Taxpayer group consolidation for calculating and paying corporate profit tax.
Legal Update No. 288
Goltsblat BLP advises of publication of Federal Law No. 321-FZ dated 16 November 2011 “On Amendments to Part 1 and 2 of the Tax Code of the Russian Federation in Connection with Creation of a Consolidated Taxpayer Group” (except for certain provisions).
Contrary to expectations, the minimum limits on consolidated revenues, assets and paid taxes for a consolidated group turned out to be rather high, with no prospects of them being decreased. Considerable entry thresholds for tax consolidations might make this instrument applicable only for a narrow range of taxpayers.
Below we provide a brief overview of the tax consolidation institute introduced by the Law.
1. Taxes in respect of which consolidation is possible. The Law provides for a consolidation opportunity solely for the purposes of corporate profit tax, other taxes being payable by the members independently. The consolidation rules do not apply either to the procedure for calculating, paying and filing reporting forms for profit tax using rates other than the common 20% rate (for instance, on dividends) and for tax on profits subject to withholding tax.
2. Set up of a consolidated taxpayers group. A consolidated group of taxpayers is an unincorporated formation based on a consolidation agreement entered into by the group members for at least two years, subject to registration with the tax authorities. The agreement is regulated by the legislation on taxes and levies and, where this is insufficient, by the civil law legislation, and may be contested by interested parties if it departs from the law.
3. Requirements on members of a consolidated taxpayer group. A consolidated group of taxpayers may be formed by Russian entities that each meets the following criteria:
the entity or any other member of the consolidated group holds, directly or indirectly, at least 90% in each of the other group members;
the entity is a taxpayer for corporate profit tax purposes and does not apply a tax exemption or the 0% profit tax rate envisaged for educational or medical organisations;
the entity is not a member of any other consolidated group, a resident of a special economic zone, a payer of gaming taxes or a clearing house and is not subject to any special tax treatment;
the entity is not in the process of reorganisation/liquidation and is not subject to bankruptcy proceedings;
its net asset value exceeds its authorised capital;
aggregated figures across all group members for the previous year comply with the following thresholds:
RUB 10 bn of cumulative paid profit tax, VAT, excise and severance taxes (other than taxes paid on goods crossing the Russian border);
RUB 100 bn of sales and other revenues;
RUB 300 bn of asset value as per statutory accounts.
In order to register a consolidated group, documentary confirmation must be provided that the members meet the above requirements.
4. Consolidation of organisations with special status.
Banks, insurance companies, non-state pension funds, and professional equity market players may only form a consolidated group together with other entities with the same status (a bank, insurer, etc., respectively).
5. Recognising losses incurred before consolidation.
The Law does not allow deduction of pre-consolidation losses of group members for determining the tax base, but the relevant members may report these under the general Tax Code rules after withdrawing from the consolidated group. The 10-year period for tax loss carry-forward is suspended for the period of participation in the consolidated group.
6. Shares of members in a consolidated tax base.
The aggregate profit tax is distributed among group members on the basis of the criteria established for distribution of profit among structural subdivisions (depending on the headcount (payroll)/depreciated value of depreciable property).
Limitations on deductible rated expenses linked to the taxpayer figures are calculated for each member separately (for instance, for advertising or hospitality costs).
7. Powers of the responsible member.
A responsible member representing the interests of the consolidated group of taxpayers acts as the authorised representative of the consolidated group members by virtue of law and exercises the rights and obligations of the group as a taxpayer, including those pertaining to payment of tax, filing of tax reports and liaising with the tax authorities during tax audits.
Members of the group also retain the right to act on their own as part of the tax audit procedure, submit documents requested by the tax authorities and contest decisions made by the authorities following an audit.
A special rule provides for the responsible member to retain a number of essential powers with regard to operations of the group irrespective of the distribution of rights and obligations in the consolidation agreement and after expiry thereof.
8. Tax accounting.
Each member of a consolidated group must keep tax records in compliance with the general tax legislation rules and report the necessary data to the responsible member.
Provision of unreliable data or no data at all, if it results in failure to pay the tax, is subject to liability similar to that envisaged by Article 122 of the Tax Code for failure to pay tax and additional liability may be provided by the consolidation agreement.
9. Tax enforcement.
A special procedure is established for collecting unpaid tax from a consolidated group, including suspension of transactions on bank accounts.
If tax is not paid, the tax authorities may, in accordance with the established priority, levy execution on cash on accounts and property of the responsible member and, if these prove insufficient, on cash and property of any member, which, in this event, has recourse against the responsible member.
10. Tax audits.
Certain specifics of tax control over a consolidated group are also stipulated.
In particular, a field tax audit may only be performed with regard to all members of the consolidated group and an audit on a specific member may be combined with a field audit pertaining to other taxes.
The Law provides time frames twice as long as those allowed for the usual submission of requested documents and objections to the audit report and to a resolution following audit results coming into effect, etc., have also been extended commensurably.
A field tax audit may take 2 months plus the number of months equal to the number of members of the consolidated group, except for the responsible member, but, in general, not more than a year.
11. Clarification of price control rules.
Apart from consolidation tax matters, the Law clarifies recent amendments to the Tax Code of the Russian Federation on control over prices, which are also to take effect next year.
It is established that transactions between members of a consolidated taxpayer group are not subject to tax control over prices, except for transactions subject to severance tax payable at ad valorem rates.
Moreover, a rule has been introduced that a pricing agreement may have retroactive effect and may apply to the period from the beginning of the calendar year in which it is executed.
12. Time frames for setting up a consolidated group.
Generally, a consolidated taxpayer group is deemed created from the beginning of the profit tax period following the year in which the consolidation agreement is registered. And registration before the end of the year is subject to submission of a set of documents before 30 October.
An exception is made for 2012: there are transit provisions allowing the documents to be submitted up to 31 March 2012. In this case, a consolidated taxpayer group will be deemed created from the beginning of 2012.
For additional information, please contact:
to Evgeniy Timofeev
Partner, Head of Tax Practice for Russia/CIS,
T: +7 (495) 287 44 44,
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