dismantling or disassembly of fixed assets being put out of operation, is to be determined as the amount of tax imposed on the income envisaged in Items 13 and 20 of Part 2 of Article 250 of the Tax Code.
The list of material expenditures has been supplemented by technological losses during production and (or) transportation. Technological losses are recognized as losses that have occurred during the production or transportation of goods (or work, or services) as a result of the specific technological features of the production cycle and the transportation process, as well as those arising from the physical and chemical properties of the raw materials being used.
Some alterations have been introduced in Article 262, which deals with the costs of scientific research and development (R&D). A taxpayer's expenditures on scientific research and (or) development are recognized, for purposes of taxation, after the completion of the aforesaid research or development (or completion of certain stages in the work) and the signing, by the parties involved, of a record of acceptance. From January 2006, the period during which taxpayer's expenditures on R&D can be taken into account for purposes of taxation has been shortened. Previously, this could be done within 3 years from the 1st day of the month following the month during which such work (or certain stages in the work) had been completed. Now, the expenditures can be written off within 2 years.
In addition, it has been established that a taxpayer's expenditures on R&D executed for purposes of creating new technologies or improving the ones already being applied, or creating new types of raw materials or other materials, that have not yielded any positive results, are to be included in other expenditures in the form of an even distribution over the period of three years, in the amount equal to the actual expenditures, in the procedure envisaged in Item 2 of Article 262 of the RF TC. In the Article's previous version, the upper limit of 70% of the actual expenditures was established.
The list of targeted expenditures associated with the social protection of disabled employees, to which organizations - employers of disabled persons may allocate their profit, on condition they comply with the requirements stipulated in Subitem 38 of Item 1 of Article 264 of the RF TC, has been expanded. Besides, new Article 267.1 has been introduced, which determines the procedure for forming and using, by an organization, its reserves against future expenditures, to be executed for purposes of social protection of disabled employees.
For those organizations that attract credits (or loaned funds) for their activity, the alterations introduced in Article 269 of the RF TC are of significance. For purposes of calculating the profits tax, the interest on credits and loans can be accepted as part of produc-474
tion costs. In the existing version, the upper limit of the amount of interest to be recognized as costs is recognized as being equal to the rate of refinancing established by the RF Central Bank, multiplied by 1.1 in the event of a rouble-denominated obligation, and equal to 15 % - in the event of an obligation denominated in a foreign currency. Prior to the introduction of these amendments, it was unclear as to which rate of refinancing was to be applied: that established as of the date on which the credit (or loan) was received, or that established as of the date on which the interest was charged. In accordance with the recent amendment, the RF CB's rate of refinancing is to be understood as follows: if a debt obligation does not contain a clause to the effect that the interest rate is to be changed during the whole period of the debt obligation, the rate of refinancing of the RF Central Bank established as of the date when the monies were attracted is applied; and in other cases -the rate of refinancing of the RF Central Bank established as of the date of recognizing the expenditures executed in the form of interest payment.
Besides, it should be noted that in 2007 the upper limit to the amount of loss to be carried forward, established by Article 283 of the RF TC, is to be abolished. The norm, in accordance with which the total amount of the carried-forward loss in any reporting (or tax) period cannot be in excess of 30 % of the tax base calculated in accordance with Article 274 of the RF TC, will become invalid in 2007. In this connection, it has been established that in 2006 the total amount of a carried-forward loss cannot exceed 50 % of the tax base.
Value Added Tax (VAT)
Following the amendments concerning the profits tax, some amendments to Chapter 21 "Value added tax" were also introduced. Here we are going to discuss those of them that are most important.
Presently, the payers of VAT are applying two methods for calculating the tax: either as of the moment of a commodity's delivery, or at the moment of the payment for it being transferred. Recently adopted Federal Law No. 119-FZ, of 22 July 2005, "On making amendments to Chapter 21 of Part Two of the Tax Code of the Russian Federation and recognizing as null and void some provisions in the legislative acts (or provisions of legislative acts) of the Russian Federation on taxes and levies" has established, from 1 January 2006, a single procedure for determining the appropriate moment for calculating the tax base for all taxpayers (Article 167). It is to be determined as the earliest of the following dates:
1) the day of delivery (or transfer) of commodities (or work, or services), or of ownership rights;
2) the day of payment (or payment in part) toward future deliveries or transfer of ownership rights.
When ownership rights are being transferred, the appropriate moment for calculating the tax base is to be determined in accordance with Article 155 "Specificities of determining the tax base when transferring ownership rights".
The moment for calculating the tax base in the event of construction and assembly work being performed for a taxpayer's own use is determined as the last day in the month at the end of each tax period.
Thus, all taxpayers will have to calculate VAT immediately after the delivery of commodities (or work, or services), or before that date if the payment is executed prior to delivery. As a result, the buyers will be entitled to VAT deduction irrespective of the fact of
payment, because any mention of the tax payment has been eliminated in Item 2 of Article 171 of the RF TC.
Due to the establishment of a new procedure, some transition provisions have been envisaged. All payers of VAT must conduct an inventory of their receivables and payables as of 31 December 2005 inclusive. Based on the inventory's results, the following items are to be determined: receivables against realized commodities (or work, or services), the payment for which has not been received; property rights, the operations pertaining to the realization (or transfer) of which are recognized as objects for taxation; payables against commodities (or work, or services) and property rights, the payment for which has not been transferred, but which have been entered in accounting records prior to 1 January 2006, that incorporate the amounts of VAT presented for payment by the sellers of the aforesaid commodities (or work, or services) and property rights and subject to tax deduction. The subsequent actions will depend upon the specific method chosen for determining the amount of proceeds for purposes of calculating VAT.
Those payers of VAT, that prior to 2006 determined the tax base as of the day of payment, are to include in the tax base the monies received prior to 1 January 2008 against their receivables and payables.
For this purpose, the payment for commodities (or work, or services) is recognized as the termination of a counter obligation of the buyer of the aforesaid commodities (or work, or services) to the taxpayer, directly associated with the delivery (or transfer) or these commodities (or with the performance of work, or the rendering of services), except in the instances of the counter-obligation being terminated by the buyer - promisor by drawing its own promissory note. The payment for commodities (or work, or services), in particular, is recognized as follows: as monies received at the bank accounts of the taxpayer or the taxpayer's commissioner, attorney or agent, or monies paid to the cash office of the taxpayer (or commissioner, attorney or agent); the termination of an obligation by a set-off; the transfer, by the taxpayer, of the right of claim to a third party on the basis of a contract or as established by the law. In the event of the counter obligation of the buyer of commodities (or work, or services) to pay for these commodities (or work, or services), being terminated by the transfer, by the buyer - promisor, of its own promissory note, the payment for the aforesaid commodities (or work, or services) is recognized as the settlement by the buyer - promisor (or some other person) of the aforesaid note, or the transfer, by the taxpayer's endorsement, of the aforesaid note to a third party.
