10Annex 1. An Overview of Legislation in the Field of Tax Regulation and Civil Legislation Adopted in 20061
The year 2006 proved to be no exception for lawmakers in the sphere of tax legislation's reforming. A whole package of laws was adopted, which introduced some significant changes to the RF Tax Code (TC) and touched upon not only the general norms stipulated in Part I, but also upon nearly all the existing taxes - the value added tax (VAT), the profits tax, the single social tax (SST), excises, the tax on the extraction of mineral resources (TEMR), the single agricultural tax, as well as levies for the right of use of objects of fauna and for the right of use of objects of aquatic biological resources.
Below we are going to discuss the most important changes that occurred in the tax sphere, and also in the spheres of civil and labor legislation.
The main changes introduced in Part I of the RF Tax Code
The main changes concerning the improvement of tax administration are introduced by Federal Law of 27 July 2006, No 137-FZ, "On making changes to Part One and Part Two of the Tax Code of the Russian Federation and in some legislative acts of the Russian Federation in connection with the implementation of measures designed to improve tax administration", to come into force from 1 January 2007 (with the exception of a number of norms). The changes introduced in Part I of the RF TC are aimed at improving tax control, putting in order the procedures for tax audits and circulation of documentation in the tax sphere, providing better conditions for the independent and honest execution, by taxpayers, of their responsibilities in respect to lawful payment of the established taxes and levies, and expansion of guarantees for the observance of the rights and lawful interests of taxpayers.
In accordance with this Law, the majority of provisions stipulated in Part I of the RF TC are to be amended: the procedure for the payment of taxes is changed; the procedure for the recovery of taxes, fines and penalties is changed; changes are made to the procedure for the request for documentation; considerable alterations are made to the procedure for the conduct of in-house tax audits; the procedure for the conduct of on-site tax audits, including repeated on-site tax audits, is changed; the rule of mandatory pre-judicial appeal against decisions to a superior tax agency is established; tax agencies are granted powers to impose a ban on the alienation of property by a taxpayer; taxpayers are granted the right, in the presence of a bank guarantee, to suspend the actions relating to the recovery of a tax, a penalty or a fine; and a number of other amendments are also introduced.
A new wording is adopted for Article 6.1, which regulates the procedure for determining the timelines established by legislation on taxes and levies. State bodies of executive authority and the executive bodies of local self-government, or other agencies, officials and organizations, empowered by them and receiving from taxpayers (or payers of levies) monies in the established procedure for the payment of taxes (or levies) and their transfer (remittance) to budgets, as well as
1 The overview has been prepared with the aid of the legal system KonsultantPlus. 210
the agencies of state off-budget funds, are excluded from the list of participants of tax legal relations.
By the changes introduced in Item 2 of Article 11, the notions of "personal account", "account of the Federal Treasury", and "accounting policy for purposes of taxation" are determined. It is established that the rules envisaged in Part I of the RF Tax Code for banks are to be extended to the RF Central Bank.
The Law has broadened the rights of taxpayers: by the changes introduced in Article 21, the right of taxpayers to participate in the process of considering the materials of a tax audit or other acts issued by tax agencies in instances envisaged by the Code is established.
A new wording is introduced for Article 23 "Duties of taxpayers (or payers of levies)". It is determined that individual entrepreneurs, notaries with a private practice, and advocates who have established advocate's offices are obliged at the place of their residence to submit, at the request of a tax agency, the ledger for recording incomes and expenditures and economic operations, as well as accounting reports. Notaries and advocates are also obliged to notify, in writing, the tax agency located at the place of their residence of the opening (or closing) of accounts intended for the execution of their professional activity by them.
The instances when tax agencies may bring suits to courts of general jurisdiction or arbitrage courts are defined mote precisely. Tax agencies have lost the right to create tax posts. Tax agencies are now obliged to be guided by written explanations of the RF Ministry of Finance concerning the issues of applying RF legislation on taxes and levies. It is established that the RF Ministry of Finance, financial agencies of RF subjects and municipal formations issue written explanations within the limits of their competence within two months from the day of submitting an appropriate request. This period can be extended by decision of the head of an appropriate financial agency, but no longer than by one month.
By the changes introduced into Article 45 "Performance of the duty with regard to the payment of a tax or a levy" it is established that the taxes due as a redemption of arrears accumulated for a period of more than three months by organizations which are dependent (affiliated) societies (enterprises), as well as by organization for which a personal account has been opened, must be recovered in a judicial proceeding. The instances are determined when the duty of paying a tax is not recognized as having been fulfilled, in particular in an event of a recall by a taxpayer or a return by a bank (or an agency of the RF Treasury) of a non-executed order, or insufficiency of funds on an account, or an incorrect entry of the number of the RF Treasury's account and the name of a recipient bank in the payment documents.
A new wording is adopted for the norms establishing the procedure for recovering a tax or a levy, or penalties and fines, from the monies kept at the accounts of a taxpayer (or a payer of levies) - an organization, an individual entrepreneur or a tax agent - an organization or an individual entrepreneur at banks, as well as the norms establishing the procedure for recovering a tax, a levy, or penalties and fines at the expense of the property of a taxpayer (or a payer of levies) - a physical per-
son who is not an individual entrepreneur. Thus, earlier it was established that a petition to sue for the recovery of a tax at the expense of a taxpayer's property - a physical person who is not an individual entrepreneur, may be submitted to a court of general jurisdiction by a tax agency (or a customs agency) within six months after the expiry of the period for the execution of a demand for the payment of a tax. In the new wording it is stated that the period for submitting a petition, if lapsed for a justifiable reason, may be reinstated by a court of justice.
Certain changes have been introduced in the procedure for granting a deferral (or an installment system) with regard to the payment of taxes and levies (Chapter 9 of the RF TC). In particular, the condition concerning the limits for their granting within the limits established by the laws of the RF, the laws of the RF subjects on the corresponding budgets and the legal acts of the representative bodies of municipal formations is excluded. The maximum period for granting a deferral (or installment payment) is extended from six months to one year. In this connection, a deferral or installment payment of federal taxes in the part transferable to the federal budget for a period of more than one year but no more than three years may be granted by decision of the RF Government. The institution of tax credit is abolished. Now only the methods for changing the timeline for the payment of a tax will be a deferral, an installment plan or an investment tax credit, which is quite logical, because tax credit represents a certain replica of a tax deferral. Besides, the period is shortened during which a related person must submit a copy of an application for the granting of a deferral or an installment plan for the payment of a tax to the tax agency at the place of registration, - now it is five days.
A new wording is introduced for the norms concerning the timelines for sending a demand for the payment of a tax or a levy; the consequences of a change of the duty with regard to the payment of a tax or a levy; the suspension of bank account operations of organizations and individual entrepreneurs; carry forward or refund of excessive amounts of a tax, a levy, a penalty or a fine; tax declarations and changes thereof; and the provisions on tax control.
The norms concerning the registration of organizations and physical persons are changed. Thus, when operations are carried out in the Russian Federation through a solitary subdivision, the application concerning the registration of an organization at the location of its solitary subdivision is to be submitted within one month after the creation of the separate subdivision.
A physical person whose place of residence for purposes of taxation is determined by location has the right to apply to the tax agency at his or her location for a registration with tax agencies. In accordance with the changes introduced to Article 84 of Part I of the RF TC, a tax agency is obliged to register a physical person on the basis of an application within five days from the receipt of the said application by the tax agency, and within the same period to issue to him or her a certificate of registration at a tax agency.
The range of responsibilities of the Chambers of Advocates of subjects of the Russian Federation, of the agencies (or institutions) empowered to conclude notarial actions, of private notaries, of the bodies and organizations effectuating the ac-
creditation of affiliations and representative offices of foreign juridical persons, as well as of banks, to submit to a tax agency the information needed for the execution of tax control.
The norms establishing the timelines and the procedure for conducting tax audits are changed, which will be discussed later.
The changes in the procedure for appealing against the decisions of tax agencies are associated with the establishment of the rule of mandatory prejudicial appeals against such decisions to a superior tax agency. From the year 2008 onward an organization will not be able to file a petition to a court of justice before undergoing the stage of a pre-judicial appeal against a tax inspectorate's decision to a superior agency.
The RF Tax Code is augmented by Article 101.2 "Procedure for appealing against the decision of a tax agency concerning the bringing to responsibility for the commission of a tax violation or the decision concerning a refusal to bring to responsibility for the commission of a tax violation". Such decisions of a tax agency may be appealed against first to a superior tax agency, and only after that - to be petitioned to a court. In this connection, an appellation procedure is introduced for appealing to a superior tax agency against a decision of a tax agency that has not entered into force.
It is established that within the period of limitations for bringing to responsibility is to be suspended if the person being brought to responsibility for having committed a tax violation has been actively resisting the conduct of a tax audit. The violation of the procedure for registration of objects of gambling business is also placed within the category of tax violations.
Below we discuss in more detail some of the changes introduced in the Tax Code.
