COVID-19 impact on the Russian tax legislation

The proliferation of the COVID-19 coronavirus infection triggered changes in almost all spheres of life in our country, which, in turn, could not but affect taxation issues. In the recent days, the state authorities came out with significant amendments to the Russian tax legislation, the main of which are highlighted below.

Taxpayer Support

A number of proposed measures are intended to help overcome the adverse consequences of the epidemic: the focus is on those, who, in the government’s opinion, need protection most of all: small and medium-sized businesses, microenterprises, individual entrepreneurs and entities of the industries hit hardest by the virus attack (tourism, culture, public catering, etc.).

The proposed support measures include the following.

1. Extending tax payment deadlines for small and medium-sized businesses for the affected industries

It is envisaged that entities and individual entrepreneurs included in the unified register of small and medium-sized enterprises ^[1] (SMEs) ^[2] at 1 March 2020 and operating in the affected industries will be entitled for:

• a six- month extension of the period for payment of corporate income tax, tax paid under the simplified taxation system and unified agricultural tax for 2019;
• a six- month extension of the period for payment of taxes (tax prepayments), excluding VAT, for the reporting periods relating to 1Q 2020 (and a four- month extension - for the reporting periods relating to the 1^st HY (2Q) 2020);
• deadlines for transport tax, corporate property tax and land tax prepayments will be set as follows: for 1Q 2020 - not later than 30 October 2020, and for 2Q 2020 - not later than 30 December 2020.

A list of sectors of the Russian economy most hit by the spread of the new COVID-19 infection has been approved by the RF Government (hereinafter, the List) and as at 30 March 2020 covers the following industries:

• air carriage, airport operations and truck haulage;
• culture, leisure and entertainment;
• sports and recreation activities;
• operations of travel agencies and other organisations providing services in the field of tourism;
• hospitality;
• public catering;
• activities of additional education centres and non-governmental educational institutions;
• organisation of conferences and exhibitions;
• activities involving provision of personal services to household (repairs, laundry, dry cleaning, hairdressing and beauty salons) ^[3].

2. Postponing deadlines falling on non-business days

Article 6¹of the Russian Tax Code ( RTC) is amended to exclude from business days the non-business days officially recognized as such by the Russian President’s Act ^[4].

For taxpayers this step signifies that all the deadlines, including those set for tax returns filing, calculated in business days and falling on the period from 30 March to 3 April 2020 are postponed to the closest business day following these dates. From now – to 6 April 2020.

The RF Ministry of Finance and the Federal Tax Service (FTS) have already determined the deadline for submission of annual financial statements for 2019: the deadline for submission of a mandatory set of financial statements in 2020 is the first business day following 31 March 2020, i.e. 6 April 2020.

In addition, it should be borne in mind that this measure extends not only the deadline for submission of financial statements, but also the due date of tax payments to the Russian tax authorities. In particular, payment of income tax is "tied" to the annual tax return filing deadline (paragraph 1, Article 287 of the RTC). If this draft law is adopted in the next few days and enters into legal force, tax payments will be postponed for a week.

3. Postponing social payments by microenterprises and individual entrepreneurs

The next proposed measure is to extend the period for payment of social contributions calculated based on payments and other remuneration to individuals ^[5] for payers operating in the sectors of the Russian economy included in the SME register at 1 March 2020 and recognized as microenterprises:

• a six-month extension - for the period from March to May 2020;
• a four-month extension - for the period June and July 2020

For individual entrepreneurs the deadline is extended to pay social contributions due not later than 1 July 2020, based on income of individual entrepreneurs exceeding RUB 300 000.

4. Suspension of tax audits

The Draft Resolution of the RF Government intends to suspend until 1 June 2020 ^[6]:

• adoption of decisions on conducting field (follow-up field) tax audits and examination of completeness of tax calculations and payments with respect to related party transactions;
• performance of the scheduled field (follow-up field) tax audits and examination of completeness of tax calculations and payments with respect to related party transactions; and the time period stipulated by the RTC for such audits and examinations.
• the time periods provided for by Article 100 of the RTC (documentation of tax audit results), Article 101 of the RTC (decision-making based on the results presented in the tax audit documentation) and Article 101.4 of the RTC (tax offence proceedings, as stipulated by the RTC);
• adoption of decisions by tax authorities in accordance with paragraph 3, Article 76 of the RTC to suspend transactions of taxpayer organisations through their bank accounts and transfers of their electronic funds.

The FTS of Russia establishes by Order No. ED-7-2/181@ dated 20 March 2020 that:

• adoption of decisions on conducting field (follow-up field) tax audits and their performance are suspended until 1 May 2020;
• tax control measures involving direct contact with taxpayers (their employees or representatives), witnesses or other persons (presence of tax inspection officials on the territory (premises) of the taxpayer, conducting interrogations, inspections, calls to the tax authority, seizures, inventory counts, etc.) are prohibited;
• procedures associated with decision-making based on the tax audit results (Article 101 of the RTC), as well as tax offence proceedings, as stipulated by the RTC, (Article 101.4 of the RTC) shall be carried out via telecommunication and videoconferencing channels.

5. Deadline extension

The RF Government intends to grant, in particular ^[7]:

• a 3–month deadline extension for taxpayers and tax agents to file tax returns (excluding VAT returns), tax prepayment computations and financial statements, which submission deadline is March through May 2020;
• a 20–business day deadline extension for submission by taxpayers of documents, explanations and other information, if such are requested, which shall be submitted in accordance with the tax legislation, if such requests are received within the period from 1 March to 1 June 2020;
• a 3–month deadline extension for submission by organisations, in respect of which tax monitoring is not conducted, of applications for tax monitoring to be conducted for the year 2021.

