Common Characteristics of the System of Taxation in the Russian Federation
The basic laws governing taxation are covered by the Tax Code of the Russian Federation (TC RF).
The Tax Code consists of two parts. The first part of the Tax Code came into effect on January 1, 1999. It contains the basic rules that are applicable to tax legislation in Russia, including the concepts used in the tax law, the principles of taxation, the system of taxation, the status of taxpayers and government bodies involved in taxation, general rules governing the payment of taxes, as well as the rules on liability for any breach of tax laws and regulations on the protection of rights of taxpayers.
The second part came into effect on January 1, 2001. This part establishes the rules as it relates to specific taxes.
On a territorial basis there are three levels of taxation in Russia, federal, regional and local taxes.
The basis of the tax system consists of federal taxes, which are:
· Value Added Tax (VAT);
· Excise Tax;
· Tax on Personal Income;
· Tax on an Organization’s Profit;
· Charges for the use of wildlife and for the use of aquatic biological resources;
· Water Tax;
· State Fees;
· Tax on the extraction/production of minerals.
For federal taxes, all elements of taxation, including taxpayers, the object of taxation, tax base, tax period, rates, procedures for the calculation of taxes and the procedure and terms of payment are determined by federal tax laws.
Value Added Tax
Those who are subject to the Value Added Tax (VAT) are organizations and individual entrepreneurs, as well as persons who are involved with the movement of goods across the common customs border of the Customs Union between Russia, Kazakhstan and Belarus.
Also subject to the Value Added Tax (VAT) are transactions of goods (works, services) in the Russian Federation, as well as some other operations, including the import of goods onto the territory of the Russian Federation and other territories which are under its legal jurisdiction.
The rate of taxation can range from 0% to 18% of the cost of the goods sold (or services provided) depending on their type.
As an example, a tax rate of 0% is applied for the service of international freight transport. A rate of 10% by implementing separate taxation of certain products which include: meat, milk and milk by-products, eggs, vegetable oil, sugar, salt, bread, cereals, flour, pasta products, living fish, food products for children and diabetics , vegetables and certain products for children and medical supplies that are of Russian or foreign origin, in addition to some other products.
The Tax Code of the Russian Federation provides for tax deductions as well as the possibility of a tax refund from the budget.
The range of the excise tax to taxpayers is similar to that of the Value Added Tax (VAT).
Goods that would be subject to an excise tax are ethyl alcohol, brandy, products containing alcohol (except for certain medicines, veterinary medicines and cosmetics), drinkable alcohol such as vodka and other spirits, brandy, wine, beer, beverages manufactured with beer as a main ingredient, beverages with a volume of ethyl alcohol of more than 1.5 %, tobacco products, passenger vehicles, motorcycles with engine an capacity exceeding 112.5 kW(150 hp), gasoline, diesel fuel, motor oil for diesel and (or) the carburetor (injector) engines and straight run gasoline.
The object of taxation is selling on the territory of the Russian Federation of goods by the person(s) responsible for their production or who have imported these goods onto the territory of the Russian Federation and other territories under its legal jurisdiction, as well as some other operations.
The taxation of goods that are subject to an excise tax is carried out at different rates depending on the type of commodity it is. For example, in 2012, beer with ethyl alcohol content of more than 0.5 % to 8.5 % will be taxed at a rate of 12 rubles per litre, and tobacco (excluding raw materials) - 610 rubles per kilogram, filtered cigarettes - at least 460 rubles for 1000.
Tax on Personal Income
Russian tax residents pay income tax on income earned from sources within Russia as well as on income derived from sources outside of Russia. Persons who are not tax residents in Russia pay tax only on income earned within Russia.
Tax residents of Russia are recognized as those persons who are actually residing in Russia for a period not less than 183 days for 12 consecutive months.
The Tax Code defines the types of income that are not subject to taxation, but also provides a system for tax deductions that reduce the tax base.
As an example, that is deemed not taxable are state benefits such as state pensions, grants provided to support science and education, culture and art in Russia, inherited property, payment for education of the taxpayer, some income derived from bank deposits located in Russia, as well as other income, as defined in the Tax Code.
The tax rate can vary from 9% to 35%. The basic tax rate is 13%. Persons who are not tax residents of Russia, as a rule pay tax at a rate of 30%. Foreign citizens who are classified as Highly Qualified Specialists and who have a work permit in Russia pay a tax at a rate of 13% even, when they are not tax residents of Russia.
Russia is as well a signatory to international agreements with many countries on ways to avoid double taxation, which provide tax relief if that same taxation was paid in another country.
Tax on an Organization’s Profit
An organization’s profit is taxable to Russian and to other foreign organizations operating on the territory of Russian Federation either permanently and (or) receive income from sources within the Russian Federation.
Participants involved in the innovative project "Skolkovo" are exempt from the obligation to pay tax for a period of 10 years from the date of obtaining their status as a participant of the project.
The object of taxation is income, which reduced the amount of expenditure of the taxpayer listed in the Tax Code.
The main and maximum rate of taxation is 20%. In certain instances the lower tax rates can reach 0%.
Fees for the use of wildlife and for the use of aquatic biological resources
Those subject to these fees are recognized as organizations and individual, including sole proprietors who are recipients in due course having:
· permission to extract wildlife on the territory of the Russian Federation;
· permission to harvest (catch) aquatic biological resources in internal waters, territorial seas, continental shelf of the Russian Federation and in the exclusive economic zone of the Russian Federation, as well as in the Sea of Azov, Caspian, Barents Sea and around the island chain of Svalbard.