The procedure for recovery of taxes and fines
In accordance with the new wording of the first paragraph of Item 1 of Article 104 of the RF TC, after the rendering of a decision concerning the bringing to responsibility for the commission of a tax violation and in those instances when no extrajudicial procedure for imposing tax sanctions is allowed, a tax agency should submit a petition to sue to a court of justice to the effect that tax sanctions should be imposed on the person being broght to responsibility. It is intended that a tax agency should appeal to a court of justice for the recovery of a fine when there exists a ban on the recovery of a fine in an extrajudicial procedure. Now, an extrajudicial recovery of a fine is not allowed only in one instance - in accordance with Item 1 of Article 115 of the RF TC, tax agencies may file a petition with a court of justice to sue for the recovery of fines from an organization or an individual entrepreneur in the procedure and within the periods envisaged in Articles 46 and 47 of the RF TC.
In accordance with Article 46 of the RF TC, the decision concerning the recovery of a tax from an organization (or an individual entrepreneur) must be made by a tax agency within 60 days from the date of the expiry of the period of compliance with the demand that a tax should be paid. In an event of a lapse of this period, a tax
may be recovered only in a judicial proceeding. For an appeal to a court of justice, in accordance with the explanations issued by a Plenum of the RF Supreme Arbitrage Court, the maximum period of six months is established2. If a tax agency petitions to a court of justice after a lapse of this period, this entails a refusal by the court to satisfy the petition. The new wording of Article 46 of the RF TC grants to courts of justice an opportunity, on a request of a tax agency, to reinstate the period for petitioning for an enforced recovery of a tax in an event when this period has lapsed for a justifiable reason. It should be noted that no criteria for determining the justifiability of such reasons are offered. We believe that such amendments result in a worsened position of taxpayers.
It is also noteworthy that if a taxpayer has not voluntarily paid a tax, a tax agency within two months after the expiry of the period specified in a demand for payment should make the decision that the tax be recovered from the monies kept at bank accounts. After the rendering of such a decision, the tax agency has the right to make a decision that the taxpayer's account operations should be suspended. Thus, an organization may lose the capacity to dispose of its money until it settles its debt. Some important changes concerning such a suspension of operations have been introduced into Article 76 of the RF TC. The article's new wording envisages that operations should be suspended not in respect of all the monies kept at a bank account, as it was established previously, but only within the limits of the sum specified in the tax agency's decision. That is, from the year 2007 onward a tax agency may suspend operations only within the limits of a sum needed for the redemption of the debt, which can be recognized as a positive factor.
Set-off and refund of excess paid (or recovered) amounts of tax
The most significant changes appear to be those concerning the broadening of the sphere for applying the rules established by Articles 78 and 79 of the RF TC. Thus, the procedure for setting off (or refunding) from 2007 onward will be extended to advance payments and fines. And from 2008 it will be possible to carry forward the amounts paid not by budgets, but by the types of taxes: federal taxes will be set off against federal taxes, regional - against regional taxes, and local -against local taxes, respectively. Thus, for example, the excess of the profits tax can be carried forward as the payment of VAT.
The timelines for setting off the taxes paid have also been changed. A tax agency now has the right to make the decision concerning the carry-forward of a tax within 10 working days instead of 5 calendar days from the day of receiving the application of a taxpayer, or from the day of signing an act of reconciliation (if it has actually taken place), which means that the period has actually been made three times as long by the lawmakers. The same 10-day period has been established for making the decision concerning a refund or the sending of an order for a tax refund to a territorial agency of the Federal Treasury (no such period was established previously).
2 Decree of the RF Supreme Arbitrage Court's Plenum as of 28 February 2001, No 5, "On some issues concerning the application of Part I of the Tax Code of the Russian Federation". 214
The period for the notification, by a taxes agency, about its decision concerning setting-off (or refunding) of excess tax paid, or about its refusal to carry forward (or refund) the excess has, on the contrary, been made shorter. Instead of 2 weeks, this period is now 5 working days from the day of the corresponding decision being made by a tax agency.
Besides, the period during which a tax agency is obliged to inform the taxpayer concerning any fact of an excess payment of tax that has become known to it and of the amount thus paid in excess has been shortened from 1 month to 10 days. An important detail is the precise definition of the procedure for calculating the interest charged on the delay in refunding the excess amounts of taxes. From the year 2007 onward a territorial agency of the Federal Treasury will have to notify a tax agency as to the exact date of refund and the amount refunded, with the interest charged. If the interest has not been paid to a taxpayer in full, then, after receiving such a notification, the tax agency will be obliged within 3 days to make a decision concerning the refund of the remaining amount of interest, depending on the actual date on which the excess amount of tax was refunded.
The same is true for setting off and refunding the amounts of excess tax recovered: the procedure for refunding the amounts of excess tax is extended to advance payments and fines; the period for a tax agency to make the decision concerning the refund of the amounts of excess tax recovered; and the period for a tax agency to issue a notification of the established fact of an excess amount of tax having been recovered will now be 10 days instead of 1 month; and the amount recovered in excess, with the interest charged to it, will have to be refunded to a taxpayer within one month from the day of receiving a written application (no such period for refund was established before the introduction of this amendment).
The procedure for conducting on-site tax audits
In accordance with Article 88 of the RF TC, in-house tax audits are to be conducted within three months from the day of the submission, by a taxpayer, of a tax declaration and the documents serving as a basis for calculating and paying a tax, as well as of other documents concerning the activity of the taxpayer available to the tax agency. In accordance with the new wording of this article, an in-house tax audita can be conducted within three months from the day of the submission by the taxpayer of a tax declaration and the documents which, according to the Tax Code, must be attached to a tax declaration. Thus, the timelines established for submitting any additional documents should not influence the length of in-house tax audits.
Article 89 establishes that in an event of the reorganization or liquidation of an organization (or in the procedure of a superior agency controlling a subordinate one) a tax agency may conduct a second audit of a taxpayer. This innovation is associated with the establishment of the only justification for the conduct of a second on-site tax audit: if an organization submits an adjusted declaration with an amount of tax lower than that declared earlier, the tax agency has the right to conduct a
second audit of the documentation relating to the period in respect of which the taxpayer has made adjustments.
Other amendments establish that tax agencies have no right to conduct more than two on-site tax audits of one and the same taxpayer during one calendar year, except in extraordinary cases by decision of the head of a federal body of executive authority. Tax agencies may not conduct two or more on-site tax audits of the same taxes during one and the same period. The duration of an on-site tax audit has also been changed - now it may not continue for more than two months. Its duration may be extended to four months, and in exceptional cases - for up to six months. Presently it is possible to extend the duration of an on-site tax audit to three months. It should also be noted that the recent changes have introduced a rule whereby within the framework of an on-site tax audit a period can be checked which is no longer than three calendar years preceding the year during which the decision concerning the conduct of a tax audit is made. This direct stipulation makes it possible for a tax agency to interpret the date of the beginning of a tax audit at its own convenience (either the date of making the decision or the data of the actual onset of a audit).
By the changes introduced in Article 93 of Part I of the RF TC "The demanding and obtaining of documents during a tax audit" it is forbidden to demand a notary's certification of the copies of documents submitted to a tax agency (or to an official), if not envisaged otherwise by legislation of the Russian Federation. Besides, the RF TC was augmented by Article 93.1 "The demanding and obtaining of documents (or information) concerning a taxpayer, a payer of levies and a tax agent, or information on specific transactions". The norm determining the procedure for formalizing the results of a tax audit has been made more precise (Articles 100 and 101). In particular, it is established that on the basis of the results of an in-house tax audit a reference concerning the tax audit should be drawn up within 10 working days after its completion. Prior to the introduction of these changes the RF TC contained no stipulations concerning the mandatory nature of drawing up such an act. An organization will have the right to present motivated objections to an act of tax audit, for which a period of 15 working days from the moment of the receipt of such an act is granted.
Bringing to responsibility for the commission of a tax violation
By Article 113 of the RF Tax Code in the wording as of the end of the year 2006 it is established that a person may not be brought to responsibility for having committed a tax violation, if three years have expired since the day of the commission thereof or since the next day after the end of the tax period during which this violation was committed.
From January 2007 onward it is established that the three-year period of limitations for tax violations must be calculated from the moment of a tax violation being committed (from the next day after the end of the tax period during which this violation was committed) and until the moment of rendering the decision concerning the bringing to.responsibility for the commission thereof.
At the same time, the RF TC is now amended so as to include the stipulation as to the possibility for suspending the period of limitations for tax violations. The suspension of the period of limitations will become possible if the person being brought to responsibility for having committed a tax violation has actively resisted the conduct of an on-site tax audit, thus creating an insurmountable impediment to its conduct and the determination, by tax agencies, of the amounts of taxes due to be transferred to the budgetary system of the Russian Federation. The period of limitations is suspended if the head of an audit group draws up a special act, which is envisaged in Item 3 of Article 91 of the RF TC for instances when the access by the officials of tax agencies conducting a tax audit to the territory or premises of a taxpayer is obstructed. The period of limitations is reinstated after the decision is made that the on-site tax audit should be continued. Tax agencies will be obliged to prove, in a judicial procedure, that a certain taxpayer has created obstructions to them. However, it is not explained how exactly the currently existing notion of "active resistance" should be understood.
The punishment for operating without having registered at a tax agency has been made more severe. The lower threshold for a fine for an organization's or an individual entrepreneur's operation without having registered at a tax agency within a period of more than 90 days has been established (Item 2 of Article 117 of the RF TC): from 1 January 2007 the amount of fine is to be no less than 40 thousand roubles. This is one of the highest fixed fines envisaged by Russian legislation.
