Russian Tax Code - Federal Taxes

Federal Taxes

Distinction between federal, regional and local taxes depends on the level of legislature that is entitled to establish rates for that kind of tax. Federal rates are explicitly set by the Tax Code; regional tax rates are limited by the Code but set by regional laws. Federal taxes such as the personal income tax may forwarded to regional governments; corporate profit taxes are split into federal and regional shares defined by the Code.

VAT is the largest source of federal revenue (32 percent in 2008). VAT on imports (13 percent of federal revenue) is 18 percent (10 percent on selected foodstuffs) prior to release from the customs warehouse. VAT on domestic goods is calculated as the difference of VAT on sales (at the earliest of cash receipt or shipment of goods on credit) and input VAT on accrued costs.

VAT paid to suppliers that has not yet materialized into services or goods cannot be credited against current tax liability. VAT paid to suppliers on export sales is refunded in full if the seller receives payment for exports within 6 months of shipment. Refund of export VAT has become a major source of fraud, while law-abiding exporters have to resort to court action to get the refund.

VAT exemption extends to targeted companies in medicine, pharmaceutical industry, education, public housing and transportation; to private homes and apartments; to traditional banking and insurance services; to sales of exclusive copyright on software, integrated circuit topologies and similar high technology contracts.

VAT ineligibility is a very common charge by tax authorities. An April 2004 ruling by the Constitutional Court of Russia that increased corporate tax liabilities was revoked by Supreme Arbitrage Court in December 2004. The Federal Tax Service resolved the same case one year later.

Tax on mineral resource extraction (MRET) is the second largest source of federal revenue regulated by the Code; most of it is paid by oil companies. Tax rates for oil (per metric ton) are set by the government; its formula refers to world market prices (same for all domestic producers) and a "depletion factor", specific to each oil field. The latter has been regularly criticized as a source of corruption and unfair competitive advantage. New oil fields in Sakha, Irkutsk Oblast, Krasnoyarsk Krai are exempt from MRET altogether.

Rates for other mineral resources are set in the Code as a fixed percentage of their market value (from 3.8 percent for potassium salts to 17.5 percent for gas condensate) or, in case of natural gas, at a fixed amount per unit volume. The tax is paid monthly based on physically extracted tonnage, not sales. A related but separate Water tax is paid by organizations physically extracting surface or subterranean fresh water, as well as by hydroelectric powerplants and timber rafting loggers.

Corporate profit tax (CPT) is the largest source of regional revenues. The rate for 2009 is 20 percent on pre-tax profits, 2 percent to the federal budget and 18 percent to regional budgets. The rate decreased from 24 percent effective in 2001–2008 in the wake of the 2008 Russian financial crisis.

Expense deductibility limitations were gradually eliminated in the years following enactment of Chapter 25, and as of August, 2008 practically all business expenses are fully deductible. The Code retains a principal statement that deductible expenses must be "economically justified and properly evidenced with documents". The tax authorities manage the specifics. Taxpayers resolve disputes through court litigation; resolutions of upper-tier Arbitrage Courts, clarifying gray areas of tax accounting, form a separate layer of tax environment that augments the Code.

Double taxation of dividends is completely eliminated when a Russian shareholder owns at least 50 percent of Russian or foreign subsidiary paying dividends (excluding foreign entities located in tax haven jurisdictions) for at least 365 days and the investment is worth more than 500 million roubles. All other dividends received by Russian shareholders are subject to 9 percent tax.

Excise tax is levied on manufacturers of raw and refined alcohol, alcoholic drinks stronger than 1.5 percent by volume, including beer; gasoline and diesel fuel, motor oils; passenger cars and motorcycles with engines in excess of 150 h.p.; tobacco products. The Code specifies strict licensing rules for oil refineries and alcohol distillers. Rates increased until 2010; by 2010, excise taxes of a typical cigarette pack will reach 15–30 percent, which is less than its European counterpart. Since 2007, cigarettes have been taxed based on a percentage of manufacturers' suggested retail price (MSRP). This approach made MSRP mandatory and quickly led to government-induced retail price fixing.

Unified social tax (UST) combines previously separate contributions to Pension Fund, Social Security Fund and medical insurance.

UST is accrued on all employer-to-employee payments which are deductible for profit tax purposes; non-deductible payments like dividends or charity are not subject to UST. Pensions, severance pay, and travel expenses are not taxable. The schedule is regressive: annual income up to 280,000 roubles is taxed at 26 percent; marginal rate for income above 600,000 roubles is 2 percent. Rates in agriculture and in special high technology parks are lower. Note that a significant part of mandatory contributions to Pension Fund is not included in UST.

Pension Fund deficits have caused calls to increase UST rates or switch from regressive to flat rates. A proposal for a flat UST was initiated in July 2008 by INSOR, Dmitry Medvedev's think tank and further detailed in Putin's proposals made October 1, 2008.

Workplace accident insurance, enacted later, is not part of UST or the Tax Code. Each employer must contribute to group accident insurance. The rate varies between 0.2 percent and 8.5 percent, depending on the type of business. The rate for trading companies is 0.2 percent and for transportation companies 0.7 percent.

Personal income tax (PIT) is levied individually normally at 13 percent. There is no joint filing. Employers withhold income taxes, thus the taxpayers whose only taxable income was paid by employer do not need to file a tax return—except to claim a refund for itemized deductions. The most important deductions are for home purchase (once a life), and education and medical expenses. Deductions require documentation and are subject to limitations. Tax returns are mandatory for registered entrepreneurs and professionals (lawyers, notaries, etc.), sellers of personal assets and recipients of other income. Out of 10.4 million registered residents of Moscow, only 94 thousand filed tax 2006 returns and 105 thousand filed for 2007. State pensions and alimony are normally not taxable, as well as bank interest (unless it exceeds the refinancing rate set by Central Bank of Russia).

Capital gains from asset sales are taxable only if the seller owned the asset for less than 3 years. A special tax rate of 35 percent applies to lottery and gambling wins and excess of bank interest received over the threshold interest computed using refinancing rate. Interest rates are usually below the threshold, making interest tax free.

Withholdings are remitted to the employer's registered region, rather than the employee's. The governments of Moscow Oblast, Tver Oblast and Leningrad Oblast object to this policy. They are net exporters of suburban manpower to Moscow and Saint Petersburg. In March 2008 Moscow Oblast initiated a federal bill intended to change the system in favor of suburban territories.

Other federal taxes prescribed by the Code include a tax on animal and water wildlife, levied upon licensed hunters and fisheries, and a document tax (stamp duty), most notably the ad valorem duty required to start civil litigation in state courts.

In 2007, the Ministry of Finance estimated that taxes will generate federal revenues as follows: