ACCOUNTING & TAXATION IN RUSSIA

Transcription

1 ACCOUNTING & TAXATION IN RUSSIA Moscow, March

2 Contents Introduction... 2 Accounting in Russia... 3 Preface... 3 Russian accounting documents... 4 Cash payments and cash management... 5 Personnel management and personnel accounting... 6 Fines and Penalties... 7 Taxation in Russia... 9 Preface... 9 Important Tax Types Tax on profits Value Added Tax Wealth Tax Wealth Tax for private Individuals Income Tax Social Insurance Contributions Industrial Insury Insurance Simplified Taxation System Fiscal Problems When Forming a Company Tax Inspection Double Taxation Agreement Foreign Exchange Control Closing Words... 18

3 Introduction We help international companies in Russia! Our mission statement Russia offers international companies outstanding business opportunities. In the future a high consumer demand and demand for investment may also be expected because of the enormous pent-up demand and need for modernisation of the Russian economy. Products and services from Germany enjoy a particularly good reputation. Therefore Germany has been Russia's most important foreign trade partner for several years and with 6,000 companies, including many selfemployed businessmen, also provides the largest foreign business community in the country. Where there are chances, there are also risks. Amongst the risks of a business venture in Russia are the intricate bureaucracy as well as the complicated and confusing accountancy and tax guidelines. We specialise in removing these barriers for you. 2 RUFIL CONSULTING offers to outsource the complete Russian accounting process, including the handling of tax returns, as well as further services in the area of international accountancy, market entry and business expansion, for medium-sized German companies in Russia. In this brochure we would like to give you an overview of the specialities of accountancy and taxation in Russia. If you have further questions regarding this or any other topic, you can contact us at any time. Our contact details can be found at the end of this brochure or on the internet at Your Philipp Rowe Chief Executive Officer RUFIL CONSULTING / Accounting & Management in Russia

4 Accounting in Russia Preface All companies registered in Russia, including any representation of foreign companies, are legally required to keep their own accounts. This requirement exists even if the company does not conduct any commercial activities. Furthermore it is compulsory that in every company there is a managing director and chief accountant. Both of these roles can also be carried out by one single person. You assume particular responsibility for the accounting, and can also be held personally liable for it. The accounting practice is very formalistic. The required documents are more often than not statutory. Forms which are compiled by the company itself are only accredited and legally effective after an internal order, a so-called "Prikaz". Also, according to financial requirements the chart of accounts cannot be chosen freely, the treasury regulates it using legislation. However it is possible to add subsidiary account. Another distinctiveness is that a financial year in Russia has to correspond exactly to a calendar year. Companies are additionally obligated to define their accounting principles once a year according to both commercial and fiscal law. These principles describe how individual voting rights should be exercised. For example, the internal amortisation methods, which have to be submitted to the tax authorities every year, should be defined here. These cannot be altered retrospectively. 3 A balance sheet, profit and loss calculations, as well as corporate tax returns have to be submitted quarterly to the tax authorities. In addition further declarations are required by the social insurance and statistical authorities. More than 15 different reports are accumulated every quarter. We will gladly send you an overview of these at your request. Payments from abroad are subject to currency controls. For bank transfers of more than 50,000 USD (including VAT) extensive proposals, in Russian "Pasport Sdelki", have to be submitted to the bank before the money arrives. In this case you also have to submit the respective underlying contracts and accounts. However there are consistently delays and unexpected difficulties, for example because a stamp is missing or the bank requires proof that the parent company does not use a company