In the event of the buyer's failure to fulfill the counter obligation prior to the expiry of the period of limitation of action in respect to the claims pertaining to the fulfillment of the counter obligation to deliver commodities (or perform work, or render services), the date of payment for the commodities (or work, or services) is recognized as the earliest of the following dates: the day on which the aforesaid period of limitation of action expires, or the day on which the receivables are written off.
If the receivables are not settled before 1 January 2008, their amount is to be included by the taxpayer in the tax base in the first tax period of the year 2008. If the amounts of tax as presented to a taxpayer by the sellers of commodities (or work, or services), or of property rights, which have been entered in the taxpayer's accounting records before 1 January 2006, are not paid by the taxpayer before 1 January 2008, the deduction of the aforesaid amounts is to be made in the first tax period of the year 2008.
The payers of VAT, which until 2006 are to determine the tax base as of the day of delivery, will be deducting the tax that has not been paid at the moment of purchasing the commodities (or work, or services), or property rights, which have been entered in their
accounting records before 1 January 2006, in the first half-year of 2006 in equally spread amounts.
Thus, not only the method of paying VAT, but also the mechanism of tax deduction has been changed.
If fixed assets are immovables (purchased, or constructed by a contracting company, or constructed by the organization on its own, in the course of construction and assembly work for its own use), the process of redemption of the previously deducted tax amounts has become more complicated. By the new wording of Item 6 of Article 171 of the RF TC, the following procedure has been established. The tax amounts presented to the taxpayer during the capital construction of immovable objects (or fixed assets) by contractors, or during the purchase of immovable property (with the exception of aircraft, seagoing vessels and inland ships, or outer space objects), and those calculated by the taxpayer during the construction and assembly work performed for the taxpayer's own use, and accepted for tax deduction in the procedure envisaged in Chapter 21 of the RF TC, are to be restored in the event of the aforesaid immovable objects (or fixed assets) being subsequently used for purposes of executing the operations specified in Item 2 of Article 170, with the exception of those fixed assets which have been fully depreciated, or of the instances when from the moment of their having been put into operation by a given taxpayer no less than 15 years have passed.
In this case, the taxpayer is obliged, after the end of each calendar year, starting from the year during which the property began to be depreciated, in the tax declaration submitted to the tax agencies at the place of the taxpayer's registration, in respect to the last tax period of each of these ten calendar years, to reflect the restored tax amount. The amount of tax to be restored and paid to the budget is calculated as one-tenth of the deducted amount, as a corresponding percentage. This percentage is determined on the basis of the value of tax-exempted commodities delivered (or work performed, or services rendered), or of property rights transferred, all supplied or transferred within one calendar year. The amount of tax to be restored is not included in the value of this property, being instead recorded as part of other expenditures in accordance with Article 264 of the RF TC.
Some changes have also been made to the list of property rights, the transfer of which is subject to VAT. These also include the transfer, by participants in construction partnerships, of their rights to housing buildings or dwelling premises, to shares in such buildings or premises, or garages or parking lots. The tax base in this case is determined as the difference between the transfer value of the rights and the cost of their acquisition. The rights associated with the right to conclude a contract (or option), and the lease rights are also mentioned. The tax base for these rights is determined in the general procedure in accordance with Article 154 of the RF TC, that is, when the amount of VAT is calculated, the price specified in the contract is applied. It should be noted that a person, having acquired one of the property rights, is entitled to a tax deduction, as established by the amendments made to Articles 171 and 172 of the RF TC.
The list of tax-exempted operations (Article 149) has been augmented by some more types of operations, such as: the services associated with the servicing of bank cards; the conducting of lotteries (by decisions of an authorized executive body), including the services relating to the sales of lottery tickets; the conducting of notarial actions by privately practicing notaries; the sale of scrap and ferrous and non- ferrous metal waste; and the transfer of commodities, the cost of one unit of which is no more than 100 roubles, for purposes of advertising.
Chapter 21 of the RF TC was augmented by Article 162.1, which deals with reorganization issues, that is, the ways for determining the tax base and the procedure for VAT de-
duction. Thus, a legal successor has the right to accept a certain amount of VAT for deduction only when the fact of payment has been confirmed either by the organization being reorganized, or by the legal successor itself. It should be noted that the changes in the reorganization procedure have been introduced from 1 January 2005.
By Item 2 of Article 163 of the RF TC, for those taxpayers whose tax period has been established as one quarter, the amount of proceeds of realization of commodities (or work, or services), without tax, has been increased to 2 million roubles.
Chapter 21 has also been augmented by Article 174.1, which regulated the specific features of the calculation and payment to the budget of the tax imposed on operations effectuated under a simple partnership agreement (or an agreement on a joint activity), or a contact on entrusted management of property on the RF's territory. Tax deduction is granted only to a participant in the partnership, or to the administrator, if the invoices drawn up by the sellers to these persons are available.
From January 2007, Article 176 of the RF TC, which determines the procedure for VAT refunding, will be in effect in a new version. The period of refund has not changed, being three months as before, whereas the refunding procedure has been somewhat adjusted.
A refund is to be effectuated no later than within three months, starting from the day of a tax declaration being submitted by the taxpayer. Within this period, a tax agency in two months verifies the justification for the amounts of tax to be refunded. After the completion of the verification, the tax agency within seven days makes the decision to the effect that the refund of the amount being claimed be granted, in the form of a set-off or a repayment, or to be refused (in part or in full).
In the event a tax agency has decided to refuse the refund (in part or in full), it will be obliged to issue to the taxpayer a substantiated statement no later than 10 days after the day on which the aforesaid decision has been made.
If during the established period the tax agency has not made the decision concerning a refusal of refund, and (or) it has not issued the aforesaid statement to the taxpayer, it will be obliged to make the decision to the effect that the amount, in respect to which no decision concerning a refusal of refund has been made, be refunded, and to notify, within 10 days, the taxpayer concerning the decision that has been made.
If a taxpayer has VAT arrears and forfeits, or arrears of other taxes and forfeits, as well as arrears of tax sanctions imposed by a court and due to the same budget from which the refund is due, these are subject to set-off as a priority, by decision of a tax agency.
Tax agency are to effectuate the set-off on their own, and to notify the taxpayer accordingly within 10 days.
If a tax agency has made the decision concerning a refund, in the presence of tax arrears, accumulated in the period between the date of the declaration being submitted and the date on which the amounts claimed are refunded, and not in excess of the amount to be refunded by decision of a tax agency, no forfeit is charged on the amount of arrears.
