On the Draft of The Main Directions of the Tax Policy of the Russian Federation for the Year 2012 and the 2013-2014 Planning Period
Early in July, the RF Ministry of Finance published a draft of The Main Directions of the Tax Policy of the Russian Federation for the Year 2012 and the 2013-2014 Planning Period1.
This document is designed to ensure consistency of the tax policy being implemented by the State in conditions when the federal budget continues to be drawn with a deficit. In this connection, one of the principal goals in the sphere of tax policy is to create an efficient and stable tax system capable of ensuring, in its turn, budget stability.
In effect, this is the reason why the development of a special system for monitoring the effectiveness of tax exemptions is pointed out as one of the main directions the government’s tax policy. It is intended that the newly created system will be based on assessment of the results of tax exemptions, thus making tax expenditures better substantiated and improving the quality of the process of drawing up budgets and the accuracy of the data on their execution. The implementation of the system, according to the draft’s authors, will help to eliminate a number of economically inefficient tax exemptions. In this connection, the data on their effectiveness will be generated by the Federal Tax Service on the basis of tax declarations submitted by taxpayers to tax agencies.
A switchover to a system for regular monitoring of the effectiveness of tax exemptions will certainly be a step forward in the development of Russia’s tax system. At the same time, such a system will require elaboration of adequate criteria for assessing the effect of tax exemptions, an assessment methodology, and a better statistical base. Additional efforts will be needed in order to deal with all those issues.
It is planned that the financial resources made available as a result of the system’s application will be redistributed to more practically relevant directions. At the same time, the document does not specify which signs and criteria should be applied in order to recognize some or other directions as practically relevant. Besides, it is not specified how exactly these resources are going to be redistributed. In this situation it is possible to implement one of several scenarios. If financial support is granted, as before, in the form of tax exemptions, this method of distribution may turn out to be inefficient. Firstly, tax administration may become more complicated as a result. Secondly, there may occur an excessive reduction in the tax load imposed on taxpayers, which, as a rule, results in unjustified risk taking when carrying out their entrepreneurial activity and /or supporting investment projects which would never have been accepted under normal conditions.
An alternative scenario for the use of free resources may be direct subsidizing of taxpayers or general lowering of tax rates. The latter measure represents an incentive that can be implemented without lowering taxation’s neutrality or increasing the costs of tax administration. From the point of view of innovation development, such an approach can yield better results than targeted tax exemptions that will require some additional elaboration of criteria for their granting.
The draft of The Main Directions implies that the tax system will maintain its orientation towards creating incentives for innovation activity. For this purpose, it is intended that a number of alterations will be introduced in tax legislation, such as, for example, new approaches to classifying fixed assets by depreciation groups and the depreciation norms to be applied to those groups that will be taking into account the speed of upgrading the technologies influencing the renewal of fixed assets. It should be noted that the alterations envisaged with regard to this direction introduce no additional tax exemptions, while at the same time have a potential for creating certain tax incentives because they make it possible to adjust the tax base to certain specific features of innovation-oriented development. Such an approach is fraught with lower risks of producing a negative effect on the tax system’s qualitative parameters and so appears to be more preferable, especially in a budget deficit situation.
The draft of Main Directions offers some more specific changes to the taxation procedure applied to small businesses. These involve, first of all, the abolition of the single tax on presumptive income with regard to some types of activity, and the introduction of a patent-based taxation system as a separate tax regime that will function outside of the simplified taxation system, as an alternative to that system. In respect of single tax on presumptive income, it is envisaged that the sphere for applying that regime will become gradually narrower as a result of the exclusion from it, from 1 January 2013 onward, of the following types of activity:
а) retail trade through shops and pavilions with a sales area of no more than 150 m² for each outlet;
b) public catering services through outlets with a customer service area of no more than 150 m² for each outlet.
It is planned that the regime will be completely abolished from 1 January 2014. The patent-based taxation system will probably be introduced as early as next year. It will be regulated by a separate chapter – Chapter 26.5 "Patent-based Taxation System"– in Part II of the RF Tax Code. If this regime is introduced it will be available only for individual entrepreneurs.
As for the simplified taxation system, it is still unclear at which level the margin values for proceeds enabling small-size enterprises to switchover to this tax regime will be established from 2013 onwards, after the expiry of the period established for the norms regulating the corresponding temporary values2.
At the same time, the size of the tax load on those small business subjects operating outside of the trade sphere3 that will switch over to the simplified taxation system may be lowered already next year, by means of establishing an aggregate tariff rate for insurance contributions at the level of 20 %. At present this rate is 26 %. The base for calculating insurance contributions is being indexed on an annual basis, and from 1 January 2012 will amount to 512 thousand Rb. Any payments exceeding that margin will be taxed at a rate of 7 % (the rate applied under the general taxation regime is 10 %). At present the base for calculating insurance contributions is 463 (after indexation)4, while no insurance contributions are charged to any payments or remuneration received by a physical person in excess of that sum. The overall tariff for enterprises paying taxes in the framework of a general taxation regime may be brought down from 34 to 30 %, but even then it will remain at a high level for taxpayers.
V. V. Gromov – Research Fellow, Department of Tax Policy
1 See http://www1.minfin.ru/common/img/uploaded/library/2011/07/ONNP_2011-07-04U.doc
2 The current proceeds margins, established in the amounts of 45 and 60 mn Rb by Item 2.1 of Article 346.12 and Item 4.1 of Article 346.13 of the RF TC respectively, are temporary and will be applied only until 2013.
3 Subitem 8 of Item 1 of Article 58 of Federal Law of 24 July 2009, No 212-FZ, "On Insurance Contributions to the Pension Fund of the Russian Federation, the Social Insurance Fund of the Russian Federation, the Federal Compulsory Medical Insurance Fund and Territorial Compulsory Medical Insurance Funds".
