4• benefits for temporary disability resulting from illness or trauma (with the exception of industrial accidents and occupational diseases), to be paid from the third day of temporary disability (the maximum amount to be paid for one full calendar month should not exceed 12,480 roubles);
• mandatory social insurance benefits to citizens employed by organizations and individual entrepreneurs applying special tax regimes (no more than 1 minimum salary for one full calendar month);
• benefits paid from the SIF in accordance with the Federal Laws (the list of such benefits is included in Article 8 of the Federal Law of 16 July 1999, No. 165-FZ, "On the fundamental principles of mandatory social insurance", in particular the benefit in the event of pregnancy and delivery, and the benefit for the caring of a child until it reaches the age of one and a half years).
Annex 2
Changes in the Taxation of Small Businesses in 2005
On 21 July 2005, the State Duma adopted Law No. 101-FZ "On the Introduction of Alterations in Chapters 26.2 and 26.3 of Part 2 of the Tax Code of the Russian Federation, and in Some Legislative Acts of the Russian Federation on Taxes and Charges". In order to assess the changes introduced in legislation on the taxation of small businesses, it will be necessary to begin with the definition of appropriate criterions. Certainly, the major criterion should be the correspondence between the forecasted results of the policy which is to be implemented, and its established goals. However, as far as the clarity of the goals of the tax policy toward small businesses is concerned, there exist a number of problems. The explanatory note to the draft law introduced by the RF Government does not contain any clear definition of the policy's goals. As stated in the explanatory note, the draft law "is aimed at improving the taxation of small businesses, and at eliminating the existing drawbacks in the established procedure for applying" Chapter 26.2, "The Simplified System of Taxation", and Chapter 26.3, "The System of Taxation in the Form of a Single Tax on Imputed Income for Some Types of Activity", of the RF Tax Code. While the elimination of the existing drawbacks in the procedure for applying the Code's chapters is a rather definite task, which implies the correction of certain contradictions and discrepancies, as well as the clarification of those provisions that have been giving rise to disputes between taxpayers and tax authorities, the task of improving the taxation procedures has not been specified in exact terms. Therefore, there have emerged the grounds for formulating some presumably rational goals of the tax policy to be applied to small businesses, from the point of view of tax legislation's efficiency and fairness.
If the costs incurred by enterprises were to be reduced only to those associated with the production technologies and the transactions with other economic subjects, it would have been difficult to find appropriate grounds for introducing special tax treatments for small businesses, or for any other specific features of taxation depending on the scale of production. On the contrary, in the long-term perspective, any interference aimed toward shifting the minimum efficient scale of production may result in an inefficient distribution of resources, because thereby the average production costs will be increased. The amounts of tax liabilities proper are also part of the costs incurred by enterprises, but when the tax laws are rational, and the objects of taxation are clearly defined, such costs are not expected to distort the choice of a scale of activity. If such distortions do emerge, it becomes
necessary to introduce appropriate alterations in corresponding laws (and in case when any such alterations cannot be made for some reasons, the possibility of potential distortions must be investigated prior to choosing tax regulations based on the scale of production).
However, when operating in a real economy, enterprises usually incur some costs that are not limited to the amounts of taxes alone, but have to do with the activity of the State - namely, the compliance costs related to the payment of taxes, as well as to the implementation of state regulation requirements. Usually, those costs are close to quasi-constant ones, and therefore they tend to decrease significantly as an enterprise's scale of activity goes up. Also, the economic (alternative) compliance costs associated with the payment of taxes can be higher for small businesses. This can happen, for example, when the amounts of taxes must be calculated on the basis of certain accounting data which are intrinsically indispensable for big business and are not relevant for small businesses. It is the adjustment of the amount of such costs, which is made in order to achieve greater efficiency and fairness, that can become the aim of establishing special tax treatments for small businesses. Usually, costs become lower when simplified rules for calculating tax liabilities are applied, or when simpler accounting procedures are introduced, or when the duration of an accounting period becomes longer, or due to the implementation of some other measures. Sometimes, instead of directly influencing the amount of such costs, or alongside the measures designed to produce such an influence, an incremental rate of income taxation can be applied. However, if the benefits granted to enterprises result in the tax liability becoming much lower than is necessary for the adjustment of the aforesaid compliance costs associated with the activity of the State, there may emerge a downward shift in the minimum efficient scale of production, which will result, in the long term, in growing production costs and an overall inefficiency of the national economy.