When a taxpayer has no tax arrears or forfeits, or arrears and forfeits relating to other taxes and levies, or arrears of imposed tax sanctions, which are due to the same budget from which the refund is due, the amounts to be refunded are carried forward toward current payments of this tax and (or) other taxes and levies due to the same budget, as well as the taxes imposed in relation to the transfer of commodities across the Russian Federation's border, and those imposed in relation to the realization of work or services directly associated with the production and (or) realization of such commodities, by agreement with the customs agencies; or, the amounts to be refunded are to be transferred to the taxpayer at the latter's request. 478
In the event a tax agency has made the decision that certain amounts of tax are to be refunded from a given budget, this decision is to be sent, no later than on the next day, to an appropriate body of the RF Federal Treasury.
These amounts are to be refunded by the RF Federal Treasury within seven days after the receipt of the tax agency's decision. In the event such a decision has not been received by an appropriate body of the RF Federal Treasury within seven days from the day of its being sent by the tax agency, the day on which this decision is received will be recognized as the 8th day from the day of its being sent by the tax agency.
When the timelines established by this Item are not complied with, interest is to be charged on the amount to be refunded to a taxpayer, in accordance with the rate of refinancing of the RF CB.
Excises
Here we are going to discuss the most important changes among those introduced by Federal Law No. 107-FZ of 21 July 2005 to Chapter 22 "Excises" of Part Two of the RF TC, which are to come into force from 1 January 2006.
First of all, there should be noted the increased rates of the excises on most of the excisable commodities. Traditionally, once more the rates applied to ethyl alcohol and alcohol products, beer, wines (with the exception of natural wines, champaign, and prickling wines), tobacco products, and passenger cars with engine power of over 67.5 kW and over 112,5 kW, as well as motorcycles, were raised.
The greatest increase in the excise rates was seen in respect to cigarettes. The hard components of the combined rates went up by approximately 20 %, and the lower margin of disbursing prices - by 5 % (from 20 % to 25 %).
Besides, the rate of excise on distilled gasoline was raised dramatically - from 0 roubles to 2657 roubles per 1 ton. Now the rate of excise on distilled gasoline corresponds to the rate established in respect to gasoline with octane values of up to 80.
The rates of excises on natural wines, including champaign, prickling, aerated, and sparkling wines; beer with normative (or standard) content of ethyl alcohol of up to 0.5 % inclusive; passenger cars (with engine power of under 67.5 kW (or 90 hp); and petroleum products, with the exception of distilled gasoline, have not been changed.
From the year 2006, the regime of an excise warehouse in respect to alcohol products is to be abolished, and the excise warehouses of wholesale organizations are to be excluded from the number of the payers of excises. The producers of alcohol products are to pay full amounts of excises to the budget, no matter to whom these products are to be realized.
At the same time, some transition provisions concerning the payment of excises have been established from the year 2006. Those wholesale organizations that established their excise warehouses prior to 1 January 2006 and have been realizing since 1 January 2006 the alcohol products with the content of ethyl alcohol of over 9%, received before 1 January 2006, and (or) delivered to their address before the aforesaid date, are to be recognized as payers of excises until they have sold out the whole volume of their alcohol products.
Three additional types of registration certificates have been introduced for persons engaged in transactions with excisable commodities. Alongside four types of certificates for petroleum products - their production, retail, wholesale and wholesale-retail trade -from 1 January 2006 tax agencies are authorized to issue certificates for the procession of distilled gasoline. Such certificates will be issued to those organizations and individual en-
trepreneurs which produce petrochemical products and use distilled gasoline as raw material.
Besides, depending on the type of activity, registration certificates are to be issued to organizations engaged in transactions with denatured alcohol. Thus, those organizations that produce denatured ethyl alcohol will receive certificates for the production of denatured ethyl alcohol, and those organizations that use it for producing non-alcohol products - certificates for the production of non-alcohol products.
From 1 January 2006, for those taxpayers that hold only the certificate for wholesale realization of petroleum products, two timelines for the payment of excises have been established: those on petroleum products, with the exception of distilled gasoline, and separately for distilled gasoline. In the first instance, the excise is to be paid within the usual timeline - no later than on the 25th day of the second month following the completed tax period, and in respect to distilled gasoline - one month afterwards, no later than on the 25th day of the third month following the completed tax period. The timeline for the submitting of tax declarations for those taxpayers that hold only the certificate for wholesale realization of petroleum products has remained as before - no later than on the 25th day of the second month following the completed tax period.
Thus, in 2006 the excises on petroleum products, with the exception of distilled gasoline, are to be paid by taxpayers in the same manner as before - simultaneously with the submitting of their tax declaration, and the excise on distilled gasoline - one month later.
Also, the timeline for the payment of the excise by taxpayers holding only the certificate for the procession of distilled gasoline has been established: they are to pay the excises no later than on the 25th day of the third month following the completed tax period. The timeline has also been established for the payment of the excise by organizations holding the certificate for the production of non-alcohol products, when they receive denatured ethyl alcohol (or enter it in their books), - also no later than on the 25th day of the third month following the completed tax period. In other words, in such cases the timeline for the payment of excises lags two months behind that established for the submitting of declaration (or by two tax periods).
Besides, the list of alcohol products that have been taken off the list of excisable commodities has been augmented by perfumery and cosmetic products in aerosol-type metal packaging. From 1 January 2006, the perfumery and cosmetic products (solutions, emulsions, suspensions and other liquid products) with ethyl alcohol content over 9 % are to be exempted from excises, which is to be reflected in the lowered prices of such commodities.
Transport Tax
Besides, we are going to discuss the most important ones among the changes introduced to Chapter 28 "Transport tax" by Federal Laws No. 131-FZ, of 20 October 2005, "On making amendments to Chapter 28 of Part Two of the Tax Code of the Russian Federation", and No. 62-FZ, of 18 June 2005, "On making amendments to Article 363 of Part Two of the Tax Code of the Russian Federation", which are to come into force from 1 January 2006.
In accordance with the amendments introduced by Federal Law No. 131-FZ, of 20 October 2005, the reporting periods for taxpayers - organizations are established as the first, second and third quarters; the legislative (or representative) bodies of subjects of the Russian Federation have the right not to establish any reporting periods.
Simultaneously with the introduction of reporting periods, the procedure for calculating the tax amount has also been changed. Beginning from next year, by the results of reporting periods, taxpayers will be obliged to make advance tax payments. The amounts of the advance tax payments are to be calculated by organizations independently, as equal to one-fourth of the appropriate tax base multiplied by the tax rate, and are to be taken into account when settling the results of each tax period.
In the event of the registration (or taking off the register) of a transport vehicle during a reporting period, the amount of an advance payment is to be calculated in the same manner as the tax amount is presently calculated, that is, by applying a special coefficient. In other words, the amount of an advance tax payment will depend on the number of whole months during which a given transport vehicle has been registered as belonging to a given taxpayer.