4 Decree of the RF Government of 27 November 2010, No 933, "On the Maximum Base for Calculating Insurance Contributions to the State Off-budget Funds from 1 January 2011".
In effect, this is the reason why the development of a special system for monitoring the effectiveness of tax exemptions is pointed out as one of the main directions the government’s tax policy. It is intended that the newly created system will be based on assessment of the results of tax exemptions, thus making tax expenditures better substantiated and improving the quality of the process of drawing up budgets and the accuracy of the data on their execution. The implementation of the system, according to the draft’s authors, will help to eliminate a number of economically inefficient tax exemptions. In this connection, the data on their effectiveness will be generated by the Federal Tax Service on the basis of tax declarations submitted by taxpayers to tax agencies.
A switchover to a system for regular monitoring of the effectiveness of tax exemptions will certainly be a step forward in the development of Russia’s tax system. At the same time, such a system will require elaboration of adequate criteria for assessing the effect of tax exemptions, an assessment methodology, and a better statistical base. Additional efforts will be needed in order to deal with all those issues.
It is planned that the financial resources made available as a result of the system’s application will be redistributed to more practically relevant directions. At the same time, the document does not specify which signs and criteria should be applied in order to recognize some or other directions as practically relevant. Besides, it is not specified how exactly these resources are going to be redistributed. In this situation it is possible to implement one of several scenarios. If financial support is granted, as before, in the form of tax exemptions, this method of distribution may turn out to be inefficient. Firstly, tax administration may become more complicated as a result. Secondly, there may occur an excessive reduction in the tax load imposed on taxpayers, which, as a rule, results in unjustified risk taking when carrying out their entrepreneurial activity and /or supporting investment projects which would never have been accepted under normal conditions.
An alternative scenario for the use of free resources may be direct subsidizing of taxpayers or general lowering of tax rates. The latter measure represents an incentive that can be implemented without lowering taxation’s neutrality or increasing the costs of tax administration. From the point of view of innovation development, such an approach can yield better results than targeted tax exemptions that will require some additional elaboration of criteria for their granting.
The draft of The Main Directions implies that the tax system will maintain its orientation towards creating incentives for innovation activity. For this purpose, it is intended that a number of alterations will be introduced in tax legislation, such as, for example, new approaches to classifying fixed assets by depreciation groups and the depreciation norms to be applied to those groups that will be taking into account the speed of upgrading the technologies influencing the renewal of fixed assets. It should be noted that the alterations envisaged with regard to this direction introduce no additional tax exemptions, while at the same time have a potential for creating certain tax incentives because they make it possible to adjust the tax base to certain specific features of innovation-oriented development. Such an approach is fraught with lower risks of producing a negative effect on the tax system’s qualitative parameters and so appears to be more preferable, especially in a budget deficit situation.
The draft of Main Directions offers some more specific changes to the taxation procedure applied to small businesses. These involve, first of all, the abolition of the single tax on presumptive income with regard to some types of activity, and the introduction of a patent-based taxation system as a separate tax regime that will function outside of the simplified taxation system, as an alternative to that system. In respect of single tax on presumptive income, it is envisaged that the sphere for applying that regime will become gradually narrower as a result of the exclusion from it, from 1 January 2013 onward, of the following types of activity:
а) retail trade through shops and pavilions with a sales area of no more than 150 m² for each outlet;
b) public catering services through outlets with a customer service area of no more than 150 m² for each outlet.
It is planned that the regime will be completely abolished from 1 January 2014. The patent-based taxation system will probably be introduced as early as next year. It will be regulated by a separate chapter – Chapter 26.5 "Patent-based Taxation System"– in Part II of the RF Tax Code. If this regime is introduced it will be available only for individual entrepreneurs.
As for the simplified taxation system, it is still unclear at which level the margin values for proceeds enabling small-size enterprises to switchover to this tax regime will be established from 2013 onwards, after the expiry of the period established for the norms regulating the corresponding temporary values2.
At the same time, the size of the tax load on those small business subjects operating outside of the trade sphere3 that will switch over to the simplified taxation system may be lowered already next year, by means of establishing an aggregate tariff rate for insurance contributions at the level of 20 %. At present this rate is 26 %. The base for calculating insurance contributions is being indexed on an annual basis, and from 1 January 2012 will amount to 512 thousand Rb. Any payments exceeding that margin will be taxed at a rate of 7 % (the rate applied under the general taxation regime is 10 %). At present the base for calculating insurance contributions is 463 (after indexation)4, while no insurance contributions are charged to any payments or remuneration received by a physical person in excess of that sum. The overall tariff for enterprises paying taxes in the framework of a general taxation regime may be brought down from 34 to 30 %, but even then it will remain at a high level for taxpayers.
V. V. Gromov – Research Fellow, Department of Tax Policy
1 See http://www1.minfin.ru/common/img/uploaded/library/2011/07/ONNP_2011-07-04U.doc
2 The current proceeds margins, established in the amounts of 45 and 60 mn Rb by Item 2.1 of Article 346.12 and Item 4.1 of Article 346.13 of the RF TC respectively, are temporary and will be applied only until 2013.
3 Subitem 8 of Item 1 of Article 58 of Federal Law of 24 July 2009, No 212-FZ, "On Insurance Contributions to the Pension Fund of the Russian Federation, the Social Insurance Fund of the Russian Federation, the Federal Compulsory Medical Insurance Fund and Territorial Compulsory Medical Insurance Funds".
4 Decree of the RF Government of 27 November 2010, No 933, "On the Maximum Base for Calculating Insurance Contributions to the State Off-budget Funds from 1 January 2011".