One further aim of using simplified tax treatments, which is common in international practice, is to reduce budget losses in the situation of a widespread tax evasion by small businesses, when there are no resources for ending this practice by any other means. In this connection, it should be noted that such special tax treatments must not create new opportunities for tax evasion.
The existing procedure for the taxation of small businesses does not meet these requirements. The combination of simplified tax treatments with a variety of different rules has made it possible for many enterprises to significantly reduce their tax liabilities, in particular through creating, instead of one firm, two or even more, each of them subject to different tax treatments. The existence of high thresholds for the eligibility to special tax treatments makes it possible for them to be used, in particular, also by those taxpayers whose average compliance costs are relatively low. At the same time, the benefits from the application of simplified tax treatments are much lower for the smallest taxpayers than for those who are relatively larger. We should also like to note another important circumstance -that of the existing regulations being disadvantageous for small-sized businesses whose production activity requires the use of technologies associated with relatively large fixed capital per worker.
Below, we are going to consider the main changes introduced in the procedure of taxation of small businesses, and the expected consequences thereof.
1. The recent alterations include a number of editorial correction, which have clarified the essence of the law and eliminated its potential misinterpretations. These alterations were necessitated by the practice of the law's application.
2. The new version makes it possible to directly switch over from one special tax treatment to another. In the past, it was possible only to switch over from a simplified tax
treatment to the general one, and vice versa. The only exception was the instance of a forced switchover to compulsory presumptive taxation. The above alteration has apparently been dictated by the existence of a multitude of special tax treatments, and a high degree of variability of the potential scenarios of taxpayers' economic activity, with the situation frequently arising when the use of a certain tax treatment is no longer possible, while the option of selecting some other special tax treatment is still available. On the one hand, it is true that if, as a result of certain alterations in a taxpayer's activity, this taxpayer becomes no longer eligible for the use of the single agricultural tax, but still qualifies for the switchover to the simplified system, the prohibition of a direct switchover to the simplified system places him in disadvantageous conditions by comparison with other taxpayers, who at the moment have similar characteristics. On the other hand, the simplification of the choice to be made between various tax treatments also simplifies the procedures of tax planning. However, in any case, both in the former and in the new versions of the law, the switchover to another taxation procedure is associated with certain costs, which are relatively lower in the new version of the simplified system of taxation, as we will see it below.
Apart from the possibility to switch over to a new tax treatment, the new version of the law also makes it easier to change the object of taxation: while previously it was impossible to change the object of taxation when applying the simplified system of taxation (Article 346.14), in the new version this is allowed after three years of the simplified tax treatment having been applied. However, in the text of the article it is not indicated whether it will still be possible to repeat such a switchover after three more years, without temporarily abandoning the simplified tax treatment.
A considerable proportion of other alterations have been introduced because of the necessity for many of the provisions contained in the above chapters of the Tax Code to be brought into compliance with these alterations.
3. Some changes have been introduced in the procedure for determining the amount of a taxpayer's income, which will entitle the latter to switch over to a simplified tax treatment; the amount of this marginal income was also changed. In the new version of the law, this income is to include not only the incomes from realization, but also all the other types of income determined in accordance with Article 248 of the Tax Code. Thus, it has become possible not to extend the simplified tax treatment to those taxpayers who have substantial non-realization incomes. It should be noted that some of non-realization incomes are associated with relatively low costs. Therefore, when the simplified tax treatment is used, in the event of the income being taxed at the rate of 6%, this tax rate is applied, in fact, to the net income. The threshold values of incomes, which entitle a taxpayer to the right to use the simplified system, have been made higher in the new version of the law. In order to switch over to the simplified tax treatment, it is necessary for the amount of income, received in 9 months of the year during which the application for the switchover to the simplified tax treatment has been submitted, to be no more than 15 million roubles (the threshold index formerly applied, which included only incomes from realization, was equal to 11 million roubles). For the simplified tax treatment to be continued, the amount of income must not exceed 20 million roubles (the former threshold was 15 million roubles, but only in respect to incomes from realization). Thus changed, the threshold income values are still rather high, which makes it possible for those taxpayers, whose alternative tax compliance costs are not critically significant for their business activity, to use the simplified tax treatment. At the same time, bearing in mind the fact that the list of income types to be taken into account when calculating these values has been expanded, and also bearing in mind the effects of inflation accumulated since the enactment of Chapter 26.2, the new limitations regarding incomes have become relatively more rigid, as compared to the time when 494
this tax treatment was launched in 2002. One really important change is represented by the introduction of a deflator coefficient (to be established by the Government) for the indexation of these threshold values. Such a solution to the problem, apparently, represents just a half-measure, because in a situation when the rate of inflation is high it is advisable to provide for the changes of all those threshold values (or at least most of them) which are being applied, directly or indirectly, while determining the amount of tax liabilities. This can be achieved either by means of indexation, or by expressing such values in special taxation units, instead of roubles. The task of determining the value of the deflator or of the taxation unit can be entrusted, by the State Duma, to the Government; however, it can also be the subject of a special law.