The advance payments are to be paid similarly to the tax payments, at the location of transport vehicles in the same procedure and within the same timelines as those established by subjects of the Russian Federation. In this connection, the legislative (or representative) bodies of RF subjects, as before, will have the right to exempt certain categories of taxpayers from calculating and paying advance payments against this tax within a given tax period.
For the legislative (or representative) bodies of RF subjects it has been established that the timeline for the payment of the transport tax for taxpayers - organizations cannot be established before 1 February of the year following a completed tax period.
Among the most noticeable amendments, we can mention the establishing of final timelines for taxpayers - organizations for the submitting of their tax declarations and of tax settlements in respect to advance tax payments.
These calculations are to be submitted after the expiry of each reporting period to the tax agency at the location of transport vehiclesB. The form to be submitted is the same as the tax declaration form established for the transport tax; it will be approved by the RF Ministry of Finance. Thus, from 1 January 2006 the legislative (or representative) bodies of RF subjects will no more have the right to establish the reporting forms for the transport tax.
The ultimate timelines for the reporting to be submitted by organizations are as follows. A tax declaration is to be submitted no later than 1 February of the year following a completed tax period, and the tax settlements in respect to advance payments - during a tax period and no later than on the last day of the month following a completed reporting period.
By Federal Law No. 62-FZ of 18 June 2005, from 1 January 2006 the provision that determines, as the ultimate deadline for tax notifications to be delivered to physical persons, the day of 1 June of a current tax period, is to be excluded from Item 3 of Article 363 of the RF TC.
Thus, from the next tax period onward, tax agencies will have more time at their disposal for calculating the transport tax. When these amendments were introduced, it was taken into consideration that by Article 52 of the RF TC it was determined that a tax notification was to be sent to a taxpayer no later than 30 days before the timeline established for the transfer of a payment. And in accordance with Item 1 of Article 363 of the RF TC, the timeline for the payment of the transport tax is to be established by a RF subject. Thus, from the year 2006 the timeline for tax notifications to be sent to physical persons will be determined by Article 52 of the RF TC, depending on the specific timeline for the payment of the tax established by a given subject of the Russian Federation.
By Letter of the RF FTS of 24 January 2005 No. MM-6-21/44, the issues relating to the payment of the transport tax in the event of transport vehicles being utilized have also been clarified. In the event of utilization (or destruction) of a transport vehicle, that is, its physical elimination as an object, no object for imposing the transport tax is present any more. Therefore, in the event of a transport vehicle having been utilized (or destroyed), as the justification for tax agencies' imposing no transport tax, the document will serve, issued by the organization that has actually performed the aforesaid actions, that determines the fact and date of utilizing (or destroying) a transport vehicle.
Simplified taxation system (STS)
In this sections, the changes introduced to Chapter 26.2 of the RF TC "Simplified taxation system" by Federal Law No. 101-FZ, of 21 July 2005, "On making amendments to Chapters 26.2 and 26.3 of Part Two of the Tax Code of the Russian Federation and some legislative acts of the Russian Federation on taxes and levies, as well as recognizing as null and void some provisions of the legislative acts of the Russian Federation" will be discussed.
From the year 2006, the maximum income from realization that will make it possible to switchover to this tax regime, is to be increased from 11 to 15 million roubles (with the exception of some organization, to the list of which the advocates that have established advocate's offices or other forms of advocacy agencies, budget-funded institutions, subsidiaries and representative offices of foreign companies, are added). The restriction on the direct participation of other organizations (over 25%) is no more extended to not-forprofit organizations and the organizations of consumer cooperatives.
The marginal amount of income received during a reporting (or tax) period is increased to 20 million roubles, in excess of which the right to apply the simplified regime ceases. At the same time, this amount is to be indexed by the deflator coefficient, the value of which is to be established on an annual basis for each following calendar year2 (Item 4 of Article 346.13 of the RF TC).
Also, the list of fixed assets and intangibles, the exceeding of the residual value of which in the amount of 100 million roubles will prevent organizations from applying the simplified system, has been made more precise.
Somewhat simpler has also become the procedure for switching over to the simplified taxation system (STS). An organization can make such a decision within 5 days from the moment of its registration at a tax agency. The former payers of the single tax on presumptive income (STPI) have the right to declare their desire to apply STS beginning from the month in which the duty to pay the single tax has ceased in accordance with legislations of RF subjects (Item 2 of Article 346.13 of the RF TC).
Prior to the introduction of these amendments, the choice of the object of taxation was to be made independently by a taxpayer. In this connection, it was established that the object of taxation could not be changed throughout the whole period of the simplified taxation system being applied. Now, it has become permissible to change the object of taxation during three years of the simplified taxation system being applied.
Article 346.14, which deals with objects of taxation, has also been augmented by a new norm. The participants in the agreement on a simple partnership (or an agreement on joint activity, or of trust management of property) now no more have the right to choose the
2 The coefficient established for the year 2006 is equal to 1.132, in accordance with Order of the Ministry of Economic Development and Trade of 3 November 2005 No. 284 "On establishing the deflator coefficient, for purposes of applying Article 26.2 of the Tax Code of the Russian Federation "Simplified System of Taxation", for the year 2006".
object of taxation, the object - incomes less expenditures - being now consolidated to them.
For the taxpayers who decrease their incomes by the amount of their expenditures, the list of expenditure items acceptable for deduction has been augmented. The procedure for recording certain operations has been made more precise. A single procedure for writing off fixed assets and intangibles has been established. From 1 January 2006, taxpayers will have the right to write off, in accordance with the same procedure, the expenditures on the creation (or manufacture) of fixed assets and intangibles by their own means. Alongside auditing services, entrepreneurs now have the right to decrease the amount of their incomes by the costs of accounting and legal services.
The following types of expenditures have been added to such costs:
• the costs of commissions, agent's remunerations and remunerations paid under contracts of agency;
• the costs of services relating to guarantee-based maintenance and repair;
• the costs of confirming the conformance of products and other objects, the processes of production, exploitation, storage, transportation, realization and utilization, the performance of work or rendering of services, to the requirements of technical regulations, standard provisions or terms of contracts;
• the costs of mandatory assessment, for purposes of control, of the correctness of tax payments in the event of a dispute concerning the calculation of the tax base;
• the costs of providing the information concerning registered rights;
• the costs of the services provided by specialized organizations that prepare the documents for cadastral and technical registration (or an inventory) of immovable objects (including documents that establish the rights to land plots, and land surveying documents);
• the costs of the services provided by specialized organizations that conduct expert estimations and surveying, or issue resolutions and prepare other documents necessary for obtaining a license (or permit) to a specific type of activity;
• the costs of judicial proceeding and arbitration charges;
• the costs of periodical (or current) payments for the use of the rights to the results of intellectual activity and to means of individualization (in particular, the rights arising from patents to inventions, industrial designs and other types of intellectual property);
• the costs of training and retraining of the personnel employed by a taxpayer on a contractual basis;
• the costs represented by a negative difference in the exchange rate arising as a result of re-estimation of property in the form of valuables denominated in foreign currencies, and claims (or liabilities) denominated in foreign currencies, including those at foreign-currency bank accounts, conducted in connection with the changes in the official exchange rates of foreign currencies in respect to the Russian rouble, introduced by the bank of Russia.