5 stamp or is registered in a different country. However because there are no explicit rules for this, it is administered very differently by the banks. Although there have been Russian accounting standards, so-called PBUs, in Russia since 1998, in practice the financial statements relating to commercial law are compiled as close to fiscal law as possible. There are now 22 such standards, though they are hardly used. The Russian accountant is in constant contact with the tax authorities to represent the interests of the company. Due to the formalities and complications described, there are generally at least twice as many bookings in Russian accounting compared to German. Therefore multiple documents have to be issued, collected and archived. Russian accounting documents As a consequence of the strong formalistic nature of the Russian accounting system and large effort required with documents, there are various documents which are often incomprehensible to outsiders. The most important of these documents will be subsequently explained in this brochure. Unlike in Germany, an invoice itself is not relevant for accounting and fiscal purposes in Russia. The invoice, in Russian "Schyot", is simply considered to be an invitation to payment. This is often sent in advance by or fax because delivery by post would take too long. To be operative Russian accounting documents must always be in the original format with a signature and a blue round company stamp. A document sent electronically and printed out will not be accepted. 4 In contrast, the faktura invoice, in Russian "Schyot-Faktura", and completion certificate for services provided or delivery of goods, are much more important than the invoice. The faktura invoice is a predetermined accounting document, whose format cannot be changed. It serves as prepaid tax to deduct VAT from the invoiced amount for the recipient of a service or good. If this document is not available the VAT cannot be subtracted as prepaid tax. As a rule such a document is only issued in the case of non-cash transactions. Cash payments in a restaurant or shop do not qualify for tax rebates. So that an invoice which has already been paid can effectively be recorded as an expense the completion certificate is required, in addition to the invoice and the faktura invoice. The completion certificate is issued for a service provided or goods delivered. Both parties to the contract certify once again in this transcript, that a

6 service has been duly fulfilled or the goods have been duly handed over. It is not to be confused with a delivery note. For services it is called an "Akt" and for the delivery of goods "Tovarnaya Nakladnaya". In order to be able to prepay the VAT and to record the incurred outgoings as expenses, the invoice, faktura invoice and completion certificate have to be on hand. Incomplete recording of documents is penalised by fines. The following is an example of this: "You have a flat rate contract to use the internet and pay a fixed amount in advance at the start of the month. However you cannot record this amount as an expense, because the payment from the bank is initially recorded as an advance payment or demand from the internet provider. Only at the end of the month once you have received the "Akt" and faktura invoice signed by the CEO of the internet provider can the internet use costs be rebooked as expenses instead of as an advance payment." To control the integrity of all documents, all incomings and outgoings are recorded in special ledgers. Generally this begins a time-consuming follow-up for the accountants of the different parties to the contract. In the process the missing documents have to be collected otherwise the payments already made cannot be booked as expenses. 5 Cash payments and cash management In order to be able to carry out cash payments and to be allowed to keep money in the cash register, the company is required to keep an official cash register with a cash ledger. A so-called cash limit as well as a ledger for cash withdrawals must be applied for in advance. As part of cash management further formalised records of cash takings, cash outgoings and advance payments have to be compiled for every incoming and outgoing payment. All transactions and outgoings are then recorded again in the so called "Avansovyi Otschyot", similar to in an expense report. When paying by cash or a credit card care must be taken to ensure that the tax number of the payee is stated on the receipt and that the services are precisely labelled and listed. When purchasing merchandise an additional "Tovarnyi Chek" is required. This is a document which lists once again all purchased articles in detail. A

7 faktura invoice is not issued for cash purchases. Consequently a prepaid tax deduction is not possible. In order to be able to obtain takings made in cash or by credit card, the company has to register a till with the tax authorities. However it is not permitted to offset the cash takings with the cash outgoings. The takings must be paid in separately at the bank. Personnel management and personnel accounting The Russian labour law is very complicated and employee friendly. It features many elaborate regulations, especially regarding personnel management and accounting. The most important are mentioned below. The notice period in Russia is generally two weeks or one month for a chief executive officer. The probation period is generally three months, however for a chief executive officer, manager of a representative office or branch, assistant chief executive officer, assistant manager of a representative office or branch, chief accountant or assistant chief accountant the period is six months. During the probation period both parties can withdraw from the contract within three days and in doing so the employer must justify the cancellation in writing. In Russia personnel management is for the most part carried by the accounting department. The reason for this is the complex calculation of monthly salaries, which corresponding to Russian labour legislation have to be paid at least twice a month. If an employee goes on holiday, this complicates matters further. The salary, which an employee receives during their holiday, is calculated according to the average salary of the previous twelve months. Additionally, premiums, pay rises or a 13th month's salary can also affect the calculations. The salary should be paid before the beginning of the holiday. 6 Every employee is entitled to at least 28 calendar days of holiday per year. When divided cleverly this does not correspond to four weeks or 20 working days, but can actually be more. Any remaining holiday entitlement can be carried over into the next year. Furthermore when adjusting, cancelling or beginning a holiday, so-called "Prikazy" have to be issued and signed by the general director, as well as the usual documents like the labour contract, letter of notice, application for leave and the respective internal orders. A table with all days of attendance, leave and illness has to be maintained monthly for every employee. In addition a so-called employment record