A positive development is represented by the expansion of the list of circumstances excluding the guilt of a person in committing a tax violation: instead of a closed list the lawmakers have approved an open one. Item 1 of Article 111 of the RF TC is augmented by an additional subitem which adds to the circumstances excluding the guilt of a person in committing a tax violation some other circumstances, which may be recognized by a court of justice or the tax agency considering a case as excluding the guilt of a person in committing a tax violation.
The main changes introduced into Part II of the RF Tax Code
The value added tax (VAT)
Among important changes, the switchover from the monthly to quarterly schedule for the payment of VAT can be noted. Presently VAT can be paid on a quarterly basis by all taxpayers whose monthly sums of proceeds from sales of goods (or work, or services) during a given quarter before tax are below 2 million roubles. The norm coming into force from 1 January 2008 for all taxpayers, tax agents including, will make it possible to reduce the bulk of submitted documentation and enable taxpayers to use the amounts of the tax as their circulating assets.
From 1 January 2007 the special procedure for VAT refunds on export transactions is abolished: the deductions of VAT on internal and external operations must be reflected in one declaration (Item 6 of Article 164 of the RF TC, requiring that a separate tax declaration with a zero tax rate should be submitted, is abolished). That is, the sums of the tax to be refunded to exporters will be entered into a
general declaration and thus be accepted for deduction in a declarative procedure. The procedure for refunding is general, to be applied only if the amount of VAT paid on internal and export transactions is in excess of the total amount of tax as calculated by a taxpayer (Item 1 of Article 176 of the RF TC).
A new wording is introduced for Article 176 "Procedure for tax refund". After a taxpayer has submitted a tax declaration, the tax agency, during an in-house tax audit, verifies the justifiable character of the amount of tax declared as due to be refunded. The decision concerning the refunding (in full or in part) of the corresponding amounts must be made by the tax agency within 7 days after the completion of a tax audit, if no violations of legislation on taxes and levies have been found.
If a taxpayer has arrears of VAT or of other federal taxes, or arrears of the corresponding penalties and (or) fines, a tax agency independently sets off the amount of tax to be refunded against the aforesaid arrears. If there are no arrears, the amount of tax to be refunded by decision of a tax agency is returned, on the basis of the taxpayer's application, to the bank account specified in it. Also, on the basis of the taxpayer's written application, the amounts to be refunded may be set off against future payments of VAT and other federal taxes.
On the next day after the decision concerning a refund was made the tax agency must send to a territorial agency of the Federaloro Treasury an order for the refund of the amount of tax, and the territorial agency of the Federaloro Treasury, within 5 days from the day of receiving this order, must refund to the taxpayer the amount of tax, and within the same period to notify the tax agency as to the date of the refund and the amount refunded to the taxpayer. The tax agency must also notify the taxpayer in writing as to its decision concerning a refund, or a setoff of the amount of tax to be refunded, or a refusal to refund it, within 5 days from the day of making the corresponding decision.
The norm stipulated in Article 149 concerning the exemption from the value added tax established for religious organizations was made more precise. At present it is established that the value added tax in the territory of the Russian Federation is not to be levied on the realization (or transfer for their own needs) of items used for religious purposes and religious literature produced and realized by religious organizations. In this connection, in actual practice this exemption can be taken advantage of by those religious organizations that both produce and realize, on their own, items used for religious purposes and religious literature. From the year 2007 onward VAT will no more be levied not only on the commodities (or work, or services) produced and realized by a religious organization or by the economic societies owned by that religious organization, whose charter fund is constituted only by the contributions made by religious organizations, but also on any transfers of such commodities (or work, or services) between any religious organizations and (or) the economic societies created by them, whose sole founders (or participants) are religious organizations (or unions).
Because of the establishment of a new type of state and municipal institutions -autonomous institutions (which are not budget-funded), which enjoy greater freedom in respect of the property transferred to them, certain changes have been
introduced into Subitems 5 of Item 2 of Article 146 of the RF TC: VAT will not be levied on the reimbursable transfer of fixed assets to any state and municipal institutions - either budget-funded or autonomous.
The personal income tax (PIT)
Certain changes have been introduced in Chapter 23 of the RF TC "Personal income tax", which make more precise the notion of tax levied on a resident of the Russian Federation. For purposes of PIT payment, all physical persons are divided into the tax residents of the Russian Federation and those persons who are not such residents. Different tax rates are applied to the incomes of residents and nonresidents - 13 % and 30 %, respectively (Items 1 and 3 of Article 224 of the RF TC).
In accordance with Item 2 of Article 11 of the RF TC, tax residents are understood as those physical persons who have actually spent no less than 183 days in one calendar year in the territory of the RF. Thus, the status of a tax resident is acquired by a physical person in respect of each calendar year, and until the expiry of the period of 183 days from the beginning of a calendar year a physical person (including Russian citizens permanently residing in the RF) is not a tax resident.
Now, from 1 January 2007 onward, a tax resident will be recognized as a physical person who has actually spent no less than 183 calendar days in the RF during 12 successive months. In this connection, the period of a physical person being in the RF is not disrupted by his or her exit from the RF territory for a short period (less than six months) for purposes of medical treatment or education. It is suggested that certain categories of persons, namely the Russian military serving abroad, as well as the employees of bodies of state authority and bodies of local self-government dispatched to work abroad, beyond the limits of RF territory, should be recognized as RF tax residents no matter what the actual length of time has been spent by them in the territory of the Russian Federation.
Some workers, instead of a standard tax deduction in the amount of 400 roubles (Subitem 3 of Item 1 of Article 218 of the RF TC), enjoy the right to a monthly PIC deduction in the amount of 500 roubles (Subitem 2 of Item 1 of Article 218 of the RF TC). These are, e. g., veterans of World War 2; persons disabled from childhood and disabled persons of Groups I and II; citizens demobilized from the armed forces, who have served in the Republic of Afghanistan. In contrast to the deduction of 400 roubles, granted only after the annual income is below 20,000 roubles, the deduction of 500 roubles is granted on a monthly basis independently of the size of a worker's income. From 1 January 2007 the right to a standard tax deduction of 500 roubles will also be enjoyed by those citizens who have participated in combat actions in the territory of the Russian Federation.
From 1 January 2007 onward the maximum size of a social deduction from the tax, granted to a taxpayer in connection with his or her expenses on education or medical treatment, will be increased from 38,000 to 50,000 roubles (Subitems 2 and 3 of Item 1 of Article 219 of the RF TC)3. In accordance with Subitem 3 of Item 1
3 If an application for a deduction is filed in 2007 in respect of the year 2006 and earlier tax periods, the maximum amount of deduction will be 38,000 roubles.
of Articles 219 of the RF TC, the social tax deduction will also cover the sums of insurance premiums paid under the contracts of voluntary personal insurance envisaging the payment of insurance companies only for medical services.
It is established that from 1 January 2007 the property deduction from the tax, envisaged in Article 220 of Part II of the RF TC, will be granted to a taxpayer in an event of sale or purchase not only of an apartment or a house, but also a room.
From 1 January 2007 it is envisaged that PIC should not be levied on the sums of parent capital established in the amount of 250,000 roubles (Item 34 of Article 217 of the RF TC). In this connection no social or property deductions are granted when parent (or family) capital is spent on education and (or) construction (or acquisition) of a residential building, apartment or share (shares) therein.
Excises
Traditionally, the rates of excises on the majority of excisable goods have been raised (Item 1 of Article 193 of the RF TC ). Thus, from January 2007 the rate of excise on ethyl alcohol is increased from 21 roubles 50 kopecks to 23 roubles 50 kopecks, the rate of excise on beer with per cent volume of ethyl alcohol from 0.5 % to 8.6 % inclusive - from 1 roubles 91 kopecks go 2 roubles 07 kopecks per liter, and with per cent volume of ethyl alcohol over 8.6 % - from 6 roubles 85 kopecks to 7 roubles 45 kopecks per liter.
The rate of excise remained the same for champagnes and sparkling, carbonated and prickling wines; the rate for natural wines has not been changed, either; the same rate will be applied to natural beverages with per cent volume of ethyl alcohol not higher than 6 %, produced from wine materials without the addition of ethyl alcohol. For all the other types of spirituous liquors a general rate is established of 162 roubles per liter of absolute ethyl alcohol contained in excisable commodities. The rates of excises on oil products have also remained unchanged.
A zero excise tax rate will be applied, as before, to beer with per cent volume of ethyl alcohol of up to 0.5 % and on passenger cars with engine capacity of up to 90 hp.
Previously, alcohol-containing products with metal spray cans - perfumes, cosmetics and household chemicals - were not recognized as excisable goods (paragraphs 7 and 8 of Subitem 2 of Item 1 of Article 181 of the RF TC). From 1 January 2007 onward these products will become excisable, but the rate of excise will be zero (Item of 1 of Article 193 of the RF TC).
The rate of excise on passenger cars with engine capacity of above 90 hp and below 150 hp has been raised from 16 roubles 50 kopecks to 18 roubles per hp, and on passenger cars and motorcycles with engine capacity of above 150 hp -from 167 to 181 roubles per hp.
The rates of excises on tobacco products have been also raised, but this deserves a special comment. The rates of excises on cigarettes have been raised on the average by 30 %: on filter-tipped cigarettes the fixed part of the rate is increased from 78 to 100 roubles per 1000 pieces, on cigarettes without filter and cigarettes with cardboard mouthpieces - from 35 to 45 roubles per 1000 pieces.