Besides, the rules for switching over from the simplified taxation system to the general regime (or other regimes), and vice versa, as regulated by Article 346.25, were made more specific; some clarification was offered concerning the procedures for recording the settlement of arrears against commodities previously delivered, or work performed, or services rendered (as part of incomes), or purchased commodities, or work, or services (as part of expenditures), in the course of a switchover from STS to the profits tax.
Chapter 26.2 of the RF TC "Simplified taxation system" was augmented by new Article 346.25.1, that established the specific features of the simplified taxation system being applied by individual entrepreneurs on the basis of a patent.
The application of STS on the basis of a patent is permitted to individual entrepreneurs who do not make use, in their activity, of employed workers, including under contracts of civil-legal character, and engaged in one of the types of entrepreneurial activity envisaged in the aforesaid Article, e.g., dress-making and dress-mending, as well as the making and mending of other types of garments (knitwear, etc.); shoe-making and shoe-repairing; hairdresser's and cosmetic services; repairs of household appliances, radio and television equipment, and computers; maintenance and repair of motor cars; renovation of apartments; leasing of apartments and garages; hire and sale of video- and audiocassettes, DVDs and CDs; sports and fitness activities and coaching services; undertaker's services. All in all, the list includes 58 types of activity.
The size of an annual potentially permissible income to be received by an individual entrepreneur, as well as the decision as to the introduction of such a system, is to be established by the laws of RF subjects for each of the types of activity in respect to which the application of the simplified taxation system on the basis of a patent is allowed. In this connection, this annual income can be subject to differentiation depending on local specificities and the location of the entrepreneurial activity conducted by individual entrepreneurs on the territory of each RF subjects.
A patent is issued, based on a taxpayer's choice, for one of the following periods, beginning from the first day of a quarter: one quarter, one half-year, nine months, or one year. The application for the issuance of a patent is to be submitted to the tax agency at the location of an individual entrepreneur's registration no later than one month prior to the application, by the individual entrepreneur, of the simplified taxation system on the basis of a patent.
Those individual entrepreneurs who have switched over to the simplified taxation system on the basis of a patent must make the payment of one-third of the patent's value no later than within 25 days after they have started their entrepreneurial activity on the basis of the patent. The payment of the remaining part of the patent's value is to take place no later than within 25 days after the end of the period for which the patent has been obtained.
Besides, by the RF Ministry of Finance's Letter of 25 March 2005, No. 03-03-0204/1/88, some clarification was offered in respect to issues relating to the recording, for purposes of taxation, by the organizations applying the simplified system, of the cost of acquisition of new fixed assets. In accordance with Subitem 1 of Item 1 of Article 346.16 of the RF TC, when determining the object of taxation, the taxpayers applying the simplified system of taxation are to decrease their incomes received by the cost of acquisition of fixed assets.
In other words, the costs are accepted for deduction after an object's entry into records. Capital investments do not belong to the category of fixed assets.
The cost of leased fixed assets is not included in expenditures. In this case, when the tax base for the single tax is determined, the rent payments for the leased fixed assets are taken into account. Therefore those organizations - lessees that apply the simplified taxation system can record the cost of the fixed assets received under lease agreements in respect to the reporting period during which the right of ownership to these fixed assets was transferred.
The System of Taxation in the Form of a Single Tax on Presumptive Income (STPI) Established for Certain Types of Activity
The main changes to the system of taxation in the form of a single tax on presumptive income have been as follows:
1. By Federal Law of 18 June 2005, No. 63-FZ, "On making amendments to Article 346.26 of Part Two of the Tax Code of the Russian Federation", whereby from the year 2006 municipal formations have been granted the right to introduce STPI in respect to public services on a differentiating basis.
When a RF subject introduces the single tax on presumptive income in the sphere of public services, the tax is to be extended simultaneously to all the public services listed in the All-Russian Classifier of Public Services. This procedure makes no allowances to regional specificities and often results in a situation when RF subjects exclude public services from the sphere of STPI application altogether. The changes introduced by Article 346.26 of the RF TC make it possible to establish, at the level of municipal raions, urban districts, and the federal cities - Moscow and St. Petersburg 3, in respect to which services listed in the All-Russian Classifier it will be feasible (or not feasible) to introduce STPI.
2. By Federal Law of 18 June 2005, No. 64-FZ, "On making amendments to Article 346.29 of Part Two of the Tax Code of the Russian Federation", municipal formations have been granted the right, when introducing STPI, to determine the procedure for calculating the basic profitability adjustment coefficient K2.
From the year 2006, the representative bodies of municipal raions and urban districts, and the legislative (representative) bodies of the federal cities - Moscow and St. Petersburg - have been granted the right not only to establish the value of coefficient K2, but also that of calculating this value, which will enable them to fully apply this coefficient for purposes of taking into account all the existing factors that influence the base profitability value of different economic subjects. In this connection, the value of adjustment coefficient K2 will depend on the actual duration of entrepreneurial activity in a given tax period, and will be determined as the ratio of the number of calendar days on which the entrepreneurial activity has actually taken place during a given month to the total number of calendar days in that month.
3. By Federal Law of 21 July 2005, No. 101-FZ, "On making amendments to Chapters 26.2 and 26.3 of Part Two of the Tax Code of the Russian Federation and some legislative acts of the Russian Federation on taxes and levies, as well as on recognizing as null and void some provisions of the legislative acts of the Russian Federation". The main changes have been those that now make it possible to apply this system of taxation to the activities relating to public catering that are being performed not only by those organizations that have in their possession, in respect to each of their objects, public halls whose area is no more than 150 ml, but also by those that have in their possession no halls for servicing their customers.
The notion of retail trade has been further specified, in accordance with which retail trade for purposes of this regime is to be understood as sales of commodities on the basis of a contract of retail purchase and sale.
3 It is based on their decision that from 1 January 2006 the aforesaid tax regime be applied, in accordance with Federal Law No. 95-FZ of 29 July 2004 "On making amendments to Parts One and Two of the Tax Code of the Russian Federation and recognizing as null and void some legislative acts (or provisions of legislative acts) of the Russian Federation on taxes and levies".
It is established that the single tax is not to be applied to the types of entrepreneurial activity envisaged in the Tax Code in the event when these are carried out within the framework of a simple partnership agreement (or an agreement on joint activity).