When the imputed tax treatment and the simplified system are used simultaneously, the limitations applied to the indicators of the number of workers and the value of assets are to be extended to all types of activity, similarly to the requirements established by the previous version of the chapter. But the corresponding rule, previously used when calculating the income for the purpose of determining the right to use the simplified tax treatment, has been excluded from the new version (Item 4 of Article 346.12). It should be noted that the procedure of determining the residual value of depreciable property is associated with much higher costs than the determination of gross income, and therefore the reduction in costs achieved in the instances when the criterions are met is relatively small. At the same time, it has now become possible for organizations engaged in those types of activity that are liable to presumptive taxation to apply the simplified tax treatment in respect to their second type of activity when the turnover thereof is rather significant. Moreover, in the new version of Article 346.18 it is envisaged that, when the presumptive and the simplified tax treatments are used simultaneously, "in the event when it is impossible, while calculating a tax base, to distribute the expenses between the taxes calculated in accordance with different tax treatments, these expenses shall be distributed in proportion to the shares of respective incomes in the overall volume of incomes acquired during the period when the above-noted special tax treatments were applied". Bearing in mind that the combination of several tax treatments creates opportunities for tax evasion, which in this case would be difficult to detect, the advisability of this change seems dubious. The explanatory note of the RF Government, while mentioning the advisability of this measure, does not offer any arguments in its favor.
4. By the Government's suggestion, the list of persons who do not have the right to use the simplified tax treatment includes lawyers who have established lawyer's offices and other forms of lawyer's agencies. This change can be recognized as rational, because the alternative costs of tax accounting, incurred by such persons, are relatively small due to the high qualification level of their personnel and to the uniformity of the operations subject to accounting, while the costs associated with the generation of income are mostly represented by salaries, which makes it possible to reduce, by several times as compared to the general tax treatment, the aggregate tax liabilities of a taxpayer, by means of using the simplified tax treatment, with "incomes" as the object of taxation and the rate set at 6%.
5. The limitation concerning the participation of other organizations in the capital of a taxpayer has also been altered. In the new version, it is not to be extended to not-for-profit organizations. This alteration was not suggested by the Government, having been introduced in the draft law during its consideration in the State Duma. We assume that, as far as not-for-profit organizations are concerned, it would be more advisable to introduce a special taxation procedure corresponding to the specificity of their activity, rather than to extend to them simplified tax treatments, irrespective of the share of participation of other
organizations. In such organizations, the requirements to the quality of accounting must be at least as rigid as those established for commercial organizations, and therefore any additional control on the part of tax authorities would not be superfluous. At the same time, rigid requirements to accounting reduce the alternative compliance costs of tax accounting. This is also true in respect to budget-funded organizations which, after the new version of the Chapter has been introduced, have become completely deprived of the right to use the simplified tax treatment. The above alteration have been introduced by the government's version of the draft law similarly to the prohibition for foreign organizations, which have their subsidiaries, representations or any other detached subdivisions in the territory of the Russian Federation, to use the simplified system.
