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Ministry of Finance Ready to Soften Tax Consolidation

19.10.2011 / Vedomosti

Officials and deputies have no time to improve the new transfer prices control regulations before they come into effect in 2012. However, they promise to pass the act, which allows holding companies to pay consolidated income tax. Not a few, but several dozen companies will be able to use this opportunity.

The Ministry of Finance prepared about 60 amendments to the New Transfer Prices Control Act, which comes into effect on January 1, 2012, the Deputy Minister of Finance Sergey Shatalov said, "We under no illusion that we have made it perfect, this is the first step, and we have lots of issues to resolve". "Unfortunately, we cannot pass them in this session, as it is very short", he said.

According to Sergey Shatalov, the amendments are generally technical and should correct some mistakes made in the draft. The bill was passed in July with some regulations to be improved during the autumn session. For example, price control does not cover civil law issues, including royalties, although their inclusion was approved in 2009. It was postponed because the Ministry of Finance insisted on the inclusion of all objects of civil law rights into the Act, and deputies wanted to include them only partially. According to the Deputy Head of the State Duma Budget Committee Andrey Makarov, the deputies still did not receive the relevant amendments from the Ministry of Finance.

Sergey Shatalov considers other problems of multinational companies in Russia to be of more importance. According to him, the first one is the "incorporation in the Act such problem as a cost-sharing agreement, the second one is to solve problems with permanent representative offices of foreign companies. Amendments which allow accounting for parent company expenses in Russia are to be included in the Act in spring, said Sergey Shatalov. The representative offices issue is "much more complicated", he added. Problems include revenue sharing and expenditure allocation between the parent company and subsidiaries, and transfer prices control of the transactions made through the permanent representative office.

But not all the companies face new transfer prices control regulations. Deputies and officials promise to pass the consolidated taxpayer amendments in this session. Sergey Shatalov "has high hopes for this". According to Andrey Makarov, the Act will be passed during the autumn session anyway, as decreed by the President.

By creating a consolidated group with 90% owned subsidiaries for joint profit taxation, companies can avoid internal transfer control. The draft allows creating a group with minimum consolidated assets of RUB 1 trillion, RUB 15bn paid tax for the preceding year and upwards of RUB 100bn income. Shatalov said yesterday that the Ministry of Finance agrees to lower the limit to RUB 300bn in assets and RUB 10bn paid tax. According to Makarov, the amendments will be discussed at the tax subcommittee tomorrow, and deputies insist on significant reduction. Makarov declined to name his own limit proposal.

Shatalov said earlier that the RUB 1bn asset requirements will only allow 5-6 companies to create a consolidated group. Lowering the barrier increases the number of companies that will benefit from this mechanism. SPARK-Interfax data shows that as of 31 December 2010 there were 50 companies with over RUB 300bn in assets and 13 with over RUB 1 trillion (RAS). Bloomberg states that according to consolidated reports, there are 20 public companies in Russia with assets over RUB 300bn.

If X5 Retail Group can pay consolidated tax, it would be a relief, says company representative Mikhail Susov: “This will hugely simplify administration, allowing us and the tax authorities to perform less checks, to substantiate this or that internal transaction”. Not all companies are after building a group, says a top manager at a major raw materials holding. Income distribution within a group is determined by assets and headcount, which is not always profitable, he says: ultimately this destroys existing partnerships with regional authorities, which depend on tax revenue from majors.

The limit should be lowered further, yet the Ministry of Finance fears lower revenues from the industry leaders, says Partner at Taxadvisor, Budget Committee Expert Council Member Dmitry Costalgin. The draft became more business-friendly by the second reading, he says, for instance the tax authorities lost the right to send out collection letters and block accounts of all companies of the group.

Dmitry Kazmin

Project Group №2, Project Group №2