The minimum general rate of excise on filter-tipped cigarettes is 115 roubles per 1000 pieces, on cigarettes without filter and cigarettes with cardboard mouthpieces - 60 roubles per 1000 pieces. The most significant change is that the ad valorem part of the rate on cigarettes and cigarettes with cardboard mouthpieces will not amount to 5 % of their estimated value. That is, now the ad valorem (per cent) part of the rate on cigarettes and cigarettes with cardboard mouthpieces is established on the basis of the estimated value of a commodity, calculated by the maximum retail price and not by the disbursing price, as it was done previously. In this connection, a taxpayer must notify the tax agency concerning the maximum retail prices of each item name of tobacco products. Presently two forms for such a notification are established - for the maximum retail prices of tobacco products manufactured in Russia and for the maximum retail prices of tobacco products imported into Russia.
The rules for determining the estimated value of cigarettes and cigarettes with cardboard mouthpieces are established by new Article 187.1 of the RF TC. A taxpayer must independently determine the maximum retail price of one package of cigarettes of each brand. Tobacco products cannot be sold to consumers at a price higher than the established maximum retail price. The notification should be submitted no later than 10 days prior to the beginning of the month during which the prices indicated in it are going to be applied. The maximum retail price declared in a notification must be applied for no less than one calendar month. After the expiry of one month a taxpayer can change the price by submitting a new notification.
The information concerning maximum retail prices, as well as the information on the month and year in which a product was manufactured, must be indicated on each package of tobacco products. The production and import of filter-tipped cigarettes without the provision of this information will be forbidden from 1 January 2007, and their retail sale - from 1 January 2008. For cigarettes without filter and cigarettes with cardboard mouthpieces, any production and import without the indication of information on a package will be forbidden from 1 July 2007, retail sale -from 1 July 2008 In the period between 1 January through 1 July 2007 the estimated value of cigarettes without filter and cigarettes with cardboard mouthpieces will be determined on the basis of the maximum retail price stated in a notification.
Noticeable changes have been made in the levying of excises on oil products. The payers of excises will now be recognized as persons carrying out the realization of oil products produced by them. The persons engaged in wholesale, wholesale and retail, or retail sale of oil products will no more be treated as payers of excises. Article 179.1 of the RF TC, where the issue of certificates for carrying out transactions in oil products was envisaged, had been abolished. Also abolished are Subitems 2-4 of Item 1 of Article 182 of the RF TC, establishing the instances of the payment of excises on oil products: at the moment of the entry in the books of oil products produced on their own by persons without a certificate; at the moment of the receipt in the territory of the RF of oil products by an organization or an individual entrepreneur holding a certificate.
Excises on oil products will be paid by their producer at the moment of realization of the oil products (Subitem 1 of Item 1 of Article 182 of the RF TC), as well as in other general cases listed in item 1 of Article 182 of the RF TC, which are as follows:
- the transfer of excisable goods for processing and the return of excisable goods manufactured from a customer's raw materials (Subitem 12 and Subitem 7 of Item 1 of Article 182 of the RF TC);
- the transfer, within the structure of one organization, of manufactured excisable goods for further production of non-excisable goods (with the exception of transfer of straignt-run petrol for further manufacture of petrochemical products within the structure of an organization holding a certificate for carrying out transactions in straignt-run petrol) (Subitem 8 of Item 1 of Article 182 of the RF TC);
- the transfer of manufactured excisable goods for an organization's own needs and as a contribution in charter capital, or a contribution under a simple partnership agreement (Subitem 9 and 10 of Item 1 of Article 182 of the RF TC);
- the transfer of manufactured excisable goods at the withdrawal of a participant from an organization;
- the separation of the share of a participant in a simple partnership agreement (Subitem 11 of Item 1 of Article 182 of the RF TC).
When concluding transactions with straignt-run petrol, the payers of excises will be recognized as producers of straignt-run petrol at the moment of its realization (in accordance with Subitem 1 of Item 1 of Article 182 of the RF TC) and as the persons carrying out the production of petrochemical products from straignt-run petrol at the moment of its receipt (in accordance with newly introduced Subitem 21 of Item 1 of Article 182 of the RF TC). The newly adopted Article 179.3 of the RF TC envisages the issue of certificates for carrying out transactions with straignt-run petrol to the following agents:
а) to persons engaged in the production of straignt-run petrol, including from customer's raw materials, - a certificates for the production of straignt-run petrol;
б) to persons engaged in the production of petrochemical products, when straignt-run petrol serves as raw material, - a certificates for the processing of straignt-run petrol.
Exports of oil products are exempt from excises (Subitem 4 of Item 1 of Article 183 of the RF TC).
Besides, among the changes introduced in Chapter 22 "Excises" of the RF TC the elimination of tax posts at the payers of excises carrying out transactions with oil products (from 1 January 2007 Article 197.1 of the RF TC is to be deemed null and void).
Other taxation - related changes introduced to Part II of the RF TC
Some changes were also made to Chapter 24 "The single social tax" in Part II of the RF TC. Special lowered rates of the tax single social tax (Article 241 of the RF TC) are established for taxpayers - organizations operating in the field of informa-
tion technologies, with the exception of taxpayers with the status of a resident of a special zone for technical development. These are recognized as Russian organizations carrying out the development and sale of software and databases on material carriers or in electronic form through communications channels, and (or) rendering services (or performing works) relating to the development, adaptation and modification, as well as installment, testing and maintenance of software and databases. An organization operating in the field of information technologies will be able to apply lower rates when complying with certain terms established by Item 8 of Article 241 of the RF TC:
- an organization must have State accreditation issued by the RF Ministry of Information and Communications;
- the incomes from information activity in the field of information technologies for the first 9 months of the year preceding the transfer to lowered rates must constitute no less than 90 % of all the incomes of an organization, where 70 % must represent incomes from foreign persons operating outside the RF territory;
- the number of staff of an organization in the first 9 months of the year preceding the transfer to the payment of SST at the lowered rates must be no less than 50 persons.
By the changes introduced into Chapter 25 "The tax on profit of organizations" it is determined that the operating in the field of information technologies enjoy the right not to apply the established procedure for depreciation of electronic appliances.
The most serious changes made to Chapter 25 are relating to the abolition of restrictions on carrying forward the losses of past years (Article 283 of the RF TC). Thus, in 2005 an organization could carry forward the losses incurred during past periods only within the limits of 30 % of the tax base of a current year. From 2006 this limit was equal to 50 % of profit received in a year. However, from the year 2007 there will be no more such restrictions. At the same time, although the norm concerning the abolition of the maximum size of losses carried forward is to come into force from 1 January 2007, the 50 % limit will be applied to the profit of 2006 being formed early in the next year.
One more change relating to the profits tax involves a marked simplification, from the year 2007 onward, of the procedure for recognizing incomes from research and development (Article 262 of the RF TC). Thus, from 2006 the costs of research and development that have yielded positive results may be included in costs during 2 years (in 2005 this period was 3 years). Also from 2006 another restriction - that on the recognition of the costs of research and development that yielded no results - was abolished. In particular, prior to 2005 costs could be charged in the amount of no more than 70 % of the actual costs, and from the year 2006 onward they are to be charged in full. In this connection, the period during which the costs of research and development that yielded no results are to be evenly distributed in order to diminish the tax base should be 3 years. From 2007 it will become possible to evenly charge such expenditures to costs during one year, irrespective of whether any positive results have actually been obtained or not.
Autonomous institution do not record as their income the property received by decision of bodies of executive authority (Subitem 8 of Item 1 of Article 251 of the RF TC) or funding allocated to them in the form of subsidies and subventions (Subitem 14 of Item 1 of Article 251 of the RF TC).
Some of the changes introduced in Chapter 26 "Tax on the extraction of mineral resources", alongside those that have already been discussed here, are to come into force from January 2007. Thus, the procedure for determining the tax base for the extraction of dehydrated, desalted and stabilized oil is established. The norm concerning the taxation of mineral resources at the rate of 0 % (0 roubles) in the part relating to standard losses is augmented. It is established that of at the moment of the payment of a tax a taxpayer has no approved standard losses for the next calendar year, until the approval of the aforesaid standards the previously approves standards should be applied, and for newly developed deposits - the standard losses established by a technical project4.
Beside, changes were made to Chapters 26.1 "The system of taxation for producers of agricultural goods" (the single agricultural tax)" and 26.3 "The system of taxation in the form of a single tax on presumptive income for some types of activity" in Part II of the RF Tax Code. These are aimed at improving the application of the system of taxation in the form of a single agricultural tax (and are also with force from 1 January 2007).
Thus, the norm determining the range of the payers of the single agricultural tax is augmented by the information on the types of agricultural products for purposes of applying Chapter 26.1 of the RF TC. It is established that no right for a switchover to the payment of the single agricultural tax can be enjoyed by the organizations and individual entrepreneurs operating in the sphere of gambling business; those producing excisable goods; organizations with affiliations (or representative offices); and budget-funded institutions.
The norms determining the procedure for a switchover to the single agricultural tax of newly created organizations or newly registered individual entrepreneurs, as well as the provisions determining the procedure for the discontinuation of the right to apply the single agricultural tax have been made more precise.