6. Changes have also been introduced in the procedure for VAT deduction from the tax base in instances when the object of taxation is "incomes less expenses". On the one hand, it is permitted to deduct the paid VAT from the tax base, if the expenses on which it has been paid are acceptable for deduction within the framework of the simplified system, in accordance with Articles 346.16 and 346.17. On the other hand, the list of deductible expenses has been extended. The first of the aforementioned measures corresponds to the procedure under which the expenses incurred by persons who are not payers of VAT must be accepted for deduction in the amount of the sums actually paid, including indirect taxes. If the expenses are not accepted for deduction, the amounts of indirect taxes are not deductible either. Such an approach has logic of its own, but at the same time, the amount of VAT received by a partner must to be transferred to the budget. Moreover, Article 346.17, especially in its new version, sometimes envisages longer periods for the expenses to be accepted for deduction than those envisaged for the offsetting of VAT by Chapter 21 of the Tax Code. From this point of view, this restriction seems rather tough.
7. Despite the extension of the list of deductible expenses, the procedure for deducting the residual value of the fixed assets acquired prior to the date of switching over to the simplified tax treatment is not equivalent to the procedure for deducting the value of the fixed assets acquired after the transition to the simplified tax treatment. However, because of the preservation of the existing limitations on the tax loss carry-forward, in combination with the rule that the tax base of the future periods can be reduced only by 1/15 of the nominal value of the minimum tax, immediate deduction of the costs of the acquisition of capital assets can be less profitable for many taxpayers than gradual deduction of these expenses over the course of several years.
The following provision has also remained intact: in the event of the realization of assets, whose service life is more than 15 years, after less than 10 years of their having been in service, instead of the expenses being deducted in compliance with the rules of the simplified system, the tax base must be recalculated in accordance with the depreciation norms. Any additional revenues for the budget can be generated in such a situation only by the payment of forfeits in the course of the recalculation procedure.
Nevertheless, it should be noted that, in accordance with the rules of depreciation specified in Chapter 25, the new version of the Article has abolished the procedure for recalculating the residual value of fixed assets during the transition from the simplified tax treatment to the general one.
In general, it can be noted that, despite the cancellation of the procedure for recalculating the tax base during the switchover from the simplified tax treatment to other tax treatments, this procedure remains disadvantageous for those taxpayers whose production technology is associated with a substantial amount of fixed capital per worker, if their investments are financed from their own resources. This is typical of a large number of
production enterprises, and special tax treatments are evidently hostile to them, by contrast with the enterprises in the trade and services sectors.
8. It has been already mentioned that the list of deductible expenses is extended in the new version of Chapter 26.2. Nevertheless, it should be noted that, while previously it was possible to accept expenses for deduction while the products were being paid for -which, despite a number of differences, made the simplified system, with its "incomes less expenses" base, similar to the tax on cash flows, in the new version this possibility exists no more. Now, the tax base is to be decreased by the amount of expenses simultaneously with the realization of goods (for acquired goods), or as the goods are written off into production (for raw materials and other materials). This rule further differentiates this tax from the tax on cash flows, i.e., it can be said that this procedure has become much more similar to the general tax treatment, which follows the cash-based method. Moreover, the major advantage of the simplified system of taxation (based on "incomes less expenses") over the cash-based method remains the tax rate reduced to 15%, the benefit concerning the single social tax, and the absence of the property tax. As already noted, under conditions of rigid limitations on tax-loss carry-forward and the minimum tax, which does not, in fact, results in any significant reduction in the future tax liabilities, the immediate deduction of expenses on capital assets does not represent an advantage; sometimes it can even increase the amount of tax liabilities.
There is an obvious tendency for the simplified system, with its "incomes less expenses" object of taxation, to be made unprofitable, as compared to other tax treatments, for the majority of enterprises (with a possible exception of those operating in the sphere of wholesale trade).
