Mutual agreement procedures to be included in the Tax Code
Mutual agreement procedures to be included in...
A brief overview of the main provisions of the draft law
On 29 May 2019, the Government of the Russian Federation submitted draft federal law No.720839-7 to the State Duma, which had been developed by the Ministry of Finance of the Russian Federation (hereinafter the Draft Law), with further multiple amendments to the Tax Code of the Russian Federation. We already wrote about this draft law when it was first submitted for discussion in March this year1. It is highly likely that the State Duma will start considering the draft law in the autumn session after the summer recess, which will provide the business community with an opportunity to carefully review the draft law once again and make their comments before the first reading, and also to start the discussion on identified bottlenecks.
Mutual agreement procedures will be included in the Tax Code
A new chapter will be added to the Tax Code regulating the dispute resolution procedures on the application of the provisions of international tax treaties concluded by the Russian Federation. In particular, the Code will establish mandatory requirements for mutual agreement procedures (MAP)2 to ensure that Russian national legislation complies with the minimum standard of the dispute resolution mechanism when applying double tax treaties (DTT), including the following:
— the taxpayer will have the right to submit an application to the Ministry of Finance of the Russian Federation3 for mutual agreement procedures if it believes that the tax treatment of the taxpayer’s income, profit or property contravenes or will contravene the provisions of the DTT prior to the expiration of three years from the date when the act of the tax authorities enters into force, which in the taxpayer’s opinion results in such a discrepancy;
— within 90 days of receiving the taxpayer’s application, the Ministry of Finance of the Russian Federation will make a decision to start mutual agreement procedures, or refuse them4; in this case, the timeframe of MAP remain unregulated;
— The Ministry of Finance of the Russian Federation will only be able to apply to the tax authorities for a reasoned opinion, on which basis it will take a decision on the MAP results. In this case, the tax authority will have to prepare such an opinion within 3 months of receiving the documents from the Ministry of Finance of the Russian Federation. For this purpose, it will be able to request the documents (including transfer pricing documentation) from the taxpayer or its counterparty, even if such documents had previously been submitted. In turn, the taxpayer and/or its counterparty will have to respond to the request of the tax authority (the deadline for submitting the documents is 1 month).
Please note that the mutual agreement procedures may be initiated not only by the taxpayer, but also by the competent authorities of the foreign country with which Russia signed the respective double tax treaty.
MAP codification means that the Ministry of Finance of the Russian Federation is ready to apply this mechanism to eliminate discrepancies in the interpretation of DTT.
In our opinion, however, the text of the draft law in this aspect will require further amendments, as some issues remain outstanding. In particular, it remains unclear whether it is possible to apply for MAP in respect of future periods in cases when there is only a decision based on the results of historical checks. However, it is already clear that a similar approach will apply in future.
There will be fewer opportunities for tax optimization in the case of a reorganization
To prevent companies from using tax evasion schemes during a reorganization and the application of special tax regimes by their legal successors, the following is planned:
— in the event of reorganization through merger or consolidation the legal successor may only deduct losses for the period when the reorganized companies were related parties. The amendments are to be introduced to Clause 5 of Article 283 of the Tax Code of the Russian Federation;
— after the legal successor makes the transition to a special tax regime or performs operations that are exempt from VAT, the previously accepted VAT for goods (work, services), including fixed assets, intangible assets and property rights, is recoverable. Under the draft, the respective amendments will be introduced to Article 162.1 and Article 170 of the Tax Code of the Russian Federation. At present the Tax Code does not establish such a requirement.
The refund of excess tax payments is limited to three years
If the taxpayer identifies errors in the tax returns of previous periods which resulted in excess payment of income tax, the excess tax paid can only be recovered within a three-year period from the date when the amount of the tax is paid. At the same time, the corrections should be made to the tax return of the current period. If the errors are discovered outside the three-year timeframe, any recalculation of the tax base of the period in which the error was made will be impossible. Amendments will be introduced to Article 274 of the Tax Code of the Russian Federation to include Clause 22.
Amendments to Article 78 of the Tax Code stipulate the elimination of limitations which stipulate that the excess payment can be offset only as a tax of the same type: federal as federal, regional as regional, and local as local – this is definitely a positive change for taxpayers.
However, amendments to this article will result in stricter requirements - a tax refund will only be possible if there are no arrears on any taxes and relevant penalties and fines. The current edition stipulates that there should be no arrears on the same type of tax.
