Business trip abroad: Intricacies of accounting9 February, 2018
By Ekaterina Ermakova, project manager at Intercomp
Although business trips abroad represent new opportunities, new business partners, new markets, and new experiences, they often give rise to questions in accounting departments in charge of recording of business trip expenses. Ekaterina Ermakova, Project Manager at Intercomp, has worked out the ins and outs of the accounting of business trip expenses, which she describes in this article.
Any expenses made by employees sent on business trip must be documented and economically justified to be recognized as deductible expenses for profit tax purposes (Article 252 Russian Tax Code). This the first thing that must be remembered. Surprisingly, although this fact has been repeated over and over again, it is rare, in practice, to find companies with all their business trip documents in perfect order.
Business trip expenses as defined by the Russian Labor Code and the Russian Tax Code consist of:
— Travel expenses;
— Accommodation expenses;
— Additional expenses related to accommodation;
— Other expenses incurred by employees with their employer’s permission or knowledge.
Documents issued in a foreign language must be submitted with a line-by-line translation. Such translation may be completed by employees themselves (Ministry of Finance Decree No. 34-n dated July 29, 1998). Plane tickets are an exception to this rule as they do not need to be translated (Federal Tax Service Letter No. ShS-37-3/656@ dated April 26, 2010).
When plane tickets are purchased online, electronic tickets and boarding passes are, for profit tax purposes, confirmation of expenses incurred (Ministry of Finance Letter No. 03-03-06/1/65743 dated October 09, 2017). In such case, details confirming actual air travel must be indicated in boarding passes, including electronic ones. Security check stamps usually fulfill this role. When electronic boarding passes are not stamped, actual air travel must be supported in another way. For example, a certificate specifying all the details confirming the flight issued by the air carrier or its representative may be submitted to support the expenses incurred for profit tax purposes (Ministry of Finance Letter No. 03-03-06/1/65743 dated October 09, 2017).
This is another curious fact. When payments are made with bank cards, bonus points, which may be redeemed for plane or train tickets, are often granted by banks. If a ticket is paid using an employee’s bonus points saved up on his/her personal bank card, then it will be necessary to solely rely on documents for the recording and accounting of such ticket. For example, when train tickets are bought using the bonus points granted by several banks, it is indicated on such tickets that they are paid in cash, and in such case, their cost should be refunded in full. The same should be done if the method of payment is not specified: as usual, travel costs should be refunded to the employee, and incidentally, it will also be possible to deduct the VAT on such cost. And if it is indicated on the ticket that the employee has paid no money for it, in this case, no expense is incurred, and no refund can be made to the employee so the employee has actually saved some money for the company.
When a so-called "non-refundable" plane ticket is purchased, its value is not returned in case of flight cancelation (Article 108(1(4)) Russian Air Navigation Code). The Russian Tax Code provides that only economically justified and documented costs may be recognized as deductible expenses for profit tax purposes (Article 252(1) Russian Tax Code). The Russian Tax Code also specifies that business trip expenses, in particular, travel costs to and from destinations of employees sent on business trip should be recorded as other expenses (Article 264(1(12)) Russian Tax Code). So, even when a business trip has not actually taken place, this does not mean that the expenses incurred to buy the tickets for such trip may be deemed unjustified, especially in case of non-refundable tickets as they are much cheaper. Once again, this is an arguable point, but the cost of non-refundable plane tickets could, in my opinion, be recorded as deductible expenses for profit tax purposes even when business trips have not actually taken place. In such case, it would be necessary to submit together with the relevant expense report a document confirming that the ticket is non-refundable.
Let’s consider another example of canceled business trip. An order for business trip abroad was duly issued, and RUB 5,000 were given to the employee to pay for the visa for this business trip which, after a few days, was canceled by an order issued by the company director. The employee submitted an expense report with documents supporting the payment of charges. Documented expenses incurred both in Russia and abroad, including visa costs, are reimbursed to employees. Such expenses should also be economically justified. Although the question of whether visa costs for a canceled business trip are economically justified remains disputed, the Russian Ministry of Finance and tax authorities consider that such costs may not be deducted for profit tax purposes as they do not fulfill the criteria set out in Article 252(1) of the Russian Tax Code (Item 1 Russian Ministry of Finance Letter No. 03-03-04/2/134 dated May 06, 2006, Item 1 Federal Tax Service Letter No. ЕD-4-3/19756@ dated November 25, 2011).