As a result of the deadline postponement for tax returns filing, it should also be possible to postpone for three months the payment of income tax advances, since they are paid not later than the date set for submission of tax returns for the relevant reporting period (paragraph 1, Article 287 of the RTC).

6. Tax sanctions and sending of requests

Moreover, no tax sanctions for committing tax offenses, the liability for which is provided for by Article 126 of the RTC (failure to provide the tax authority with information necessary for tax control in the period from 1 March 2020 to 1 June 2020), shall be applied, no proceedings for such violations shall be carried out. This is, undoubtedly, a relief for the taxpayers who, due to transfer of employees to remote work and the closure of offices, will not be physically able to provide documents on time at the tax authority’s request.

The deadline for sending a payment request ^[8] and making a decision on collection ^[9] shall be extended by 6 months, which will give the tax authorities additional time for sending a payment request and decision-making on collection of taxes, social contributions, fines, penalties and interest.

7. Suspended collection

Already today, according to information posted on the website of the Russian FTS ^[10], sanctions are suspended until 1 May 2020:

• for taxpayers included in the unified SME register;
• for taxpayers involved in tourism and air transportation industries;
• for legal entities and individual entrepreneurs engaged in physical education, sports, art, culture and cinematography.
• for other industries most affected by the deteriorating situation caused by the spread of the new coronavirus infection with the purpose to provide priority targeted support. The list of such industries is approved by the Government Commission for improving sustainability of the Russian economy development);
• SME bank account transactions will not be suspended if SME fail to meet their tax obligations.

On the same site you can find lists of taxpayers for which collection is suspended (hotels, spas, tour operators, travel agents, air transportation, airports, as well as art, culture and cinematography industries, etc.).

8. Reduced rates of social contributions

The draft law proposes to reduce social contributions to 15% for payers eligible as SMEs for a portion of payments in favour of an individual determined by the results of each calendar month as an excess over MMW at the beginning of the accounting period. The breakdown is as follows:

• for compulsory pension insurance – 10%;
• for compulsory social insurance in case of temporary incapacity for work
  and maternity – 0 percent;
• for compulsory health insurance – 5 %.

Measures aimed to replenish the budget

Apart from support measures, there are steps envisaged to increase the tax burden:

1. Abolition of the reduced rate on dividends and interest under international treaties

The RF Government ^[11] was instructed to prepare by 25 December 2020 a list of international treaties of the Russian Federation on double taxation avoidance and to ensure introduction of amendments thereto providing for taxation at the rate of 15 percent of income in the form of dividends and interest paid to persons who are not tax residents of the Russian Federation, and to terminate such treaties in case of failure to reach agreement on introduction of the respective amendments.

According to the RF Ministry of Finance, these amendments will apply to transit jurisdictions (Cyprus and similar ones) and will not affect interest income paid on Eurobond loans, bond loans of Russian companies and loans provided by foreign banks. 

2. Personal income tax on deposits

On 31 March 2020, a draft law was passed in the third reading, providing that interest income earned on deposits (account balances) with banks located in the Russian Federation is subject to taxation. The tax authority will calculate the tax base as the excess of total interest income received by the taxpayer during the tax period on all deposits (account balances) with the said banks over the amount of interest calculated as the product of RUB 1 000 0000 and the Bank of Russia key rate in effect on the first day of the tax period. The tax base determined in accordance with this clause excludes interest income earned on deposits (account balances) in roubles with banks located in the Russian Federation, if the applied interest does not exceed 1% per annum during the entire tax period, and also interest income on escrow accounts.

Besides, personal income tax shall be paid at the rate of 13% on income in the form of interest (coupon, discount) earned on Russian enterprises’ RUB-denominated bonds issued after 1 January 2017, as well as on state (municipal) securities.

These initiatives come into legal force (are expected to become effective) on 1 January 2021. Based on the tax period results, information on deposits will be sent by banks to the tax authorities and the tax will be paid by individuals independently subject to a notification received from the tax authority until 1 December of the year following the end of the tax period.

[1] https://ofd.nalog.ru/

[2] Draft Resolution of the RF Government "On measures to ensure sustainable economic development” prepared by the Federal Tax Service of Russia, Project ID 02/07/03-20/00100768

[3] https://www.nalog.ru/rn77/news/activities_fts/9704633/

[4] Draft Federal Law "On entering amendments to Parts One and Two of the RF Tax Code and certain legislative acts of the Russian Federation" was adopted in the third reading by the State Duma on 31 March 2020 

[5] Draft Resolution of the RF Government "On measures to ensure sustainable economic development” prepared by the Federal Tax Service of Russia, Project ID 02/07/03-20/00100768

[6] Draft Resolution of the RF Government "On measures to ensure sustainable economic development” prepared by the Federal Tax Service of Russia, Project ID 02/07/03-20/00100768

[7] Draft Resolution of the Government of the Russian Federation "On measures to ensure sustainable economic development”, prepared by the Federal Tax Service of Russia, draft ID 02/07/03-20/00100768

[8] of taxes, duties, insurance contributions, penalties, fines, interest

[9] of taxes, duties, insurance contributions, penalties, fines, interest

[10] https://www.nalog.ru/rn77/taxation/debt/ncov/

[11] List of instructions following the President’s Address on the spread of coronavirus infection in the country, approved by the President of the Russian Federation on 29 March 2020