Further improving the patent system of taxation not only reasonable but also necessary

The respective amendments to Russia's legislation were made for the following reasons. First, the amount of taxpayer potential income determined at the regional level is not unified across the region and therefore doesn't reflect objective differences in entrepreneurial business environment between a large city and rural areas. It is obvious that such radically different areas can't show the same or similar level of development and amount of income3. Furthermore, in an effort to prevent local budget losses in determining a potential income as tax base of entrepreneurs who have moved to the patent system of taxation, regional government authorities orient themselves with respect to "regional centers as well as heavily populated cities and district centers"4, thereby eventually creating inadequate tax burden and having an adverse effect on the development of small-sized entrepreneurship. Second, under the applicable budget legislation, all tax revenues generated from taxpayers covered by the patent system of taxation constitute sources of budgeting at the regional level, however local self-government authorities are totally deprived of any possibility to influence whatsoever their own tax revenues generated from this source.

In our opinion, regions' initiative has its rationale. The patent system is a tax regime designed for individual entrepreneurs who deal with end consumers of products and fall under the micro business category. The scope of their operations is so small that it would be more advantageous for the government to collect tax from them proceeding from the tax base imputed amount rather than actual one, which is good for both the government and entrepreneurs themselves for whom the accounting system becomes extremely simplified. However, the use of imputed business performance indicators is always pregnant with the fact that real tax base may be found to be much lower or otherwise higher the imputed income amount, especially if territorial specific features and business environment are ignored. In the former case, the budget has unreasonable losses of the amount of the tax which could have been but was not generated, whereas the latter case refers to unreasonably overstated, i.e. inadequate tax burden which can slowdown the development and even become a source of discontinuance of business operations (winding-up). In fact, it is these risks that the existing procedure for the use of the patent system of taxation currently creates, in which the role of local government authorities is reduced to zero. In addition, it should be taken into consideration here that the patent system of taxation is an alternative option5 to the unified tax on imputed income of specific types of activities which is also paid in full to and retained by local budgets but introduced and regulated by local self-government authorities. It is especially important in view of the fact that patent system is intended to replace this tax regime which is to cease to have effect in 2018.

Speaking about the differences between the draft laws under review, it should be noted that each of them has its own approach towards reaching the common goal. More radical option was offered by the Legislative Assembly of Altai Territory. For the purpose of strengthening financial capability of local self-government, more accurate defining of territorial specific features of small-sized entrepreneurship and incentives for its agents to use the patent system of taxation, regional legislators suggest that this tax regime should be introduced in full at the municipal level of regulation. In other words, under the draft law, all effective powers of regional authorities (with regard to the issues that concern introduction of tax regime, determining a potential annual income of individual entrepreneurs, etc.) must be delegated to local self-government authorities (similar to the tax on imputed income for certain types of activity).

The Legislative Assembly of Krasnodar Territory has developed a more trade-off alternative. Its authors don't suggest that regulation of the patent system of taxation should be delegated to the municipal level, but offer a new adjusting factor to be incorporated into the procedure for calculation of potential annual income of entrepreneurs, which would take account of territorial special features of the place of entrepreneur activity, and its values would be set by local government authorities. Under the draft law, the currently effective procedure for the introduction of tax regime by laws of the constituent territories of the Russian Federation must be retained against marked increase in autonomy and independence of local government authorities in terms of fiscal regulation. In fact it suggests the introduction of a common or unified amount of potential income which is subsequently should be finalized at the local level.

In comparing the two approaches, it should be taken into account that when the tax regime is fully regulated at the regional or vice versa municipal levels, options are regarded as extreme and therefore create opportunities allowing for objective tax burden to be determined incorrectly. For instance, one should recognize as straitened the currently applicable procedure for determining a potential income which provides for the establishment of a patent cost (by type of business activity) which is to be unified across the entire region and not subject to any adjustments at the local level. On the other hand, introduction of a patent at the municipal level tends to perverse taxation equity. Entrepreneurs which have the same parameters of activity find themselves to be subject to absolutely different tax treatments in the case when patent is not effective on the territory of every municipality. At the same time it should be noted that this issue also remains timely for the case when some of the regions haven't introduced the patent system of taxation on their territory, like, for example, in the Republic of Kalmykia and the city of St. Petersburg.