8 book has to be maintained for every employee, in which the employer records the job, period of employment and the cause of dismissal. A journal must be maintained to aggregate all employment record books in the company. An overview of documents used in Russian personnel accounting and personnel management. Statutory documents Overview of number of personnel Order to begin work for a new appointment Employment contract Work rules and regulations Employment record book Aggregated journal of employment record book Overview of yearly holiday entitlements for all employees Rules and regulations regarding payment of premiums Salary guidelines Timekeeping table Data protection guidelines on the protection employees personal information Personal file for every employee Application for compulsory health insurance Optional documents Work permit for foreign employees Structural plan of business units Personnel records Aggregated journal of all personnel files 7 Fines and Penalties The accounting and fiscal laws in the Russian Federation allow different fines and penalties for a number of circumstances. These are paid to the tax authorities "Nalogovaya Inspektsiya" or the "Trudavaya Inspektsiya", the equivalent of the Healthy and Safety Executive, respectively.

9 Here are a few examples: If you do not notify the tax authorities within 7 days after the opening of a bank account, you have to pay a fine of 5,000 roubles (about 135). This fine is paid for each and every account which has not been declared. When in contempt of accounting regulations you have to pay a fine of 10,000 roubles (about 250), if for example a file or faktura invoice is missing or if transactions are incorrectly recorded and they only refer to one reporting period. However if they refer to more than one reporting period, the fine is 30,000 roubles. It doesn't matter whether the accounting mistakes are to the advantage or disadvantage of the treasury. Even if you pay too much tax because of incorrect bookings, you have to pay the fine. Additionally a personal fine of 2,000 to 3,000 roubles can be imposed on the general director or chief accountant. If personnel management documents are not recorded according to the rules or if they are not correctly filed, a fine of between 30,000 and 50,000 roubles can be levied. If taxes are not paid or only partly paid, the fine is 20 to 40 percent of the amount which hasn't been paid. 8 If a tax return is not submitted inside the deadline, the fine is 5 to 30 percent of the amount to be paid per month, but not less than 1000 roubles. However if it is submitted after 180 days the rate increases to 30 percent of the amount to be paid, whereupon every month beginning with the 181st day is penalised with an additional fine of 10 percent of the amount to be paid. For delayed tax payments a default interest of one 300th of the central bank's refinance rate has to be paid. If the deadline for handing in tax returns or payment is exceeded by 10 working days the tax authorities are authorised to block the current account of the respective taxpayer. The authorities are required to unblock the account within one day of payment of the tax owed or submission of the tax return. Fines and penalties are not tax deductible!

10 Taxation in Russia Preface The fundamentals of the taxation system constitute the first and second part of the Russian tax code. In this standardised document the principles of taxation, the tax proceedings and every individual tax type are written down for the whole territory of the state. The same taxes are applied to native people, foreigners, legal entities and individuals. An exception is businesses, which fall under the double taxation agreement. The Russian taxation system can be divided into three levels: the first federal level, the second federal level and the regional or local level. On the first federal level a consistent tax rate is applied to the whole of Russia. This applies, for example, to value added tax. The federal taxes on the second level are also determined centrally by the federal fiscal code, but the local authorities can lower the taxes by a proportion for the region. Tax on profits and corporate tax belong to this type. The taxes on a regional or local level are, for example, the wealth tax and property tax. Here are the most important tax types in Russia with the respective rates: Tax on profits (corporate tax): 20% 9 Value added tax: 18% (reduced rate 10%) Income tax: Wealth tax: up to 2,2% Dividend tax (withholding tax): 13% (30% for non-residents) 9% (15% for non-residents) (with the double tax agreement potentially 5%) Further on in this chapter the tax types will be examined in more detail. Subsequently the following topics will be addressed: the simplified taxation system, the fiscal problems when founding a company, tax inspection, as well as the double tax agreement.