Objects of taxation include mammals, birds, fish, molluscs, arthropods which are removed from the environment. The Tax Code of the Russian Federation contains lists of wildlife and aquatic biological resource objects, for the extraction of which charges are to be applied.
Fee rates are set in rubles per animal or per tonne in the case of aquatic biological resources.
Taxation is applied for the withdrawal of water from waterways, the use of water areas, and the use of water facilities without water extraction for hydropower or for the purposes of the alloy timber.
Tax rates are set for the amount of water that is withdrawn, the unit of area used, for the purpose of generating hydropower - a unit of electricity generated, for the purpose of alloy timber - a unit of forest alloying for 100 kilometres.
State Fees are levied for the completion of legal actions by state authorities, regional bodies and notaries.
Payment of state fees are due for example, when one is referring to the court or when applying for obtaining of certain documents (such as work permits for foreign citizens), and registration of legal entities as well in other cases.
Taxation on the extraction/production of minerals
There is an applicable tax for organizations and individual entrepreneurs who granted use of subsoil (production and extraction of minerals)
Objects of taxation include:
· minerals mined from subsoil on the territory of the Russian Federation;
· minerals extracted from the waste (loss) of mining production:
· minerals that are extracted from subsoil outside the territory of the Russian Federation, if the extraction is carried out in the territories under the jurisdiction of the Russian Federation (as well as territory leased from foreign states or is used under the terms of an international treaty).
Russian Regional Taxes include:
· transport/vehicle tax;
· tax on gaming/gambling;
· property tax.
Regional taxes are set in cooperation by federal law and the legislative bodies of the regional authorities. Regional tax is required to be paid in the region to which the tax is applicable.
With regard to regional taxes, the Tax Code of the Russian Federation defines the principles of their establishment, enforcement and termination. In addition, the Tax Code defines the object of taxation, tax base, tax period and the procedures for calculating tax.
The Regions set the tax rates within limits that are prescribed within the Tax Code. In addition, for vehicle tax and property tax regions determine the order and terms of payment of tax and tax reductions.
Those obligated to paying a vehicle tax are those who have registered vehicles in their name.
That which is subject to taxation include: cars, motorcycles, scooters, buses and other self-propelled machines, planes, helicopters, ships, yachts, sailboats, boats, snowmobiles, motor boats, jet skis, rowboats, (towing vessels) and other water and air vehicles that are registered in accordance with Russian law.
There is a list of vehicles that are not subject to taxation. For example, items listed as exempt from taxation include, passenger cars specially equipped for disabled persons, ocean and river vessels for fishing, ships registered in the Russian International Register of Ships, farm machinery and other vehicles.
Tax on gaming/gambling
Objects of taxation include: a gaming table, slot machines, sweepstakes and bookmaking (betting)
Tax rates are calculated per month:
· For each gaming table – from 25,000 to 125,000 rubles;
· For each slot machine from 1,500 to 7,500 rubles;
· For each sweepstakes or bookmaking cash register – from 25,000 äî 125,000 rubles.
The objects of taxation shall be deemed as property that is either movable or immovable (including property transferred into temporary possession, use, disposal, and asset management, as well as property contributed to joint activity and property received according to concession agreement) and accounted for the balance sheet as fixed assets.
The objects of taxation for foreign companies operating in the Russian Federation through permanent representative offices are movable and real property relating to fixed assets, property acquired by the concession agreement.
For taxation of foreign organizations, records of taxable items must be kept adhering to the norms and practices of Russian accounting rules.
The object of taxation for foreign companies that do not carry out activities in the Russian Federation on a permanent basis is their real estate in the Russian Federation or property received under the concession agreement
The tax rate cannot exceed 2.2% of the average value of the property.
Local taxes in Russia come in the form of a land tax.
Land tax is established and terminated jointly by the federal legislator and representative bodies within the municipalities (Moscow and St. Petersburg - the laws of these cities), since the establishment of the tax that is required to be paid is in the territory of the municipality (the cities of Moscow and St. Petersburg).
While establishing tax representative bodies of municipalities (legislative bodies in Moscow and St. Petersburg) determine tax rates, procedures and terms of payment of tax and tax reductions.
The tax base is defined by the cadastral value of land.
Tax rates are set within a specified range that includes the Tax Code and may not exceed:
0.3% of agricultural lands, lands that are residential and has the engineering infrastructure for housing and equipped for communal services, land that has been purchased for housing, land which has been acquired for private farming, gardening, horticulture or the raising of livestock as well as for a cottage industry;
1.5% in respect to other lands.
Besides the actual taxes in Russia there are four special tax regimes:
· a single agricultural tax;
· a simplified system of taxation;
· a single tax on attributed income for certain types of activities;
· a system of taxation under production-sharing agreements.
Special tax regimes are favourable compared with the general regime. They stipulate payment of one tax or section of output between the state and the taxpayer instead of multiple tax payments from those which we listed above.
For example, under a simplified system of taxation the taxpayer as an individual entrepreneur can pay 6% of gross income. However, he does not pay VAT and tax on personal income.
In addition to taxes Russian legislation provides for payment of compulsory insurance contributions for social insurance which are paid by employers. By their nature, these contributions are very close to taxes, but technically are not, therefore are not covered here in this article, but may be a relevant topic for subsequent articles.
This article was published in ExpatSafe Journal, #2