Clarifications on depreciable assets
Depreciable assets will be property in use for a period over 12 months, regardless of its cost. Now the cost limit is 100,000 rubles.
The amendments propose the inclusion of fixed assets received for gratuitous use in the depreciable asset for income tax purposes. Expenses on the depreciation of such assets will not be recognized in the tax accounting.
The extension of the useful life for mothballed fixed assets is canceled during the period when they are mothballed.
The depreciation method can be changed no more than once every five years.
Clarification of the concept of an investment project and other aspects related to benefits for investors
Article 11 of the Code will introduce the concept of an “investment project” (in particular, it will be used to assess the compliance of the project with the requirements for regional investment projects and the benefits of special investment contracts): it is a set of measures limited in time and resources aimed to create and ensure the subsequent operation of new, or upgrade existing fixed assets being implemented in order to establish new production facilities for goods (work, services) or increase the volume of existing production of goods (work, services).
It is clear that under this definition, projects aimed at an upgrade of production, and also modernization to improve performance or productivity in the absence of an increase in volumes or the establishment of new production facilities, will be excluded from the list of projects eligible for benefits. In the case of such changes, at the very least a “grandfather clause” is required, so that changes of the concept do not serve as the basis for excluding previously included projects from a registry of regional investment projects.
As part of the discussion of this provision, we can also return to the discussion about the current “imbalance” in the Tax Code regarding what the regional authorities include in the register of regional investment projects, and the tax authorities exclude based on the results of their audits.
There are also plans to introduce the concept of a single technological process. A single technological process is a set of interrelated consecutive technological operations required to produce goods during regional investment projects with the use of property, the costs of which constitute the volume of capital investments made by a participant of the regional investment projects.
Current legislation does not contain such a definition.
The preferential rate of income tax for participants of regional investment projects which do not require inclusion in the register of participants of regional investment projects will only be applied until the total difference between the tax at the rate of 20% and the preferential rate exceeds the amount of the capital investments in a project.
For the same category of regional investment projects participants, which apply the Ktd decreasing factor in oil production, the last period for applying the preferential income tax rate will be the tax period preceding the calendar year in which Ktd=1.
Other amendments included in the Draft Law:
—the proposed income tax rate for regional or municipal museums, theaters and libraries is 0%. Should such income account for at least 90% of the total income of the taxpayer, this rate will be applied to the entire tax base;
— individuals will have the right to submit to the tax authorities and receive from them documents and other information using multifunctional service centers;
— the minimum number of employees for the mandatory submission of reports on insurance premiums to the tax authorities in electronic form will be changed from 25 to 10 people;
— the procedure applied by tax agents to transfer personal income tax amounts for standalone subdivisions is simplified (it will be possible to do this at a tax authority at the location of one of these subdivisions);
— the payment of personal income tax at the expense of the employer is stipulated if the tax audit establishes that the tax was withheld wrongfully from an employee. In this case, the amount of tax will not be included in the income of the employee;
— the accounting treatment for fixed assets applied by taxpayers using the simplified tax system and unified agricultural tax is simplified;
— the application of a single tax on imputed income and patent regime for the sale of branded goods is prohibited;
— the sales tax payment procedure is specified for trading through fixed retail properties and warehouses.
We will continue to keep a close watch on the draft law and will inform you about developments. KPMG experts are also ready to discuss your comments and suggestions on corrections to the wording of the draft law.
1 You can study our comments as at 2 April 2019 made at the stage when the draft law was posted on the Federal portal of laws and regulations follow the link.
2 For more details ,see our alert dated 3 June 2019 “Draft amendments to the Tax Code of the Russian Federation with regard to controlled transactions with intangible assets, and also with respect to the profit distribution method and mutual agreement procedures” based on the link
3 The supporting documents to be attached directly to the taxpayer's application for mutual agreement procedures are listed in Guidelines for holding mutual agreement procedures approved on 30 January 2019 by the Ministry of Finance of Russia.
4 The following established facts may serve as reasons for the refusal to hold mutual agreement procedures: the taxpayer's actions are aimed at tax evasion (inter alia, the receipt of benefits and privileges stipulated by DTT provisions), or an effective court ruling further to the appeal of the taxpayer against a decision issued based on the results of the tax audit report, which, in the taxpayer’s opinion, leads to a discrepancy between the tax treatment of income, profit or property and the provisions of DTT.
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