Besides, by Letter of the RF FTS of 1 February 2005, No. 22-2-14/092, some issues have also been clarified that relate to the application, to some specific types of activity, of the taxation system in the form of a single tax on presumptive income. The circumstance which, in accordance with the RF TC, represents the grounds for the duty to pay the aforesaid tax, is recognized as the performance, by this taxpayer, of certain types of entrepreneurial activity that are subject to a switchover to the system of taxation in the form of a single tax on presumptive income. Those taxpayers that have temporarily suspended such an activity during a given tax period, will accordingly no more be obliged to pay the single tax for those tax periods (or calendar months of a given tax period) during which they were not performing the aforesaid entrepreneurial activity. At the same time, the tax declarations in respect to the single tax on presumptive income for the periods during which they temporarily were not performing such an activity, must be submitted regardless.
The Explanations, by Authorized Agencies, of Certain Issues of Applying Tax Legislation
Taxpayers, in accordance with Articles 21 and 34.2 of the RF TC, have the right to receive, from the RF Ministry of Finance, the financial agencies of RF subjects, and the tax agencies at the place of their registration, written explanations concerning the issues of applying legislation of the Russian Federation on taxes and levies and the normative legal acts adopted is accordance with this legislation, the procedure for calculating and paying taxes and levies, etc.
Under Article 111 of the RF TC, the execution, by a taxpayer or a tax agent, of written explanations concerning the applying of legislation on taxes and levies, issued by an authorized state agency or its officials within the limits of their competence, is to be recognized as the circumstance that eliminates any guilt of the taxpayer in terms of tax violations of the tax laws. Under such circumstances, the aforesaid person is nor responsible for having committed a violation of the tax laws.
In this connection, in addition to the following-up of the novelties introduced to legislative and other normative legal acts, some attention has been paid to the creation of a data base on the written explanations sent to taxpayers in respect to issues of applying tax legislation. Taxation is largely determined by the specific content and rules for formalizing civil-legal transactions; it is also influenced by the norms of specific branch legislation regulating the issues of conducting economic operations in certain branches or spheres of activity. Therefore, written explanations of authorized agencies concerning specific issues of applying tax legislationa represent a necessary condition for ensuring a flexible linking of tax legislation to the changing conditions under which economic subjects are carrying out their activities. So, the most important explanations among those issued by authorized agencies on issues of taxation have been incorporated in our overview, alongside other legislative acts.
The Possibility for Banks to Make Changes to the Payment Documents of Taxpayers
By Letter of the RF FTS of 14 January 2005, No. ShS-6-10/8, the procedure for executing, by credit institutions, of the settlement documents of the clients of banks relating to the transfer of taxes, levies and other payments to the budget system of the Russian Federation, formalized prior to 1 January 2005 and kept in the card-index entitled "Settlement documents that have not be settled within the established term". In accordance with Letter
of the RF Central Bank of the Russian Federation of 31 December 2004, No. 08-17/5677, the aforesaid settlement documents are to be executed by credit institutions in accordance with the norms stipulated in the Provision of the Bank of Russia of 3 October 2002, No 2-P "On clearing settlements in the Russian Federation", effective as of the moment of receipt of the settlement documents prepared directly by the payers, and are not to be redrafted by the credit institutions.
The issue as to the possibility of changes to be made by banks to the payment documents of taxpayers has become very acute for the following reasons. For one thing, the RF TC contains a direct norm (Art. 45) to the effect that a tax is considered to be paid as of the date of a payment document being submitted to a bank, provided that there are sufficient resources available on the taxpayer's account to cover the payment. At the same time, according to the explanation of the RF Constitutional Court (RF CC) No. 138-0 of 25 April 2001, this norm is to be applied only to honest taxpayers. Since the issue as to the honesty of any taxpayer in each specific case can be investigated only by a court of justice, the delays in payments occurring through the fault of banks quite often result in untimely tax settlements and the withdrawals, in the indisputable procedure by tax agencies, of taxpayers' resources in the form of arrears and forfeits from their bank accounts. In effect, the RF CC's explanation reestablished the situation of taxpayers being unprotected from the actions of tax agencies as it had existed prior to the 1998 banking crisis.
As for the date of payment to be established by a client, in accordance with banking legislation, the transfer of monies from the correspondent account at a payer's bank to the correspondent account of a recipient's bank is effectuated through a payment document issued by a bank as of the day of the monies actually being written off the correspondent account. The original payment document of a client for the payment of a tax is attached to the bank's payment document. The bank has no right to make any changes in a client's payment document. The real problem is that the system of recording the execution of tax obligation by tax agencies has so far not been adjusted to the control of the movement of payment documents in banks' card indexes. Tax agencies (thereby deviating from the norms of tax legislation) in their accounting systems register the presence of tax arrears of a given taxpayers until the moment when they receive from the treasury a notification that the monies in question have been transferred to the budget revenue account. The lack of appropriately organized recording, by tax agencies, of the movement of payment documents through the "taxpayer - bank" system results in excessively high administrative costs being borne by taxpayers in respect to the payment of taxes, while the risks associated with unjustified actions of tax agencies are too high as well.
The Inclusion of the Payment (in Full or in Part) of the Value of an Apartment of a Physical Persons from the Funds of an Organization in the Tax Base for Calculating the Tax on Incomes of Physical Persons
By Letter of the RF FTS of 24 January 2005, No. 04-1-03/800, it has been explained that the covering (in full or in part) of the value of an apartment of a physical person from the funds of an organization represents an income received in kind, and therefore is to be included in that physical person's tax base for purposes of calculating the tax on incomes of physical persons at the rate of 13 %. In this connection the employer, which has paid the amount equal to the value of the apartment being purchased by the physical person under a contract of purchase and sale, with its formalization as property, is obliged to determine the tax base, and to calculate and deduct the tax on the incomes of physical persons as of the moment of this apartment being transferred to the ownership of the aforesaid person.
In the event of the impossibility of the calculated tax amount to be deducted from the taxpayer, the tax agent is obliged, within one month from the moment of such obligations having arisen, to inform, in writing, the tax agency at the location of its registration as to the impossibility of deducting the tax and the amount of the taxpayer's arrears.
The Imposition of the Tax on Incomes of Physical Persons on the Payment of Per Diem Allowances or Field Allowances
By decision of the RF Supreme Arbitrage Court of 26 January 2005, No. 16141/04, Letter of the RF Ministry of Taxes and Levies of 17 February, 2004 No. 04-2-06/127, "On the taxation of compensatory payments associated with business trips", is recognized as incompatible with the Tax Code of the Russian Federation, and fully null and void.
In accordance with the abolished Letter, the expenditures of organizations on the payment of per diem allowances or field allowances in excess of the limits established by Decrees of the RF Government of 8 February 2002, No. 93, and of 2 October 2002, No. 729, were subject to the tax on incomes of physical persons.