9. Chapter 26.2 has been augmented by Article 346.25.1, "The Peculiarities of the Usage of the Simplified System of Taxation by Individual Entrepreneurs, Based on a Patent". This alteration has not been envisaged in the draft law introduced by the Government, and therefore the explanatory note does not offer any arguments in favor of such a step. The following specific features of this article are worth mentioning. The right to use this tax treatment is to be extended to those individual entrepreneurs who do not employ hired workers. As the threshold values of income, which entitle one to the right to apply this tax treatment, are similar to the threshold values applied to any taxpayers claiming the simplified tax treatment, they are sufficiently high for such individual entrepreneurs. The receipts of 20 million roubles per year, or approximately 1.7 million roubles per month, are sufficiently high for an individual entrepreneur, especially considering the fact that the majority of the types of activity included in the list are highly labor-intensive. Thus, it can be said that the limitation concerning the amount of income is, in fact, not restrictive in a situation when this tax treatment is applied (except when the tax treatment is made use of for the purpose of tax evasion). It should also be noted that, although the majority of the types of activity imply the provision of services to the population, some of them are also oriented to the performance of work and the provision of services to enterprises (for example, the cleaning of offices; although some other types of activity can also be interpreted in favor of enterprises). As in this case the expenses incurred by enterprises are deductible, and the tax amounts are apparently expected to be small, tax evasion by means of applying this tax treatment can be rather lucrative. The size of the expected tax amounts cannot be estimated "a priori"; it can become clear only after the adoption of the corresponding laws by those subjects of the Federation who are going to introduce this tax treatment. The tax rate for potential income is set at 6%, while the size of potentially permissible income cannot be higher that the 30-fold base profitability level established for the regime of presumptive taxation, in the event when the type of activity, in respect to which the patent-
based system is introduced, is included in the list specified in Chapter 26.3. However, if the patent value is established at a high level, the system will become useless for the category of smallest taxpayers. The main drawback of such regimes is their regressive nature (or the mean norm of the taxation of incomes that decreases as the size of incomes grows), insensitivity to changes in expenditures, and the opportunities for tax evasion. Such regimes can be justifiable as a temporary measure, in situations when the population is "not literate enough" in terms of taxation, when the administration system applied in respect to ordinary taxes is underdeveloped, when the agencies executing the control over the correctness of tax records suffer from lack of sufficient resources and (or) proper qualification of their staff, and also in other instances when control is difficult for some or other reason (e. g., in respect to seasonal services of non-residents). But even in such cases these regimes can be justified only when applied to smallest taxpayers. It is difficult to believe that any such measures are indeed necessary in Russia - fifteen years after the onset of its actual transition to market relations. However, if the regions are sufficiently interested in keeping their tax revenues at their present levels, they have the possibility to abstain from establishing such procedures in their respective territories.
10. Chapter 26.3 has also been changed in some of its aspects. In particular, the list of activities in respect to which the presumptive tax can be applied has been restructured and expanded. Those types of activity that can be performed on orders of enterprises, in particular the types of promotion-related services that are subject to presumptive taxation, the list of which has been expanded, are causing especial anxiety. In fact, the list of basic profitability indices, as well as their values, has been augmented and, in some of its aspects, changed. In the instances when presumptive taxation is applied, the tax liabilities of the supplier of services are not changed (when the amount of a transaction is increased, while those of the purchaser of services are decreased if the expenditures can be deducted from the tax base. Thus, there arise opportunities for the aggregate tax liabilities of contractors to become lower. The main drawbacks of the system of presumptive taxation are same as those of the patenting system described above, which is also a subtype of presumptive taxation. There exists a clearly observed tendency for a departure from the principle of taxation neutrality and fairness, as well as for an easier detection of the instances of tax evasion achieved by legal means, while the detection of illegal tax evasion is becoming more difficult.
In the chapter's new version, the number of adjustment coefficients has been reduced, which is a reflection of the actual state of affairs: the coefficient based on the cadastre value of land has never been applied in actual practice, while having been initially envisaged in the law. It is noteworthy that these changes have not resulted in a higher transparency of the procedure for determining the adjustment coefficients.
By way of conclusion, it can be stated that the changes in the taxation procedure for small-sized businesses, as introduced by Law No. 101-FZ "On the Introduction of Alterations in Chapters 26.2 and 26.3 of Part 2 of the Tax Code of the Russian Federation, and in Some Legislative Acts of the Russian Federation on Taxes and Charges", are not going, on the whole, to further improve the neutrality and justness of the tax system; also, they create additional opportunities for tax evasion. Especially alarming is the fact that, resulting from the introduction of such regimes, the small-sized enterprises that apply in their production technologies associated with large fixed capital per worker will be faced with a rather unfavorable situation.