Significant changes were made to the norms relating to the procedure for determining and recognizing the incomes and expenditures when the single agricultural tax is applied. In particular, the list of items of expenditure that can be taken into account when determining the object of taxation has been expanded. These changes also apply to the legal relations that have arisen since 1 January 2006. Besides, the provisions of Chapter 26.1 concerning the procedure for the calculation and payment of the single agricultural tax and on the submitting of a tax declaration have been made more precise. Now it is envisaged that both organizations and individual entrepreneurs will be submitting their declarations in respect to the payment of the single agricultural tax within the same timelines.
4 For more details concerning the changes introduced in the sphere of taxation of the extraction of
mineral resources, see the section "The oil and gas sector in 2006".
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It is not allowed to apply the taxation system in the form of the single tax on presumptive income to operations in retail trade and public catering, if these operations are carried out by those organizations and individual entrepreneurs who have switched over to the payment of the single agricultural tax, when these taxpayers sell through their retail and public catering outlets their own agricultural products.
Simultaneously, some changes were made to Federal Law of 11 November 2003, No 147-FZ, "On making changes to Chapter 26.1 of Part II of the Tax Code of the Russian Federation and some other legislative acts of the Russian Federation", which are also to come into force from 1 January 2007.
Federal Law of 6 August 2001, No 110-FZ, has also been changed, and these changes are to come into force after the expiry of one month from the day of the official publication of this document and should be applied to the legal relations that have arisen from 1 January 2006. The changes are concerned with the periods for applying the various rates of the tax on profit of organizations by those producers of agricultural goods who have not switched over to the system of taxation in the form of the single agricultural tax, in the part relating to the sale of the agricultural goods produced by them, as well as the sale of the agricultural goods produced and processed by these organizations.
The changes introduced into Chapter 30 of the RF TC envisage some additional conditions for applying the exemption from the tax on property of organizations to residents of a special economic zone (SEZ). From 1 January 2007, in order to become exempt from taxation, property must not only be kept in an account of an organization - resident of a SEZ, but also be acquired or created for purposes of operating in the territory of a SEZ and be located in its territory (Item 17 of Article 381 of the RF TC). Only on condition of complying with these requirements an organization - resident of a SEZ will enjoy the right to an exemption from the tax in respect of its property.
Concerning the land tax (Chapter 31 of the RF TC) it has been specified that the land tax should not be levied on all the plots of land placed at the disposal of a resident of a SEZ (as it previously followed from Item 9 of Article 395 of the RF TC), but only on those located within the territory of a special economic zone.
Changes in the sphere of civil and labor legislation
Reform of state and municipal institutions. Autonomous institutions as a new type of not-for-profit organizations
One of the most important areas of reforming not-for-profit organizations is the transition to the competition-based principles of allocating budget funding within those sectors of the budgetary sphere where it can be possible. This primarily applies to the implementation of different forms of competition-based (or performance-oriented) financing instead of financing by estimate, which is designed for the upkeep of a budget-funded institution.
In recent years the procedure for planning and spending the resources allocated to budget-funded institutions has already been toughened, and they were switched over to the cash services provided by the Federal Treasury, which has yielded certain results in terms of preventing non-targeted spending of budget funds, while at the same time has complicated the operation of many (and especially highly-performing) budget-funded organizations.
It appears that the issues relating to improving the efficiency of budget spending must be resolved (whenever possible, which is true for a rather wide range of sectors of the budget-funded sphere) through introducing competition for budget funding among budget-funded institutions, while truly public control over state institutions should be developed not through consolidating "the vertical of power", but through developing civil society, and in particular through introducing the procedure of reporting by the directors of such institutions to the specially created public councils of these organizations.
Presently, the following most important goals of reforming budget-funded institutions can be pointed out:
- the switchover from by-estimate financing, which is characterized by low performance and high costs, to performance-oriented budgeting;
- the liquidation of subsidiary responsibility of the budgeta for the activity of budget-funded institutions;
- the creation of a mechanism for the co-financing, by the population, of socially important services, in order to prevent shadowy transactions in the form of bribing of certain employees of budget-funded institutions;
- higher transparency of off-budget activity in order to prevent the financing of off-budget activity (the incomes from which are not fully controlled) at the expense of budget (by estimate) financing;
- ensuring efficient public control over the activity of budget-funded organizations.
The goal of reforming the taxation of budget-funded organizations may become the introduction of exemptions from the tax on profit of budget-funded organizations on condition of compliance with certain general requirements established both for budget-funded institutions and non-government not-for-profit organizations.
In an event of a switchover to new types of budget financing (state personal financial liabilities (GIFO) the system of "money following students", insurance-based financing in the health care system, etc.), the latter actually becomes analogous to off-budget financing and requires the introduction of appropriate changes in legislation. For purposes of a switchover to new competition-based forms of financing, which for formal reasons will be difficult to implement within the framework of existing legislation, the following should be done:
- either to change the organizational - legal form of budget-funded institutions in order to provide opportunities for receiving budget financing not for the upkeep of an institution by an estimate of expenses, but for specific activities relating to the rendering of specific services;
- either to change the procedure for developing an estimate of expenses, which must be transformed from an instrument for planning and controlling the expenditures on the upkeep of an institution into an instrument for activity planning, which records all types of revenues as incomes (including budget funding allocated by an estimate of expenses; budget funds allocated to the payment for services rendered by a given institution; off-budget resources). That is, the estimate of expenses designed for the upkeep of an institution must become part of an estimate of off-budget incomes and expenditures of an institution, based on the latter principle (an institution's independence in planning, the possibility of making adjustments during the execution of an estimate of expenses, etc.).
These goals can also be achieved by introducing a new and special form of a not-for-profito^ organization.
Last autumn, the State Duma adopted Federal Law of 3 November 2006, No 174-FZ, "On autonomous institutions", whereby a new type of a state (or municipal) institution was established - that of an autonomous institution. This Law is dispositive and thus is conducive to the preservation of the existing legal status of those not-for-profit institutions which need not be transformed into an autonomous institution.
An autonomous institution is to be recognized as a commercial organization created by the Russian Federation, or by its subject, or by a municipal formation5 for purposes of carrying out work or rendering services in order to execute the powers granted to the bodies of state authority and local self-government in the spheres of science, education, public health care, culture, social security, employment, physical culture and sports. An autonomous institution is a juridical person and may, in its own name, acquire and execute ownership rights and personal non-ownership rights, bear responsibilities, and act as a plaintiff or a defendant in a court of justice.
Autonomous institutions may be founded both by way of being created anew or by the reorganization of a budget-funded institution, on condition that such reorganization will not entail any violation of the rights of citizens in the social and cultural spheres, including the right to receive medical care and education services free of charge, and the right to participate in the cultural life.
An autonomous institution is subject to State registration in the general procedure, as established by RF legislation in respect to State registration of juridical persons and individual entrepreneurs.
The founder should set tasks for an autonomous institution in compliance with its main type of activity as established by its charter. In accordance with the tasks set by its founder and the liabilities to an insurer in respect to mandatory social insurance, an autonomous institution is to perform its activity related to the works being carried out or to services rendered both free of charge or partly on a commercial basis. The financial backing for the main type of activity, as established by the charter of an autonomous institution, is to be provided in the form of subventions
5 No joint foundation of autonomous institutions (including by different bodies of authority or local self-government) is allowed.
and subsidies allocated from an appropriate budget within the RF budget system, or to be covered from other sources that are not forbidden. The terms and procedure for the tasks to be formulated by the founder and the procedure for the financial backing to be provided are to be established by the RF Government in respect to those autonomous institutions that have been created on the basis of federal property; or by the supreme executive body of state authority of a RF subject - in respect to those autonomous institutions that have been created on the basis of property owned by that RF subject; or by local administration - in respect to those autonomous institutions that have been created on the basis of municipal property, respectively. The services rendered to the population partly on a commercial basis must belong to the range of an autonomous institution's main type of activity. Other types of activity may be engaged in by an autonomous institution only to the extent that they serve the achievement of the goals, for the achievement of which the said autonomous institution had been created, and only on condition that such types of activity are specified in its charter.
The administrative bodies of an autonomous institution are to be represented by a Supervisory Board, by the director of an autonomous institution, and by other bodies envisaged in the federal law and in the charter of an autonomous institution (an academic council, an arts board, etc.).
The founder is to play a significant role in organizing the administrative procedures for an autonomous institution. The founder is obliged to approve the charter of an autonomous institution and the introduction thereto of any changes and amendments; to coordinate the decisions concerning the creation of affiliations and the opening of the representative offices of an autonomous institution; to resolve issues relating to the reorganization and liquidation of an autonomous institution; to approve the deed of transfer of property and the division balance sheet; to appoint a liquidation board and to approve the intermediate and final liquidation balance sheet; to appoint and to terminate the powers of the director of an autonomous institution, as well as to conclude and terminate the labor contract with him, if no other procedure for appointing and terminating the powers of the director and (or) for concluding and terminating the labor contract with him is established by the federal law in respect to a given sphere of activity; to consider and approve the proposals put forth by the director of an autonomous institution concerning the transactions in respect to the property of an autonomous institution in the event when, for such transactions to be concluded, the consent of the owner of an institution's property is required.
