Personal Income Tax News: Legal Aspects

On January 1, 2011, a new version of the Tax Code of the Russian Federation came into force, which brought many changes in tax legislation. Amendments also concerned Chapter 23 of the Tax Code - Personal Income Tax. Consider some of the most interesting amendments.

On January 1, 2011 Article. 214.3 of Russian Tax Code (clause 12, Article 2 of Federal Law No. 281VFZ of November 25, 2009) came into force that establishes a particular definition of the tax base for REPO operations with securities. In accordance with clause 1 of Article 51.3 of Federal Law of April 22, 996 No. 39VFZ, a REPO agreement consists of two parts. In the first part, one party (the seller) agrees to transfer securities into ownership of the other party (the buyer), and the latter undertakes to accept them and pay monetary funds for them. In the second part of the agreement, the buyer agrees to transfer securities into ownership of the seller and the seller must accept them and pay. If a REPO agreement is executed at the expense of an individual, one of the parties to the agreement must be a broker, dealer, depositary, manager, clearing organization or a credit organization. Determination of a tax base, calculation, withholding and paying personal income tax with regard to REPO operations with securities shall be carried out by a tax agent, for example, a broker (clause 18 of Article 214.1 of the Tax Code). The base for personal income tax with regard to REPO operations is defined as revenues minus expenses for all REPO operations for the tax period (clause 6 Article 214.3 of the Tax Code). According to Article 214.3 of the Tax Code, the date of receipt of income, and the date of expenses for REPO operations is the date of actual fulfillment or termination of obligations of the participants in the second part of REPO (clause 10, Article. 214.3 of the Tax Code). If the second part of REPO is not fulfilled within the prescribed period in the agreement or not fulfilled at the end of the year after the deadline for fulfillment of the first part of REPO, then for purposes of Article 214.3 of the Tax Code, the second part is recognized unfulfilled (paragraph 5, clause 2, Article 214.3 of the Tax Code). This means that participants in REPO operations will have to take into account the income and expenses from the sale of securities in the first part of the REPO pursuant to Article 214.1 of the Tax Code. Income and expenses should be recognized at the date of fulfillment of the first part of REPO on the assumption of market prices for securities. If there are no such, then settlement prices shall apply (paragraph 6 clause2 of Article 214.3 of the Tax Code). Procedures for determining market and settlement prices for securities are provided for by clauses 5 and 6 of Article 280 of the Tax Code. Also, Article 214.3 of the Tax Code provides for the specifics of determining tax base for REPO operations in the event of replacement of securities received under the first part of REPO (clause 3, Article 214.3 of the Tax Code); receiving REPO (clause 7, Article 214.3 of the Tax Code), coupon payment by the issuer (clause 8, Article 214.3 of the Tax Code); settlement of mutual claims (clause 11, Article 214.3 of the Tax Code), sale of securities received by the buyer under the first part of REPO (clauses 12 , 13, 14, Article 214.3 of the Tax Code); granting loans by securities, which are objects of REPO operations (clause 15 Article 214.3 of the Tax Code).

Starting from January 1, 2011, according to clause 1 of Article 230 of the Tax Code, tax agents shall independently develop methods of tax accounting registers, and the procedure for incorporation of information about the paid individual income. Formerly, (in a version that was effective before January 1, 2011) clause 1 of Article 230 of the Tax Code imposed responsibility on tax agents for keeping records of income that they paid to individuals according to the form established by the Russian Finance Ministry. By Order of the Tax Ministry of Russia of October 31, 2003 No. BGV3B04/583, the latest form (1-PIT) of tax card to record income and personal income tax was adopted in 2003. In subsequent periods, explanations of controlling bodies did not coincide. Now the new edition stipulates what exact data must be included in the tax accounting registers. This is information that can help identify taxpayer, type of income paid to him/her and granted tax deductions in accordance with the approved codes, revenue amounts and dates of payment, taxpayer status, dates of withholding and transfer of personal income tax, details of the relevant payment document. Clause 1, Article 231 of the Tax Code describes in detail the procedure of returning excess PIT amounts withheld by a tax agent (corresponding amendment was made as clause 17, Article 2 of Federal Law No. 229VFZ of July 27, 2010). According to this procedure, an individual turns to the tax agent with a written request for refund of excess tax withheld. The tax agent is obliged to inform the taxpayer of excessive withholding of the tax and its amount within ten days from the date of discovery of this fact. Tax refund must be made within three months from the date of receipt of the individual’s request. Refund is possible at the expense of future payments both for the taxpayer himself and other employees, from whose income the tax agent withholds a personal income tax. The refunded tax amount shall be transferred to an account of the taxpayer specified in his/her request. If the term of repayment of the tax has been violated, the tax agent shall for each overdue day accrue interest on the amount of unpaid personal income tax (based on the refinancing rate of the Central Bank of Russia) in favor of the individual. PIT excessively withheld and transferred, the inspectorate shall return to the tax agent in the manner prescribed by Art. 78 of the Tax Code. Together with the request of refund, the tax agent shall submit to the inspectorate an extract from the tax accounting register, which is kept in accordance with clause 1, Article 230 of the Tax Code. Also, now clause 1, Article 231 of the Tax Code provides for the possibility to refund excessively withheld tax to the individual until the tax agent receives this sum from the budget. The tax agent may make a refund at his/her own expense. Note that earlier the Ministry of Finance of Russia (Letter of April 3, 2009 No. 03B04B06B01/76) was not against an earlier tax refund to the employee (before receiving money from the budget), that is, also at the expense of the tax agent. Pursuant to clause 1, Article 231 of the Tax Code, PIT excessively withheld shall also be refunded if the tax was unlawfully withheld after the tax agent had received a request from the individual to provide property deduction. Appropriate addition was made to Article 220 of the Tax Code, and it also came into force on January 1, 2011 (clause 11, Article 2 of Federal Law No. 229VFZ of July 27, 2010).