The Court noticed that, according to Article 168 of the Labor Code of the Russian Federation, the procedure for and the amount of per diem allowances to employees are to be established by a collective agreement or by a local normative act adopted by an organization. Therefore taxable income must not include the amounts of per diem allowances which are not in excess of the limits established by such an agreement or act. This provision is effective also in respect to budget-funded organizations.
The Court noted that legislation on taxes and levies established neither the standard amounts of per diem allowances, nor the procedure for the determination of such amounts in respect to incomes of physical persons. The general procedure for establishing such norms and the limits to their amounts are envisaged in labor legislation only.
The Court explained that, as far as the organizations funded from the federal budget are concerned, the aforementioned Decrees of the RF Government impose limitations only to the amount of financing from the federal budget earmarked for such purposes, while not limiting the amount of payments to employees if these are agreed upon with the employer. In this case the expenditures in excess of the established limits are to be compensated by organizations through the saving of resources allocated in the federal budget to their upkeep, as well as from the funds received by organizations from their entrepreneurial or other revenue-generating activities. At the same time, an employer cannot diminish, by this amount, its taxable base in respect to the profits tax, while it can be diminished by the amount of labor costs.
The aforesaid Decrees of the RF Government limit only the amount of expenditures on business trips to be covered from the federal budget, while imposing no limits in the event they are covered from other sources, and if they are not resulting in an unequal position of the organizations funded from the federal budget, as compared to other organization, in terms of applying Article 168 of the Labor Code of the Russian Federation.
Some Issues Relating to the Application of Chapter 24 of the RF TC "Single Social Tax"
By Letter of the RF FTS of 11 February 2005, No. GV-6-05/118, with due regard to the Letter of the RF Ministry of Finance of 1 February 2005, No. 03-05-02-03/6, some issues relating to the application of Chapter 24 of the RF TC in respect to the rate of the single social tax (SST) are explained, including the calculation of the amount of the tax due to the federal budget.
Thus, the mechanism for calculating the tax due to the federal budget (or deducting the tax), as determined by the second paragraph of Item 2 of Article 243 of the Tax Code, has remained unchanged. From the tax amount due to the federal budget, the amount of contributions to mandatory pension insurance, calculated in accordance with the tariffs established by Federal Law of 15 December 2001, No. 167-FZ, "On mandatory pension insurance in the Russian Federation", is to be excluded. From the amount of the tax due to the federal budget, calculated at the maximum rate of 20% (15.8%), the amount of contributions calculated at the maximum tariff rate of 14% (10.3%) can be deducted in full.
As for advance payments of SST, they are to be transferred monthly, throughout the whole current tax period. The ultimate timeline for the advance payments of the contributions to mandatory pension insurance is the 15th day of the month following the month in respect to which the advance payment is to be paid.
The monthly advance payments of SST and insurance contributions are to be calculated and transferred in accordance with the actual tax base, as it emerged from the start of a tax (or accounting) period through the last month, at the established tariff rates, and therefore can be regarded as part of the tax and insurance contributions that are due to be paid throughout the period of a tax (or accounting) period and ensure regular (monthly) transfers of funds.
Consequently, tax agencies must deduct forfeits on the arrears of advance payments of the single social tax and insurance contributions, beginning from the 16th day of the month following the month in respect to which the advance payment is to be paid.
Concerning the Application, from 1 January 2005, of the Treaty Agreement between the Government of the Russian Federation and the Government of the Republic of Belarus on the Principles of Indirect Taxation on Export and Import of Commodities, Performance of Work, or Rendering of Services
By Letter of the RF FTS of 2 March 2005, No. MM-6-03/167, the procedure for applying the Treaty Agreement between the Government of the Russian Federation and the Government of the Republic of Belarus on the principles of indirect taxation on export and import of commodities, performance of work, or rendering of services, that came in force from 1 January 2005, has been explained. In accordance with the Treaty, the amounts of indirect taxes paid on the commodities being imported from the territory of one Party into the territory of the other Party are subject to deduction in the procedure envisaged by the Parties' national legislations, respectively.
Thus, when commodities are imported into Russia's territory, taxpayers have the right to decrease the total VAT amount by the corresponding tax deductions in the event the commodities that have been imported into Russia's territory are entered into records on the basis of primary documents and are used for the execution of operations which are taxable by VAT.
Concerning the Procedure for Imposing the Tax on Incomes of Physical Persons -Non-Residents, and Its Specificities in Respect to Citizens of the Republic of Belarus
By Letter of the RF FTS of 21 September 2005, No. VE-6-26/786, and by Letter of the RF Ministry of Finance of 15 August 2005, No. 03-05-01-03/82, the procedure for imposing the tax on incomes of physical persons - non-residents, and its specificities in respect to citizens of the Republic of Belarus as potential RF residents, with due regard for the Inter-State Treaty, has been explained.
Foreign citizens, who have received, from agencies of internal affairs, permits for permanent residence or residence cards, are to be considered RF tax residents as of the beginning of a reporting period, and their earnings resulting from employment are to be taxed at the rate of 13 %.
All other categories of foreign citizens as of the beginning of a tax period are to be regarded as RF non-residents, and their earnings during the first 183 days of staying in the RF territory within the framework of a calendar year are taxed at the rate of 30 %. The tax status of such taxpayers is specified only as of the date following the expiry of 183 days of a foreign citizen having stayed in the RF territory. In such a case, the rate of the tax on incomes of physical persons throughout the whole period of a foreigner's staying in the territory of the Russian Federation is to be equal to 13 %
An exception was made for citizens of the Republic of Belarus as potential RF residents. When a long-term labor contract is concluded with an employer organization, the tax rate is substantially reduced from the very beginning. However, if such a contract is terminated during the first 183 days of a citizen of the Republic of Belarus staying in the RF, the employer organization is obliged to recalculate the tax imposed on the income paid to the aforesaid citizen at the rate of 30 %.
Explanations Concerning the Procedure of Taxation of Plots of Land Acquired as Property on Conditions of Housing Construction to Be Implemented on them (Including Individual Housing Construction)
By Letter of the RF FTS of 27 January 2005, No. MM-6-21/63, official explanations were issued by the RF Ministry of Finance of 14 January 2005, No. 03-06-02-02/01, concerning the application of Federal Law of 20 August 2004, No. 116-FZ, "On making amendments to Article 8 of the Law of the Russian Federation "On the land payment".
By Federal Law of 20 August 2004, No. 116-FZ, the procedure of taxation of plots of land granted (or acquired) for housing construction, including individual housing construction, was defined, and thereby any legal uncertainty has been eliminated in respect to the notion of "lands occupied by the housing fund", noted in the resolution of the Supreme Court of the Russian Federation of 13 February 2003, No. 78-VOZ-pr-3, and in the resolution of the Constitutional Court of the Russian Federation of 5 June 2003, No. 276-O.