The distinctive feature of autonomous institutions, in which they differ from the budget-funded ones, is the presence of a Supervisory Board, to be formed by the founder, within the structure of their administrative bodies. Among the members of the Supervisory Board, alongside the representatives of an appropriate branch administrative body and the administrative body for the management of state or municipal property, there should also be representatives of the public. Besides, the Supervisory Board may incorporate representatives of the labor collective of an autonomous institution, whose number, however, may not be in excess of
one-third of the total number of the board's members. This will ensure that autonomous institutions have a relatively higher degree of autonomy (as compared to budget-funded ones) and are closer to non-commercial organizations controlled by the public (or public ones).
Of the greatest interest in this connection are the certain limitations that have been established by the law in those spheres. Thus, neither the director of an autonomous institution nor his deputies may be members of the Supervisory Board, while no such restrictions are imposed on any other members of the labor collective. However, no other members of the labor collective may occupy the post of the chairman of the Supervisory Board.
At the same time, the opinions of the Supervisory Board in respect to the majority of issued to be considered by it are to be only of a recommendatory character. The sphere of its competence includes only: the consideration of proposals concerning the introduction of changes and amendments to the charter of an autonomous institution; proposals concerning the creation of its affiliations and the opening of its representative offices; proposals concerning the reorganization and liquidation of an autonomous institution; proposals concerning the participation of an autonomous institution in other juridical persons, including those concerning the contribution of monies and other property to the charter (or joint-stock) capital of other juridical persons, or concerning their transfer, in some other manner, to other juridical persons in the capacity of a founder (or participant); the draft plan of the financial and economic activity of an autonomous institution and the reports on its having been carried out; the annual accounting balance; the proposals put forth by the director of an autonomous institution concerning the conclusion of transactions in respect to the disposal of its immovable and especially valuable movable property which, in accordance with Item 2 of Article 3 of the Federal Law "On autonomous institutions", cannot be disposed of by an autonomous institution on its own; the proposals put forth by the director of an autonomous institution concerning the conclusion of big transactions; and the proposals put forth by the director of an autonomous institution concerning the conclusion of transactions in respect to which it is a related party. In respect to some of the issues, the supervisory board may only offer recommendations to an autonomous institution, while in respect to other issues it may make decisions.
The Law determines the competence of the director of an autonomous institution only in most general terms.
Autonomous institutions are allowed to conclude transactions with the participation of related parties. Autonomous institution may indeed conclude transactions in which related parties are participants6 but, irrespective of the amount of a transaction, it must be coordinated with the supervisory board. In an event when such a transaction results in a loss, the related parties are to be brought to responsibility on a substantial level.
6 The related party must be either a member of staff of an autonomous institution, or a member of one of the administrative bodies. Besides, this party should be related to the second party in a transaction.
Such peculiarities of the legal status of an autonomous institution make it a more suitable form of organization for rendering budget-funded services on the basis of targeted financing in accordance with the established norms by comparison with a budget-funded institution, because, due to the expansion of its economic independence (and primarily - the elimination of the necessity to approve an estimation of revenues and expenses), the State is no longer responsible for the liabilities of an autonomous institution. Besides, the right of the founder to differentiate the terms and procedure for formulating the tasks of an autonomous institution makes it possible to build the relations with such institutions on a contractual basis. In particular, in presence of alternative private suppliers on the market of certain services, the founder can minimize the scope of mandatory tasks by placing the order for appropriate services on the basis of a tender. For their part, autonomous institutions may participate in such tenders on equal terms with other suppliers. The Law "On autonomous institutions" will come into force in early 2007, thus providing an impetus to the reorganization of the budget-funded network at all the levels of the budget system.
The Law on the target capital of not-for-profit organizations
In the last days of the year 2006, Federal Law of 30 December 2006, No 275-FZ, "On the procedure for forming and using the target capital of not-for-profit organizations" was adopted. This Law has instutionalized a form of financing the activity of not-for-profit organizations which is new for this country but has been actively used in countries with market economies (endowment). Target capital is determined in the Law as part of property of a not-for-profit organization, formed by donations of money and transferred by the not-for-profit organization to trust management by an asset manager for purposes of generating income, to be used for the financing of the charter activity of that not-for-profit organization. In the Law the relations arising during the formation of the target capital of a not-for-profit organization, its trust management, the use of the resulting incomes, etc., are subject to detailed regulation.
The adoption of this Law may be regarded as a certain "compensation" offered by the authority for the introduction, from the year 2006 onward, of a new procedure for the registration and control of the activity of not-for-profit organizations operating in the territory of Russia. The changes in the conditions and procedure for registration, as well as in the reporting procedure had an obvious political goal - to impose limitations on the actual or hypothetical influence of foreign organizations on this country's domestic political situation; however, at the same time they complicated the activity of many not-for-profit organizations in Russia, which has no relation to politics but is financially supported by foreign beneficiaries. This provoked sharp criticism on the part of civil society both in Russia and in the West.
The existing tax regime prior to the adoption of this Law did not favor the creation of stable sources of income for not-for-profit organizations in the form of incomes from investments of an organization's own or received funds. Firstly, this had to do with the taxation levied on the funds proper being received by a not-for-
profit organization for purposes of investing (that is, the formation of capital), and secondly, the incomes received by a not-for-profit organization from investing. The main innovation in the sphere of taxation introduced by the Law on target capital is that the not-for-profit organizations forming and using their target capital are exempt from the payment of the profits tax with regard to the incomes received from their target capital. Another important issue has also been resolved in favor of not-for-profit organizations - that of donations designed to form target capital, which are not to be levied by the profits tax, either.
It is established that target capital should be created for a period of no less than 10 years, and the funds constituting target capital must always be transferred to an asset manager for investing. During that period, the incomes from the investment of target capital may be used. Target capital is to be managed by a specially created collegial agency (a council for the use of target capital), where representatives of a not-for-profit organization itself constitute no more than one-third of members; two-thirds of the council must be independent, formed from representatives of the recipients of the income generated by target capital, donors (or their representatives), citizens and representatives of juridical persons, merited by society or having authority and (or) achievements in the spheres corresponding to the goals of a given not-for-profit organization. If a donor has contributed more than 10 % of capital (balance-sheet value of property constituting target capital), the donor or its representative have the right (but not the duty) to demand that the donor or the donor's its representative should be made member of the council for the use of target capital.
The new Law offers a form of supporting the activity of not-for-profit organizations, which is sufficiently transparent for both the State and civil society. In other words, it provides the private persons and corporations prepared to provide financial support to not-for-profit organizations mostly in the socio-cultural sphere with a transparent mechanism guaranteeing the use of such donations in accordance with their declared purpose. Thus not-for-profit organizations are granted with opportunities for creating a source of long-term and guaranteed incomes, enabling them to implement long-term programs. At the same time certain limitations are imposed on the range of not-for-profit organizations authorized to have their own target capital, as well as on the directions for applying the incomes generated by it. The owners of target capital may be only those not-for-profit organizations that have the organizational-legal form of a fund, an autonomous not-for-profit organization, a public organization, a public fund or a religious organization. State corporations, political parties and social movements cannot be recipients of incomes from target capital. Target capital may be formed for purposes of using the income generated by it in the spheres of education, science, health care, culture, physical culture and sports (with the exception of professional sport activity), art, archives, social aid (or support). The formation of target capital and the use of the income generated by it for other purposes is not recognized as the formation of target capital and the use of the income generated by it. That is, in addition to the traditional spheres of charity, this list does not include such activities as protection of
human rights and freedoms of a person and citizen, environment protection, protection of fauna, etc. The Law introduces a number of important requirements and limitations for not-for-profit organizations in the part relating to the formation of a target capital and its investment.
For example, the Law envisages the minimum size of target capital has being equal to 3 million roubles. This is associated with the fact that investing a lesser sum was viewed as not feasible due to rather high costs of such an investment. Thus, within the period of two months from the day on which the sum of money received by a not-for-profit organization for purposes of forming its target capital will become equal to 3 million roubles, the not-for-profit organization will be obliged to transfer the money to trust management by an asset manager. From the day of the transfer of funds to trust management the target capital is recognized as having been formed. If during one year from the day of the coming to the account of a not-for-profit organization of the first donation earmarked for the formation of target capital the total sum of received donations does not exceed 3 million roubles, or if during that period a council for the use of target capital is not created, the not-forprofit organization will not have the right to transfer the donations to trust management. In this case no target capital is formed, and the not-for-profit organization before the end of the financial year, during which the period established for the formation of target capital has expired, will be obliged to return the received money to the donor, if not otherwise provided for by the donation agreement, or if the money is received by the not-for-profit organization in the procedure of inheritance. Thus, the donations that have not been used to form target capital and have not been returned to donors may be spent on a not-for-profit organization's charter goals.
It is established that a not-for-profit organization has no right to allocate its own money to the formation of its target capital or to the replenishment of its already formed target capital. That is, target capital may be formed only from donations (in the form of money denominated in national or foreign currency).
The rules for determining the objects of investments, in order to minimize risks, have been introduced. The resources of target capital can be placed in Russian and foreign government securities, shares, bonds, Russian mortgage securities, stakes in pension investment funds, and deposits; besides, investments can be made in immovable assets, but no immovables may be accepted as a donation.