11 Important Tax Types Tax on profits The tax on profits in Russia, comparable to corporate tax in Germany, is a federal tax and is paid by all local and foreign businesses. The tax rate is 20%. 2 % will be for the federal budget and 18 % for the budget from the region. The regional authority is able to lower the tax rate from 18 % to a minimum of 13,5 % of the assessment basis. In special economic zones, which are specialized on development in selected branches of industry the tax rate on profit for promoted companies can not exceed 13,5 % related to the budget from the region. The profit on which tax must be paid corresponds to the total revenue of the company minus the tax deductible expenses. Expenses are considered tax deductible if they are economically justified, have been suitably documented and contribute towards generating future income. The following expenses are primarily recognized as tax deductible expenses: 10 Provisions for general maintenance costs Provisions for unclaimed holiday entitlements Reserve for warranties Provisions for bad debt, dependent on the maturity (100% for more than 90 days, 45% for more than 45 days and 0% for up to 45 days) Outgoings spent on research and development The following expenses are only partially taxable: Payments by the employer for voluntary life and pension insurance for the employee (up to 12% of the total salary costs) Contributions to health insurance for the employee paid for by the employer (up to 6% of the total salary costs) Various marketing and promotional expenses Entertainment expenses (up to 4% of the salary costs)

12 Losses of the current financial year can offset against profits of the same year. The loss brought forward can account for 10 years altogether and is allowed to be offset down to zero against the profits of this time period. It must be noted that fiscal accounting can differ from accounting in terms of commercial law. The following examples demonstrate this: Interest on supplier credit, paid import duties and transport costs are counted among the expenses of the current period under fiscal law, but are counted in the purchase price under commercial law. Most types of fixed assets can be written down under fiscal law by 10% or 30% after purchase. The writedowns must be made monthly and begin the month after the start of operation. Travelling expenses are only partly tax deductible. Day rates higher than provided by the legislative authority and higher than those paid by the employer are not tax deductible under fiscal law. However under accounting regulations the complete costs are tax deductible. Within Russia subsistence costs of a maximum of 700 roubles (about 17) are approved. Travelling and hotel costs are approved based on receipts. Travel by taxi or local public transport within the city in which the company has its registered office is not recognized as an expense under fiscal law. 11 Businesses are required to transfer initial payment of their quarterly corporate tax liabilities to the tax authorities by the 28th calendar day of the current month. The quarterly tax return must be submitted to the tax authorities by the 28th day after the end of the quarter, the yearly tax return by the 28th March of the following year. If the individual quarterly turnover do not exceed 10 million roubles (about 250,000), the company only has to pay the tax on profits quarterly. Value Added Tax All turnover which is obtained by the purchase or importing of goods or services is liable to value added tax in Russia. In this process the destination principle is used and generally the same taxation principles are followed as in the European Union. The current basic tax rate is 18%, the reduced tax rate for specific goods, for example staple foods, is 10%. Value added tax has been calculated quarterly and paid monthly to 1/3 of the amount since 1st January The value added tax must be paid before the 20th of each month.

13 Below are some peculiarities of value added tax in Russia: Value added tax can only be claimed as prepaid tax if the faktura invoice (see the chapter "Russian accounting documents") is presented to the fiscal authorities. Import tax can also be subtracted as prepaid tax, but only if the goods were received after clearing customs. Equally value added tax can be subtracted as prepaid tax from purchased fixed assets or assets under construction. However this is only possible once the asset has started operation. Wealth Tax The wealth tax is a regional tax, which has to be paid by all Russian and foreign businesses, which own assets in Russia. The tax rate is determined by the business activity and is at the most 2.2%. The net fixed assets are only taxed if they are being used. There is no offsetting of assets against liabilities, as is common in other countries. Only the markdowns are removed from the fixed assets. The tax return has to be submitted quarterly to the tax authorities by the 30th of the following month and the tax has to be paid five days after it is submitted. When handing in the end-ofyear accounts this deadline is ten days. 12 Wealth Tax for private Individuals The wealth tax for private Individuals belongs to the regional taxes. The tax rate varies, because it s levied from the region and depends from the intended use and location of the property. An overview from the tax rate provides the following table. Cadaster value of the property Up to rubles up to rubles Over rubles Wealth tax rate for private Individuals Up to and including 0,1 percent Over 0,1 up to 0,3 percent Over 0,3 up to 2,0 percent

