22/22 Tax Policy23 June, 2017
Possible consequences for companies after introduction of 22/22 tax schemeThe VAT rate currently applied in the Russian Federation is the lowest one in the country’s entire history.
|Period||VAT||Applied based on|
|1992||28 %||RSFSR Law No. 1992-1 On Value Added Tax dated December 06, 1991|
|1993-2003||20 %||Russian Federation Law No. 3317-1 Amending the Tax System of Russia dated July 16, 1992|
|From 2004 to present||18%||Federal Law No. 117-ФЗ Amending Part II of the Russian Tax Code and Other Legislative Acts of the Russian Federation, and Annulling Certain Legislative Acts of the Russian Federation dated July 07, 2003|
VAT is currently one of the best administered taxes. All VAT payers, tax agents, entities which are not VAT payers but issue detailed tax invoices have been required since 2014 to submit tax returns electronically through an e-document operator (Federal Law No. 134-FZ Amending Certain Legislative Acts of the Russian Federation against Unlawful Financial Transactions dated June 28, 2013).
To audit VAT, tax authorities use the risk management system VAT Automated Control System. This tool ensures automatic collection of all information as recorded in purchase ledgers, sales ledgers, and ledgers of received and issued invoices in a single repository and also determines whether there are any discrepancies between the transactions in VAT returns prepared by taxpayers and the transactions in VAT returns prepared by counterparties. This system thus allows tax authorities to identify taxpayers evading VAT, fly-by-night companies, as well as recipients of unjustified tax benefits.
VAT is an indirect tax so the effect of its increase will also make itself known indirectly. Although VAT is paid by end consumers as manufacturers (sellers) add VAT onto the cost of goods, for most companies, the current tax mechanism provides for a temporary diversion of funds as there is always a time gap between the payment of goods (work, services) to suppliers and the payment of sold goods (work performed, services rendered) by buyers. So, raising the VAT rate will increase the tax burden on companies, especially on those with a long production or sale process and with a high share of material costs. These companies will compensate their losses for temporary diversion of funds by either increasing their prices or decreasing their profits.
Who will be at an advantage?The increase in tax burden will affect those companies that are not VAT payers or taxpayers that carry out operations which are not subject to VAT, i.e. primarily small businesses. For them, the cost of manufactured products (work performed, services rendered) will increase due to the VAT charged by suppliers and the fact that they cannot deduct it as their operations are not subject to VAT so they will also compensate their losses by either increasing their prices or decreasing their profits.
The simultaneous reduction in insurance contribution rate from 30% to 22% should be economically profitable for employers as well as an incentive for businesses to reduce the share of shadow wages. This change will be particularly profitable for companies with high wage costs. Companies paying so-called “gray” wages often pay greater profit tax (20%) as they cannot deduct their “gray” wage costs from their profit tax base, but they still “save” on insurance contributions which are not paid from “gray” salaries. The planned reduction in insurance contribution rate down to 22% is likely to make them think about the possibility of “whitewashing” their wage payments so that they can include them in their cost of goods (work, services) and deduct them from their profit tax base.