The possibility of receiving substantial incomes from target capital and the tax priveleges granted to not-for-profit organizations require that they pursue a policy aimed at limiting the financing of administrative costs. In the Law it is envisaged that a not-for-profit organization (the owner of target capital) may use it, to cover its administrative and managerial costs associated with the formation of target capital and the activity funded by the income generated by target capital, in the amount equal to no more than 15 % of the income from the trust management of property constituting target capital, or no more than 10 % of the sum of income from target capital received during a reporting year. Such costs are recognized, in particular, as the lease of premises, buildings and structures, the cost of acquisition of fixed
assets and expendable materials, the cost of audit, and the payment of salaries to the staff of a not-for-profit organization, the costs of management of a not-forprofit organization or its separate structural subdivisions, and the costs of the acquisition of administrative services for managing a not-for-profit organization or its separate structural subdivisions.
The new institution may undoubtedly have a positive influence on the development of the non-government not-for-profit sector of the national economy of this country, but because of its complexity and the overall very low level of development of the practices of trust management the scope of applying the new mechanism will, most probably, remain rather narrow in the foreseeable future.
The adoption of Part IV of the RF Civil Code
From 1 January 2008, Part IV of the RF Civil Code comes into force7, which regulates relations in the sphere of intellectual property. It is established that Part IV of the RF CC is to be applied to the legal relations that have arisen after its coming into force. In respect to the legal relations that arose prior to the coming into force of Part IV of the RF CC it is applied to those rights and responsibilities which will arise after its coming into force.
Part IV of the Civil Code combines all the norms 8 relating to objects of intellectual property - works of science, literature, the arts, software, databases, inventions, useful models, industrial models, achievements in selection, phonograms and other objects. This Part of the RF CC contains only one section - Section VII entitled "Rights to the results of intellectual activity and the means of individualization". This Part of the RF CC incorporates not only the existing norms in the sphere of intellectual property, but also a number of new norms.
Thus, legislation is amended by the notion of "secret of production" (know-how). This is understood as information of any character (industrial, technical, economic, organizational and other), including on the results of intellectual activity in the sphere of science and technologies, as well as information concerning methods of professional performance that have real or potential commercial value due to their being unknown to third parties, to which third parties have no legal free access and in respect of which the holders of such information have established the regime of commercial secret. The keeper of a production secret enjoys an exclusive right to its use. The specific features of an agreement of an alienation of the right to a production secret and the corresponding license agreement are deter-
7 Federal laws: "Civil Code of the Russian Federation (Part IV)" of 18 December 2006, No 230-FZ and "On the entry into force of Part IV of the Civil Code of the Russian Federation" of 18 December 2006, No 231-FZ.
8 From the moment of the enactment of the new part of the RF CC, a number of normative acts previously regulating the relations in this sphere are recognized to be null and void, namely: the Civil Code of the Russian Soviet Federative Socialist Republic, the RF Laws "On author's right and related rights", "On trademarks, service marks, and names of places of origin of goods", "On legal protection of computer programs and databases", "On legal protection of topologies of integral microcircuits", "On achievements in selection", the RF Patent Law; and some other normative acts.
mined. The relations between an employee and employer associated with the creation of a corporate production secret are regulated.
To all the rights to the results of intellectual activity and the means of individualization recognized as equal to such rights (e. g., a business name and a trademark) a generalized term is applied - that of "intellectual rights" (Article 1226 of the RF CC). The notion of intellectual rights incorporates the exclusive right (which is a property right), personal non-property rights (copyright, the right to a name), as well as other rights (e. g., the right of descent and the right of access).
In the RF CC some provisions have been included establishing the requirements to the content of a business name as an object of rights in the sphere of intellectual property. It is envisaged that an exclusive right to a business name arises from the day of State registration of a juridical person and is terminated at the moment of the exclusion of a business name from the Unified State Register of juridical persons as a result of the termination of a juridical person or the change of its business name. A direct ban is imposed on the disposal of the exclusive right to a business name, including by means of its alienation or by granting the right of its use to another person.
The legal regime for commercial designation, which is also used for purposes of an enterprise's individualization, is subject to detailed regulation. This designation can be used not only by commercial juridical persons, but also by not-for-profit organizations engaged in entrepreneurial activity, as well as by individual entrepreneurs. It should be noted that a commercial designation does not require registration and must not be included in a mandatory procedure in the Unified Sate Register of juridical persons, in contrast to a business name. The exclusive right to a commercial designation may be transferred to another person only as part of the enterprise for the individualization of which this designation is applied.
The notion of a commercial designation is broader than that of a business name. A business name or its separate components can be used by a possessor of right as part of the commercial designation owned thereby (Article 1476 of the RF CC). The business name incorporated into commercial designation is protected independently of the protection of commercial designation.
The list of works which are not objects of copyright has been made more precise. These are news programs, TV feature programs, transport timetables, etc., official documents of international organizations, as well as their official translations (Article 1259 of the RF CC). It is established that copyright is extended to a part of a work, its title, as well as a character depicted in a work.
The RF CC introduces the notion of "the right to the inviolability of a work", which is somewhat broader than the currently existing notion of "the right the protection of an author's reputation" (Article 1255 of the RF CC). Thus, in accordance with Article 1266 of the RF CC, it is not allowed, without the author's consent, to make changes, abridgements or additions to his or her work, the augmenting of a work by illustrations, a preface, an afterword, commentaries or explanations. Article 1267 of the RF CC speaks of the inviolability of a work which is protected indefinitely. The lawmakers have for the first time determined the procedure for the heirs
or other legal successors of an author introducing changes, abridgements or additions into a work, as well as the procedure for the publication of the works of a deceased author. In this connection it is envisaged that such actions can be executed by the aforesaid persons only if this is not contrary to the author's desire, explicitly expressed in writing (e. g., in a will, letters, diary, etc.). (Article 1266 of the RF CC).
Prior to the introduction of these changes existing legislation envisaged the transfer of exclusive rights by means of concession of the exclusive rights to the use of a work (by the Law on copyright and related rights), concession of a patent to an invention, a useful model, or an industrial sample (Patent Law) and concession of a trademark (the Law on trademarks, service marks and names of the places of origin of goods). In accordance with the Law on copyright and related rights, property rights may be transferred only under an author's contract (Article 30 of the Law). In this connection, an author's contract must determine the methods of using a work, that is, the specific rights transferred under this contract (Article 31 of the Law).
For purposes of ensuring a more effective participation in the civil turnover of intangible assets, the newly introduced part of the RF CC determines the procedure for the disposal of property rights to the results of intellectual activity and the means of individualization. Much attention is given to the characteristic and regulation of the two main types of agreements - the agreement of the alienation of an exclusive right and the license agreement (Article 1233 of the RF CC).
Under the agreement of the alienation of an exclusive right, the exclusive right to the results of intellectual activity or a means of individualization is transferred in full (Article 1234 of the RF CC).
It should be emphasized that the RF CC establishes rather strict requirements to the content and formalization of an agreement. A non-compliance with its properly written form or with the requirement concerning State registration entails nullity of an agreement. In an event of absence, in an agreement of an alienation of an exclusive right for a compensation, of a clause concerning the size of compensation or the procedure for determining its size, the agreement is considered not to have been concluded. The general rules for determining a price envisaged in Article 424 of the RF CC are not applicable in this case.
The owners of exclusive rights, if not interested in their complete and final transfer to another person, may resort to a license agreement (Article 1235 of the RF CC). Under a license agreement, one party - the owner of the exclusive right to the product of intellectual activity or to a means of individualization - grants or assumes the responsibility to grant to the other party the right to the use of such a product or such means within the limits envisaged in the agreement.
The right to the use of the product of intellectual activity or a means of indi-vidualization, if not directly stipulated in a license agreement, is not considered to have been granted. The period for which a license agreement is concluded cannot be longer than the period of effect of the exclusive right to the product of intellectual activity or a means of individualization. If this period is not determined in a li-
cense agreement, the agreement in accordance with the general rule is considered to be concluded for the period of 5 years.
The transfer of the exclusive right to the product of intellectual activity or a means of individualization to a new holder of the right cannot serve as the grounds for making changes to or cancellation of a license agreement concluded by the previous holder of the right.
In accordance with Article 1236 of the RF CC, a license agreement can envisage that a person issuing a license to the right of use of the product of intellectual activity or a means of individualization may still preserve the right to issue a license to other persons (simple license), or may not preserve such right (exclusive license). If not provided otherwise by a license agreement, a license is considered to be of the simple type.
A number of norms envisaging additional guarantees for the protection of the rights of authors are introduced. In particular, it is established that no sanction may be applied to the exclusive right belonging to the author of a work or to a performer (Articles 1284, 1319 of the RF CC). For a publishing license contract an imperative rule is consolidated, whereby a publisher is obliged to begin the use of a work no later than a certain timeline established in the contract. A noncompliance with this requirement entails the possibility of a unilateral dissolution of a contract on an author's initiative, without any compensation to the published of the losses resulting from it, as well as the possibility to recover from the publisher the full amount of remuneration envisaged in the contract (Article 1287 of the RF CC).
Besides, for the first time the norms are introduced envisaging the liquidation of a juridical person or an individual entrepreneur for repeated or flagrant violation of the exclusive rights to the product of intellectual activity and means of individualization (Article 1253 of the RF CC).
In connection with the adoption of a new part of the RF CC, some changes have also been introduced in Parts I, II and III of the RF CC and other normative acts.