14 Real estate s with a value up to rubles will be taxed with a rate up to and including 0,1 percent. If the value of the property is between and rubles the tax rate varies between 0,1 percent and 0,3 percent. Objects with a cadaster value over rubles will be taxed with a rate between 0,3 and 2,0 percent. Income Tax All individual people who earn their income in the Russian Federation are liable to income tax. This distinguishes between tax residents and non residents. Tax residents are individual people, who have their place of residence in Russia or can prove that they live in the country for at least 183 days per year. The income tax rate is 13% overall, but 30% for non residents. Companies are required to calculate, deduct and pay the income tax for their employees to the tax authorities on the day that the salary is received. This information must be reported to the authorities on a regular basis and at the end of the year a special form must be handed in which lists all deducted taxes for every employee. People who obtain their income from abroad or are self-employed are responsible for the calculation and payment of taxes themselves. 13 Social Insurance Contributions The current model for the Russian social insurance contribution system has been in force since 1st January The current rates and further important changes came into effect in Wages and salaries of up to 568,000 roubles (about 14,000) per year are taxed at a rate of 30% for social insurance. The portion of the yearly salary which is above this threshold is taxed at a rate of 10% for the pension fund. The social insurance contributions have to be paid completely by the employer and consist of the following parts:

15 Percentage of Social Insurance Contribution since % for the pension fund 2,9% for the social insurance fund 2,1% for the national health insurance fund 3,0% for the regional health insurance fund The social insurance contribution has been 30% in total since 2012 An account of the contributions paid must be given to the different funds every quarter. Industrial Insury Insurance As well as social insurance, industrial injury insurance is also compulsory for all employers. The contribution rates range between 0.2% and 8.5% and a paid in full by the employer. Simplified Taxation System 14 The simplified taxation system was introduced for smaller businesses in order to reduce the tax burden on these companies as well as to simplify their taxation. According to Russian fiscal law a smaller company is a company which employs less than 100 employees, has revenues of no more than 60 million roubles and whose fixes and intangible assets have a book value of less than 100 million roubles (about 2.5 million). Furthermore it is not allowed to have a shareholding of more than 25% in another company, which is not considered small according to these criteria. In place of value added tax, tax on profits, wealth tax and social insurance contributions, only a single tax has to be paid with this simplified system. There are two variants to choose from: Taxation of total revenue (cash method). The tax rate is 6%. Taxation of net receipts. In this case the tax rate is 15%. However some companies are excluded from this procedure independent of their size. The system of simplified taxation does not apply to companies who have particularly high profits, this means banks, insurance funds, investment funds and pension funds. Companies with a foreign equity stake are also excluded from the system.

16 Fiscal Problems When Forming a Company In Russia the expenses of a business are only recognised as tax deductible operating costs once the company has begun business operations. From the point of view of the Russian tax authorities these business operations only begin once the company has received its first operating revenue. Revenues that are received before this time can are consequently difficult to claim for tax on earnings and prepaid tax. As for the most part more value added tax is paid for incoming invoices than for outgoing invoices at the start of business operations, there is a prepaid tax surplus. This prepaid tax surplus is generally only be reimbursed by the tax authorities after three tribunals and a comprehensive tax inspection. It is therefore recommended, not to immediately disclose small start-up costs in the tax balance sheet, but to record them in the future. At the same time the first cash receipts should be generated as soon as possible and all commerical activities should be documented in great detail from the very beginning. A contribution to the initial capital, a partner's loan and invoicing the parent company are possibilities for the financing the establishment of a new company. The advantages and disadvantages of these forms of financing are discussed below. 15 The amount of initial capital required to establish a joint stock company in Russia is significantly lower than in Germany. For a limited liability company, in Russian "ООО", at least 10,000 roubles (about 250) is needed and for an open joint stock company, in Russian "ОАО", at least 100,000 roubles (about 2,500) is needed. Above a certain amount of initial capital the financing can be dealt with at the beginning of business operations. A company with a certain amount of initial capital seems more stable to outsiders and the initial capital can be reduced later without a problem. If this concerns a stake in the company of more than 10% and at least 82,000, a dividend tax must be paid when transferring the money back. Otherwise the dividend tax rate is 15%. Capital investment in the company can be carried out relatively quickly and without red tape. It is not subject to tax on profits, if the shareholder has a stake of more than 50%. The transferring back of the money is however only possible as a dividend, for which the corresponding tax rate of 5% or 15% must be paid. Another form of financing is a partner's loan. It should be noted that the thin capitalisation rule exists in Russia. In order for the interest which must be paid