A special procedure of personal income tax refund shall be used in the case of recalculation, if the individual acquired the status of a tax resident of Russia. In this situation, refund is made not by the tax agent-employer but by the tax inspectorate. For this purpose, the taxpayer shall submit to the inspectorate at the end of the tax period the declaration and the documents confirming their status, and the tax authority shall refund the tax in the manner prescribed by Article 78 of the Tax Code (clause 1.1, Article 231 of the Tax Code). This procedure is considered in the Letter of the Ministry of Finance of Russia of October 28, 2010 No. 03B04B06/6B258. It should be noted that the new procedure may prove disadvantageous to individuals who came to work in Russia. It is because only those individuals who actually stay in the Russian Federation for not less than 183 calendar days within 12 consecutive months are recognized as tax residents (clause 2, Article 207 of the Tax Code). To their income a 13% rate applies (clause 1, Article 224 of the Tax Code). Income of those individuals who are not tax residents of Russia is taxed at a rate of 30% (clause 3, Article 224 of the Tax Code). Determination of a tax status shall be made on each date of income payment (clause 2, Article 223, clause 4, Article 226 and Article 225 of the Tax Code). If the status of an employee changes during the tax period, the organization shall for the entire period recalculate the personal income tax, previously calculated from the income of a foreigner at a rate of 30%. The tax is recalculated at a rate of 13% (Letter of the Federal Tax Service of Russia of June 25, 2009 No. 3B5B04/881 @). Prior to January 1, 2011, the procedure for recalculation of the tax when the status of an individual changes was not defined in law, and controlling authorities proposed various options in this situation. Starting from 2011, the Tax Code of Russia established a special procedure for the refund to the employee of excessively withheld amount of personal income tax in connection with the acquisition by them of a tax resident status. Now the tax is recalculated for the tax period, and for the refund the employee shall turn not to a tax agent but to the tax inspectorate, where he is registered at the place of residence (stay). In other words, a taxpayer at year-end shall file a declaration and documents confirming the tax resident status to the tax inspectorate (clause 1.1, Article 231 of the Tax Code). It should be noted that a request for refund may be filed simultaneously with the declaration. In this case, the period for refund of the overpayment is calculated from the date of filing a request, but not earlier than after the completion of in-office audit or the time that such audit must be completed (clause 11 of Newsletter of the Presidium of the Supreme Arbitration Court of the Russian Federation of December 22, 2005 No. 98). The following issues related to Chapter 23 is now being considered as draft laws: exemption from personal income tax of revenues received by taxpayers from the sale of products grown in a private subsidiary farming (draft Federal Law No. 426605B5); changes providing for the introduction of progressive scale of tax rates for individual income tax, depending on the amount of taxpayers’ income and increase of standard and property tax deductions (draft Federal Law No. 428657B5); changes providing for exclusion of simultaneous personal income tax both in the form of insurance contributions, and insurance payments under voluntary pension insurance agreements concluded by employers in favor of their employees, contributions under which were paid by organizations in full before January 1, 2008 (draft Federal Law No. 420869B5).

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