In particular, the Chapter "Non-material benefits and their protection" in Part I of the RF CC is augmented by Article 152.1, whereby it is envisaged that the publication and any further use of an image of a citizen (including a photograph, as well as a videotape or a work of visual art wherein he or she is depicted) is allowed only with the consent of the aforesaid citizen. After a citizen's death, his or her image may be used only with the consent of the children or the surviving spouse, and in absence of the aforesaid persons - with the consent of his or her parents. The instances are listed when such consent is not necessary, in particular if the image is used for the sake of state, social or other public interests; if the image of a citizen was obtained during filming in places open for free public use or at public events (meetings, congresses, conferences, concerts, shows, athletic competitions and other similar events), except in instances when such an image represents the main object of use; or when a citizen has posed for a compensation.
Article 256 "Common ownership of spouses" in Part I of the RF CC is augmented by the provision whereby common ownership of spouses does not include
an exclusive right to the product of intellectual activity owned by the author of such a product. However, the incomes received from the use of such a product represent joint ownership of spouses, if not otherwise provided by an agreement concluded between them. A similar provision concerning the ownership of each of the spouses is introduced in the RF Family Code.
The "New" RF Labor Code
In late July 2006 a law was adopted whereby numerous changes were introduced to the RF Labor Code. Changes have been made to more than 300 articles of the Labor Code, many of which are fully reworded, and some new articles are added. The majority of amendments and changes are aimed at eliminating the existing contradictions and imprecision in the norms stipulated in the Code.
Now the Code contains more detailed regulation of the issues concerning the local normative acts issued by employers; of the representation of the interests of workers by primary trade union organizations; of employers - physical persons; of the annulment of a labor contract; of changes in the terms of a labor contract determined by the parties thereto; and some other issues.
New requirements have been established to the content of a labor contract. In particular, it must contain information concerning the documents confirming the identity of a worker and an employer - physical person, the employer's taxpayer identification number (with the exception of employers - physical persons who are not individual entrepreneurs), the information concerning the employer's representative who has signed the labor contract, and the substantiation of his endowment with appropriate powers. Among the mandatory terms of a labor contract, the specific type of work assigned to the worker should be indicated. The procedure for augmenting a labor contract with additional information and terms is stipulated. The absence in a contract of any mandatory information or term cannot serve as the grounds for recognizing a labor contract as null and void. The missing information is added directly to the text of a labor contract, while the missing terms are determined in an annex to the labor contract or in a separate agreement between the parties concluded in writing, which is considered to be an inalienable part of a labor contract.
The absence in a labor contract of a stipulation concerning a probation means that a worker is accepted without probation. In an event when a worker has actually been allowed to work without a formalized labor contract (Part 2 of Article 67), the stipulation concerning probation may be included in a labor contract only if the parties have formalized it as a separate agreement prior to the onset of work. In addition to the existing limitations, no probation term is allowed for women who have children aged under one and a half years, and persons concluding a labor contract for a period under two months.
Changes have been made to the procedure of concluding a fixed-term labor contract. In instances determined by the Code, it will be possible to conclude a fixed-term labor contract by agreement of the parties thereto without taking into account the character and conditions of the future employment (for example, with
retired persons or students). In accordance with the new changes, a fixed-term labor contract may be concluded with a retired person only when he or she takes up work. In the sphere of small-size business fixed-term labor contracts will be concluded if the number of workers is no more than 35, including in retail trade and domestic servicing - no more than 20 (in the previous wording - 40 and 25, respectively).
If a worker has not taken up work on the day when his employment begins in accordance with the Code, the employer has the right to annul the labor contract. In this connection, in accordance with the introduced changes, the annulment of a am labor contract cannot deprive a worker of the right to receive provision under the mandatory social insurance program if an insured event has occurred during the period from the day of the conclusion of a labor contract to the day of its annulment.
The list of grounds for the termination of a labor contract with regard to circumstances beyond control of the parties thereto has been extended, these circumstances being as follows: disqualification or another administrative punishment, as well as the expiry, suspension or deprivation of a worker of a special right, if this entails the impossibility for the worker to fulfill his or her duties relating to employment; termination of an access to a state secret, if the performance of work requires such access; or vacating of a court ruling or the decision of a state labor inspectorate that a worker should be reinstated in work.
A new article is introduced, which regulates the general procedure formalizing the termination of a labor contract, whereby it is established that the familiarization of a worker with the order (or disposition) issued by the employer concerning the termination of a labor contract must require the former's signature.
The employers who are individual entrepreneurs are charged with an additional responsibility, whereby they, similarly to juridical persons, are obliged to keep the labor books of their employees. Individual entrepreneurs are equated to organizations also in respect of other rights and responsibilities (the conclusion of collective labor contracts, the dissolution of labor contracts, etc.).
The notion of transfer to other work has been changed. In the new wording, the transfer to other work is understood both as a permanent or temporary change in a worker's labor function. The notion of transfer also encompasses the change of a structural subdivision in which a worker works (if the structural subdivision has been designated in a labor contract), the continuation of work with the same employer, as well as the transfer to work in another locality together with the worker. In all these instances the employer will need a written consent of the employee. Exceptions are represented by extraordinary cases. The Code is augmented by the norm whereby on the basis of a written agreement between the parties a worker may be temporarily transferred to other work with the same employer for a period of up to one year, and in those cases when such a transfer is made in order to replace a temporarily absent worker, for whom in accordance with the law the place of work is retained, - until that worker resumes work. If after the expiry of the period of transfer the former is not made available to the employee, and he or she has not
demanded that it should be made available and continued to work, the contract's term concerning the temporary character of transfer becomes null and void, and the transfer is considered to be permanent.
In the new wording shirking as the grounds for a dismissal is understood not only as the absence from job without justifiable reasons for more than four hours in succession during a work day (or a shift), but also the absence from job without justifiable reasons for the duration of a whole working day (or a whole shift), which apparently is due to the fact that the duration of a shift may be less than 4 hours.
The Code equalizes the disclosure of the personal data of a worker, which has become known to another worker as a result of execution of labor duties, with the disclosure of a secret protected by the law, which as a result may entail the dismissal of the worker.
The procedure for calculating the average daily earnings for payment of leaves and payment of contributory compensation for unused leaves has been changed: the average earnings will now be calculated for the last 12 calendar months by means of dividing the amount of a earnings added by 12 and by 29.4 (average monthly number of calendar days). The procedure for replacing the annual paid leave by a money compensation has been made more precise - such a replacement is allowed for only a part of each annual paid leave in excess of 28 calendar days, or any other number of days from that part.
It is established that additional compensation should be paid to workers (with the exception of worker receiving a salary) for labor on non-work holidays, the size of which is to be determined by a collective contract, or by agreements, or by a local normative act, or by a labor contract. In this connection, the amounts of expenditures on the payment of such a compensation are charged to the payroll in full. Also another stipulation is added whereby the Government's acts concerning the carrying over of holidays to other days in each calendar year must be officially published no later than one month before the beginning of a calendar year. In an event when such an act is nevertheless issued during a calendar year, it must be published no later than 2 months prior to the calendar date of the newly established non-work day.
A new article concerning the system of payment of labor of workers of state and municipal institutions is introduced. The RF Government may establish basic salaries and basic rates by the professional qualification groups of workers which represent the lower thresholds for the salaries of workers of state and municipal institutions.
The Code is also augmented by an article regulating the compensation of expenses connected with the employment business trips of workers whose permanent work involves long-distance and short-distance travel, field work, and expeditions.
The new wording contains a list of instances when a severance benefit is granted in the amount of two weeks' average earnings - a severance payment will now be paid also in an event of the dissolution of a labor contract on the grounds of
an employee's refusal to continue work because of changes in the terms of the labor contract initially determined by the parties thereto.
Specific details have been added to the grounds for the dissolution of an apprentice contract, which may be dissolved before the expiry of the period of apprenticeship or for reasons envisaged in that contract.
Numerous alterations and amendments have been introduced to the Code's Section "Protection of labor": a new article concerning the state expert's estimation of conditions of labor is added, and the procedure for investigating accidents is described in more detail.
The procedure for compensating for the costs incurred by an employer when training a worker, in an event of the latter's quitting the job without justifiable reasons before the expiry of the period determined by a labor contract or agreement concerning training at the expense of the employer is described with greater precision. The worker will be obliged to compensate for such costs in proportion to the duration of the period which has actually been missed.
An important stipulation has been added to Article 236 of the Code. It is established that in the event of a violation by an employer of the established period for payment of earnings, payment for leave, severance payment in the event of dismissal or other payments due to a worker, the duty to pay the established amount of compensation will arise independently of the presence of the employer's guilt.
In accordance with Article 284, the duration of work time established for persons working in a second job may not exceed 4 hours per day. At the same time it is added that in those days when a worker is not engaged in his or her basic labor duties, the duration of work at a second job may be equal to a full work day (or shift). During one month (or another accounting period) the duration of work at a second job may not be longer than a half of the monthly work time norm (or the work time norm for another accounting period) established for a given category of workers. These restrictions on the duration of work are not extended to those cases when a worker suspends his or her work because of a delay (for more than 15 days) in the payment of salary or is temporarily dismissed from work.
The Code has also been augmented by other changes and amendments. The normative legal acts of the USSR are recognized as being null and void in the territory of the Russian Federation. Besides, some legislative acts of the Russian Federation that have lost their validity due to the newly introduced alterations have also been abolished (the laws "On collective contracts and agreements", "On the procedure for settling collective labor disputes", and "On the fundamental principles of protection of labor in the Russian Federation").