17 through the Russian subsidiary to be completely tax deductible, the loan cannot exceed three times the capital contribution. At the same time the interest rate must in be financially justified. The foreign parent company can grant an interest-free loan if the fiscal laws in its country allow this. If a Russian company grants an interest-free loan, it must add an amount corresponding to the market interest rate to its corporate profit. In the case of thin capitalisation the payment of interest is regarded as dividends and is taxed accordingly. The Russian subsidiary company can invoice the parent company for "services provided" and thus generate operating revenue at the beginning of business operations. The advantages are that the initial operating expenses become immediately effective for tax purposes. In addition, the tax rate which the revenue of the Russian subsidiary is subject to, is lower than the rate against which the expenses of the parent company in Germany are offset. It should be noted that these "services provided" are generally subject to VAT in Russia, but are not tax deductible in Germany. Tax recognised losses can be carried over for up to 10 years and offset down to zero against this year's current profits thanks to the loss brought forward. 16 Tax Inspection Russian fiscal law has two types of auditing. The so-called single-entry audit and the external audit. The single-entry audit takes place at the tax authorities and can only be carried out within 3 months of handing in the tax return. The company being examined is not informed when this audit starts. However the tax authorities are required to send a written report to the taxpayer after completing the audit. Written opposition to this can be filed within 15 days. External audits are carried out at the premises of company being checked, can be executed up to three years retrospectively and are not allowed to last more than two months. Only in exceptional circumstances can the audit be extended to 4 or 6 months.

18 Double Taxation Agreement The agreement between Germany and Russia to avoid the double taxation of income and wealth tax has been in force since 30th December Essentially it contains regulations regarding witholding tax on dividends, interest and licence fees. The witholding tax on dividends is 5% for a direct holiding of at least 10% and a contribution to capital of less than 82,000, and 15% in all other cases. The witholding tax on interest and licence fees is 0%. Foreign Exchange Control In Russia all payments between residents and non-residents are subject to a foreign exchange control. According to Russian law residents are all legal entities as well as individuals who have their place of residence in Russia or live in the country for at least 183 days per year. In contrast non-residents are all corporate bodies that were established in accordance with the law of another state and individuals who do not reside in Russia or stay in the country for less than 183 days per year. For transactions of more than 50,000 USD the recipient is required to apply for a socalled trade passport, in Russia "Pasport Sdelki", at their bank. For this passport all of the underlying documents for the payment, so contracts, invoices etc., have to be submitted to the bank. 17 The official means of payment in Russia is the rouble. Even when contracts are concluded in foreign currencies, such as in Euros or Dollars, transactions are only allowed to be carried out in the local currency, whether in cash or not. Often differences in exchange rates arise between the figures on the booking and the payment for the service, which can cause a duplication of accounting records and problems with the calculation of VAT.

19 Closing Words If you have any further questions about Russia, we will gladly provide you with advice at any time. You can also contact us directly at our office in Moscow whenever you wish. Call us or send us an . We look forward to hearing from you. Your German contact person in Moscow is: Philipp Rowe Chief Executive Officer RUFIL CONSULTING Accounting & Management in Russia Bolshaya Dmitrovka Moscow, Russia Tel: +7 (495) Fax: +7 (495) Website: This brochure has been compiled with the utmost care and is updated regularly. OOO RUFIL cannot guarantee the accuracy and integrity of this information and assumes no responsibility for losses or damage of any kind which results directly or indirectly from the use of this brochure.