To that end, a trade-off alternative proposed by the Legislative Assembly of Krasnodar Territory seems to be more preferable. The alternative is positively distinct in that it offers no drastic changes in the existing patent system of taxation. In fact, it suggests that the provisions set forth in Chapter 26.5 of the Tax Code of the Russian Federation should be amended, not restated, to make the patent system of taxation a more flexible instrument of taxation. Indeed, if the tax regime was all at once delegated to local government authorities (which is suggested to take effect on January 1, 2014 under the draft law submitted by the Legislative Assembly of Krasnodar Territory), many entrepreneurs would very likely lose their tax privileges, because no respective act on the introduction of patent system of taxation on the territory of a respective municipality would be adopted at the municipal level.

It should be noted that the draft law proposed by the Legislative Assembly of Krasnodar Territory is intended to address another important problem which is related to the use of patent system of taxation. At present, individual entrepreneurs obtain patent at place of residence, but may run business on the territory of any other municipality within the same region. The system under which the tax levied from the use of the patent system is credited in full to local budgets may lead to a situation when a municipality on whose territory the entrepreneur actually runs business and makes profit is not entitled to levy a tax on a part of such income, whereas tax revenues go to the municipality which issues the patent but no business is developing on its territory. This very fact discourages local government authorities to create favorable business environment. To this end, the draft law suggests to restrict the effect of a patent, which is currently may be used across the entire territory of a constituent territory of the Russian Federation, to the territory of a municipality, and the entrepreneur should obtain patent at the place of actual business rather than residence. In addition, exemptions are offered for specific types of business activity which are of mobile nature or otherwise related to home working, namely provision of motor cargo and passenger transport services; home cooking services; private detective activity; sightseeing services; street patrol services; security guard, watchman and concierge services; retail trade at stationary retail chain distributing facilities which have no salerooms, as well as non-stationary retail chain distributing facilities.

This proposal should also be considered reasonable, because the possibility to receive tax revenues and budget capabilities of local self-government authorities depend here on the level of involvement of these authorities in the development and implementation of measures aimed at developing small-sized entrepreneurship. It would make local government authorities more self-motivated and responsible for the development of their own territory. This measure is included to a certain degree into the draft law submitted by the Legislative Assembly of Altai Territory, but it provides that patent can be issued at the place when business is actually run only if the taxpayer plans to instantly run his business on the territory of the municipality in which he resides. It proceeds from the general concept of the draft law which suggests that tax regime should be delegated to the municipal level, and addresses the issue only in part.

The regionally highlighted problems are timely and need to be addressed. Moreover, options for decisions have been developed and ready for discussion.

Gromov V. V., a researcher at Tax Policy Department

1 См. законопроект № 317201-6 «О внесении изменений в главу 26.5 части второй Налогового кодекса of the Russian Federation», внесенный Алтайским краевым by the Legislative Assembly. [See the Draft Law No. 317201-6 "On the Introduction of Amendments to Chapter 26.5, Part 2 of the Tax Code of Russian Federation" submitted by the Legislative Assembly of Krasnodar Territory]
2 См. законопроект № 315306-6 «О внесении изменений в главу 26.5 части второй Налогового кодекса of the Russian Federation», внесенный by the Legislative Assembly of Krasnodar Territory. [See the Draft Law No. 315306-6 "On the Introduction of Amendments to Chapter 26.5, Part 2 of the Tax Code of Russian Federation" submitted by the Legislative Assembly of Krasnodar Territory]
3 См. пояснительную записку к законопроекту № 317201-6. [See the explanatory note to the Draft Law No. 317201-6.]
4 См. пояснительную записку к законопроекту № 315306-6. [See the explanatory note to the Draft Law No. 315306-6.]
5 См. Основные направления налоговой политики Российской Федерации на 2013 год и на плановый период 2014 и 2015 годов. [See The Guidelines of the Fiscal Policy of Russian Federation for 2013 and the Planning Period of 2014 and 2015].