Tax in Russia – II
Prior to the establishment of the Russian Tax Code, tax legislation was based on a patchwork of laws enacted in the last years of the Soviet Union (notably, the 1990 laws on personal and corporate income taxes), the 1991 law “On the framework of the tax system in the Russian Federation” and subsequent federal, regional and local laws and executive decrees. However, the underlying Soviet rules of accounting and business practices remained largely unchanged.
Between 1992–1998, taxation was substantially decentralized: regional and local authorities were entitled to invent their own taxes, or could, on the contrary, create tax havens for “domestic off-shores”.
Individual property tax, enacted and effective since the 90’s, is explicitly authorized by the Code but exists as a standalone law.
Distinction between federal, regional and local taxes depends on the level of legislature that is entitled to establish rates for that kind of tax.
- Federal tax rates are explicitly set by the Code
- Regional tax rates are limited by the Code but set by regional laws.
- Federal taxes such as the personal income tax may be forwarded to regional governments
- Corporate profit taxes are split into federal and regional shares defined by the Code.
- VAT is a major source of federal revenue
- Tax on mineral resource extraction is another major source of federal revenue regulated by the Code; most of it is paid by oil companies
- Corporate profit tax is the major source of regional revenues
- Personal income tax is levied individually. There is no joint filing. Employers withhold income taxes, thus the taxpayers whose only taxable income was paid by employer do not need to file a tax return—except to claim a refund for itemized deductions. The most important deductions are for home purchase (once a life), and education and medical expenses. Deductions require documentation and are subject to limitations. Tax returns are mandatory for registered entrepreneurs and professionals (lawyers, notaries, etc.), sellers of personal assets and recipients of other income. State pensions and alimony are normally not taxable, as well as bank interest (unless it exceeds the refinancing rate set by Central Bank of Russia).
- Capital gains from asset sales are taxable only if the seller owned the asset for less than 3 years. A special tax rate of 35 percent applies to lottery and gambling wins and excess of bank interest received over the threshold interest computed using refinancing rate. Interest rates are usually below the threshold, making interest tax free.
- Other federal taxes prescribed by the Code include a tax on animal and water wildlife, levied upon licensed hunters and fisheries, and a document tax (stamp duty), most notably the ad valorem duty required to start civil litigation in state courts.
Regional and local taxes
All regional and local taxes in Russia are asset-related: property tax, vehicle tax, land tax. Exact rates are set by regional (property, vehicles, gambling) or municipal (land) legislators within the Code’s framework.
- Land tax is the only local tax in Russia: its rates are set by municipal authorities (excluding the federal cities of Moscow and Saint Petersburg, where the rates are set by city legislators). The maximum rate is 0.3 percent on lands zoned for agriculture, housing and dachas, and 1.5 percent on other lands. Forest reserves and bodies of water are exempt. Land values are periodically assessed by land registrars and kept substantially below market prices. Unlike corporate property tax, land tax is paid by individual taxpayers.
- Corporate Property tax, or tax on fixed assets, is assessed on year-averaged book value of fixed assets excluding land (which is subject to land tax). Radioactive waste storage facilities, space satellites, church property and other itemized assets are specifically exempt from taxation. Regional authorities can vary rates depending on types of taxpayers and assets. This provides a method to establish disguised individual preferences, which are outlawed by the Code.
- Vehicle tax is levied annually on owners of motor vehicles and trailers, ships, and aircraft. Commercial ships and aircraft operated by transportation companies, agricultural, military vehicles and ambulances are exempt. The Code establishes maximum rates tied to engine power. Rates increase steeply with increasing horsepower.