Personal income tax
The situation with personal income tax is different as Article 217(3) of the Russian Tax Code provides that business trip expenses are not included in taxable income. In addition, the official position is that the cancelation of business trips does not change the aforementioned rule so the payments made to an employee to reimburse visa costs incurred for a business trip will not be subject to personal income tax even if the business trip is canceled (Item 2 Russian Ministry of Finance Letter No. 03-03-04/2/134 dated May 06, 2006).
Personal bank card
Companies may transfer advance payments for business trip expenses to an employee’s ruble bank card. The employee then pay with this card for the expenses incurred during business trips abroad. In such case, the Ministry of Finance considers that such expenses should be determined based on the incurred costs supported by primary documents at the exchange rate set by the bank on the date on which the money is debited to pay for them (Ministry of Finance Letter No. 03-03-06/1/2318 dated January 22, 2016, Letter No. 03-03-06/41128 dated July 17, 2015). A bank card statement specifying the exchange rate applied upon payment may be used as document confirming the exchange rate effective on the date of payment for business trip expenses. Such statement must be certified by the bank (Russian Ministry of Finance Letter No. 03-03-06/39749 dated July 10, 2015).
Although this is a fairly straightforward issue, questions about the accounting of expenses incurred in foreign currency often arise. When employees submit together with their business trip expense report a document confirming the effective exchange rate (for example, a currency purchase statement), then the expenses incurred in foreign currency are converted into rubles using the exchange rate specified in this document (Ministry of Finance Letter No. 03-03-06/1/2059 dated January 21, 2016, Letter No. 03-03-06/41128 dated July 17, 2015). If no such document is available, then the expenses incurred in foreign currency are converted into rubles at the exchange rate of the Central Bank of Russia. Such conversion is done for advance payments made to employees using the exchange rate effective on the date of such advance (Ministry of Finance Letter No. 03-03-06/1/2059 dated January 21, 2016) and for expenses incurred beyond advance payments on the date of approval of expense report on business trip abroad (письмо Минфина от 6 июня 2011 г. № 03-03-06/1/324).
Employees often attach to expense reports for business trip abroad supporting documents specifying the payment of foreign taxes. The Russian Ministry of Finance and the Federal Tax Service uphold that Article 270 of the Russian Tax Code provides a closed list of costs that should not be taken into consideration for profit tax purposes, and foreign taxes are not specified in this list. Taxes paid abroad may therefore be taken into account for profit tax purposes, and based on Article 264(1(49)) of the Russian Tax Code, they may be recorded as other expenses related to production and sale.
Visit to the Russian Federation by foreign nationals
When foreign nationals are invited to Russia for interview/negotiation purposes, they must be registered with migration authorities in Russia. Such registration is regulated by Federal Law No. 109-FZ dated July 18, 2006. When foreign nationals come to a Russian company on business trip, they can do so provided this company has invited them. As a rule, business visas are issued for business visits. There are several types of business visas which may be issued for 90 days (single or double-entry visa) or for up to 12 months (multi-entry visa).
Expenses incurred to purchase plane tickets may not necessarily be deemed unjustified on the grounds of business trip cancelation. This situation is disputed, and the cost of non-refundable plane tickets could, in my opinion, be recorded as deductible expenses for profit tax purposes.
Foreign nationals must be registered with migration authorities within seven days of crossing the Russian border. Other deadlines are set for various nationalities so, for example, citizens from Belarus must be registered within 30 days, and citizens from Tadzhikistan within 15 days. When foreign nationals stay in a hotel, the hotel registers them. And if foreign nationals sent on business trip stay in a corporate apartment, the company that has invited them will have to handle their registration with migration authorities.
Business trip expenses will be documented as prescribed by the laws in place in the country from which foreign nationals have arrived. Russian companies are not required to document anything. There are, however, cases where Russian companies pay some of the accommodation expenses for the foreign nationals sent on business trip. In such case, companies may re-invoice these expenses to the foreign company that has sent its employees on business trip if they have entered into an agreement providing for such possibility. If no such possibility is provided for, then it will not be possible to deduct these expenses for profit tax purposes. Moreover, if foreign nationals stay in Russia for more than 90 days within 12 months, then this will be possible only under an employment relationship.