In this connection, Federal Law of 20 August 2004, No. 116-FZ, determined different procedures for the taxation of plots of land acquired as property on condition of housing construction to be implemented on them (including individual housing construction) prior to 1 January 2005, and those acquired from 1 January 2005.
Thus, in respect to the plots of land acquired as property from 1 January 2005 by physical persons and juridical persons on condition of housing construction to be implemented on them, with the exception of individual housing construction, for three years the taxation is imposed at a doubled full rate of the land tax established in towns and urbantype settlements. In subsequent years, until the moment of the State registration of the constructed immovable object, the land tax is imposed at a fourfold rate. After the State registration of the rights to the constructed immovable object, the land tax is to be paid as for the lands occupied by the housing fund.
In respect to the plots of land acquired as property from 1 January 2005 by physical persons for individual housing construction, for ten years they are to be taxed at full rates of the land tax established in towns and urban-type settlements. In subsequent years, until the moment of State registration of the constructed immovable object, the land tax is im-
posed at a double rate. After the State registration of the rights to the constructed immovable object, the land tax is to be paid as for the lands occupied by the housing fund.
In respect to the plots of land acquired as property prior to 1 January 2005 by physical persons and juridical persons on condition of housing construction to be implemented on them, including individual housing construction, the taxation is imposed at the full rate of the land tax established in towns and urban-type settlements, until the moment of the State registration of the rights to the constructed immovable object. After the State registration of the rights to the constructed immovable object, the land tax is to be paid as for lands occupied by the housing fund.
The Determination of the Estimated Value of Extracted Mineral Resources for Purposes of Calculating the Mineral Resources Extraction Tax
By Letter of the RF FTS of 2 February 2005, No. 21-2-05/8, the issues relating to the determination of the estimated value of extracted mineral resources for purposes of calculating the mineral resources extraction tax are explained. Certain limitations are imposed on the composition of expenditures to be included in the estimated value of extracted mineral resources, and the costs which are not directly associated with the extraction of mineral resources and not to be taken into accounts when their value is estimated. Indirect expenditures associated with the extraction of mineral resources are included in the estimated value in proportion to the direct costs of the extraction of mineral resources within the total amount of direct expenditures. The costs of preparatory mining work associated with the extraction of mineral resources, with stripping work in quarries, and with the dewatering of deposits (material costs), as well as the costs of maintenance and repair of electric equipment, cables and power lines placed directly in the quarries (costs of repairs of fixed assets), represent indirect expenditures relating to the extraction of mineral resources and are to be fully included in their estimated value.
Some Issues Relating to the Recording, by Taxpayers, of the Monies Received from the RF Social Insurance Fund for Purposes of Mandatory Social Insurance
By Letter of the RF FTS of 15 June 2005, No. GI-6-22/488, Letter of the RF Ministry of Finance of 1 June 2005, No. 03-03-02-02/80, "On the recording, by taxpayers, of the monies received from the Social Insurance Fund of the Russian Federation for purposes of mandatory social insurance", was distributed for information and guidance in work.
In the letter, the types of benefits are listed that are to be paid by employers to their employees at the expense of the resources of the RF Social Insurance Fund (SIF); it is explained that the amounts of benefits paid to the employees are to be subsequently refunded to the employers by the Fund on the basis of a pay sheet, to be submitted by them to the Fund, which was approved by Decree of the RF SIF of 22 December 2004, No. 111.
Thus, the monies received by employers - taxpayers from the RF SIF, in the procedure of compensation of the monies paid to the employers for purposes of mandatory social insurance, are not regarded as incomes for purposes of Chapter 25 "Tax on profit of organizations", Chapter 26.1 "System of taxation of agricultural businesses (single agricultural tax)" and Chapter 26.2 "Simplified taxation system" of the RF Tax Code, and when determining the tax base for the tax on profit of organizations, the single agricultural tax, and the single tax imposed within the framework of the simplified taxation system, and are not to be taken into account.
Such payments include the following: • benefits for temporary disability, maternity benefits and benefits in the event of death;
• benefits for temporary disability resulting from illness or trauma (with the exception of industrial accidents and occupational diseases), to be paid from the third day of temporary disability (the maximum amount to be paid for one full calendar month should not exceed 12,480 roubles);
• mandatory social insurance benefits to citizens employed by organizations and individual entrepreneurs applying special tax regimes (no more than 1 minimum salary for one full calendar month);
• benefits paid from the SIF in accordance with the Federal Laws (the list of such benefits is included in Article 8 of the Federal Law of 16 July 1999, No. 165-FZ, "On the fundamental principles of mandatory social insurance", in particular the benefit in the event of pregnancy and delivery, and the benefit for the caring of a child until it reaches the age of one and a half years).
Annex 2
Changes in the Taxation of Small Businesses in 2005
On 21 July 2005, the State Duma adopted Law No. 101-FZ "On the Introduction of Alterations in Chapters 26.2 and 26.3 of Part 2 of the Tax Code of the Russian Federation, and in Some Legislative Acts of the Russian Federation on Taxes and Charges". In order to assess the changes introduced in legislation on the taxation of small businesses, it will be necessary to begin with the definition of appropriate criterions. Certainly, the major criterion should be the correspondence between the forecasted results of the policy which is to be implemented, and its established goals. However, as far as the clarity of the goals of the tax policy toward small businesses is concerned, there exist a number of problems. The explanatory note to the draft law introduced by the RF Government does not contain any clear definition of the policy's goals. As stated in the explanatory note, the draft law "is aimed at improving the taxation of small businesses, and at eliminating the existing drawbacks in the established procedure for applying" Chapter 26.2, "The Simplified System of Taxation", and Chapter 26.3, "The System of Taxation in the Form of a Single Tax on Imputed Income for Some Types of Activity", of the RF Tax Code. While the elimination of the existing drawbacks in the procedure for applying the Code's chapters is a rather definite task, which implies the correction of certain contradictions and discrepancies, as well as the clarification of those provisions that have been giving rise to disputes between taxpayers and tax authorities, the task of improving the taxation procedures has not been specified in exact terms. Therefore, there have emerged the grounds for formulating some presumably rational goals of the tax policy to be applied to small businesses, from the point of view of tax legislation's efficiency and fairness.
If the costs incurred by enterprises were to be reduced only to those associated with the production technologies and the transactions with other economic subjects, it would have been difficult to find appropriate grounds for introducing special tax treatments for small businesses, or for any other specific features of taxation depending on the scale of production. On the contrary, in the long-term perspective, any interference aimed toward shifting the minimum efficient scale of production may result in an inefficient distribution of resources, because thereby the average production costs will be increased. The amounts of tax liabilities proper are also part of the costs incurred by enterprises, but when the tax laws are rational, and the objects of taxation are clearly defined, such costs are not expected to distort the choice of a scale of activity. If such distortions do emerge, it becomes
