Translated material
Discrimination against modernization
The bill on the consolidated taxpayer may become an obstacle to the renewal of production
The government's draft law on a consolidated group of taxpayers, which allows large corporations uniting many enterprises to pay taxes as a single legal entity, deprives companies that invest heavily in the modernization of production from such an opportunity. Such conclusions were made at the end of last week during a regular meeting of the expert council at the Chamber of Commerce and Industry (CCI) on improving tax legislation. The Chamber of Commerce and Industry intends to submit amendments to the bill to the State Duma, but understands that the political decision on its key provisions was made at the very top and is unlikely to be changed.Draft amendments to the Tax Code (TC), allowing large corporations to create a consolidated group of taxpayers (CGT) from controlled companies to pay taxes as a single legal entity, was submitted to the State Duma by the Russian government in June of this year and was adopted in the first reading on October 22. This bill, at the urgent demand of representatives of large businesses, has become a mandatory addition to other amendments to the Tax Code, changing the mechanism of state control over transfer pricing, which interdependent companies often use to minimize tax payments. Those amendments were adopted by deputies in the first reading back in February 2010.
Deputy Chairman of the Expert Council of the Chamber of Commerce and Industry Dmitry Fadeev named three main provisions of the bill on corporate tax groups that cause the greatest objections from business. Firstly, they relate to the requirement that the parent company own at least 90% of the capital of enterprises merged into a consolidated group of companies. “50% is quite enough, since this fully allows us to influence decision-making in dependent organizations,” expressed the opinion of the majority of business representatives who sent their responses to the bill to the Chamber of Commerce and Industry, Mr. Fadeev.
Secondly, company leaders are calling for a reduction in excessively high quantitative indicators, mandatory compliance with which allows corporations to create CGN. The bill stipulates that companies that paid at least 15 billion rubles to the federal budget in the previous calendar year can unite in the KGN. taxes. It is proposed to reduce this amount to 500 million - 5 billion rubles. The total volume of revenue within the framework of the future consolidated group of taxation, according to the government, should be at least 100 billion rubles. Experts who responded to the Chamber of Commerce and Industry’s call believe that 15–50 billion rubles is sufficient. According to the draft law, the value of assets owned by companies merging into KGN should exceed 1 trillion rubles. Business proposes to reduce this threshold to 80-800 billion rubles.
Experts believe it is quite possible to eliminate the need for companies merging into a group to meet three criteria at once. The majority believes that to create a consolidated group of taxpayers, it is enough to satisfy one of the criteria, for example, the volume of tax deductions or the total amount of revenue.
Thirdly, the mechanism for conducting tax audits within the group raises concerns among potential members of the group. In accordance with the bill, within the framework of the CTG, they can be carried out in addition to the two scheduled inspections that the Tax Code currently allows to be carried out during the year. “This imposes additional burdens,” Mr. Fadeev summed up the opinion of his colleagues. Company representatives fear that all KGN enterprises will be subject to control, which will become very burdensome for the corporation’s business.
The amount of tax deductions should not be considered at all when registering a corporate group, Alexander Belichko, deputy general director of the law firm Gamma-Prestige, is convinced. “This undermines investment in production development,” the lawyer is convinced. He points out that “if a company introduces new equipment, it claims VAT as a deduction” and payments for this tax may turn out to be zero. Considering that VAT is the largest tax currently paid by business to the federal budget, it turns out that companies actively engaged in the renewal of fixed assets pay less taxes and they “will not have the conditions to switch to the corporate tax regime.”
And this problem is not hypothetical. “In fact, VAT in our tax return is minus, and the amount of all taxes is reduced by this minus VAT. If we deduct VAT, we do not meet the tax criteria,” says Natalya Khatsela, Deputy Director of the Legal Department for Tax Issues of Mechel OJSC. This does not allow the metallurgical holding to register KNG, although it fully meets the other two criteria.
Possible preferences that large corporations will receive after the formation of the Group of Taxpayers will become discrimination against all other businesses, believes Bair Tserenov, an expert at the Chamber of Commerce and Industry, a graduate student at the All-Russian State Tax Academy of the Ministry of Finance of the Russian Federation. In addition, creating advantages for large corporations will contribute to business concentration, which is disadvantageous for the Russian economy as a whole.
Vladimir Saskov, assistant to State Duma deputy Evgeny Samoilov, reassured those present with the statement that KGN participants practically do not receive any advantages over the rest of the business. The only preference they will be able to take advantage of is the consolidation of losses. Within the framework of consolidated taxation tax, it will be possible to show losses immediately, thereby reducing the taxable base for income tax. “We are dragging losses from subsequent periods to current ones. An unprofitable company can reduce its tax base not later, but right away today,” explained Mr. Saskov. He recalled that the bill on corporate tax groups was created not to provide tax preferences to large taxpayers, but to legalize the actual profit centers of large corporations and distribute the income tax collected from them across all regions where the group’s enterprises actually operate. Now these taxes are concentrated in two or three regions where the parent company of the corporation is located.
The only advantage that the CTG participants will receive is their “falling out of the field of risks under Article 40 of the Tax Code,” which introduces liability for abuse of transfer pricing in order to minimize tax deductions, Natalya Khatsela is convinced. For companies whose shares are quoted on international markets, the creation of a corporate group may not be profitable at all. “One of the negative factors of using the CTG tool is the incurrence of reputational risks by the parent company, if suddenly large amounts of taxes are charged to enterprises that are included in the CTG. A negative impact will also be had on the parent structure,” fears the Mechel lawyer.
The bill also revealed strange legal shortcomings. Lyudmila Batalova, head of the tax department of the consulting company Sameta, draws attention to the fact that the law does not provide the opportunity to challenge in court the refusal of tax and other government bodies to register corporate tax groups. Only the responsible member of the group can represent the interests of the group in the courts, who cannot be present until the group is registered.
The Chamber of Commerce and Industry intends to prepare its own version of amendments for the second reading of the bill on the creation of the Group of People's Commissars by mid-November. But, as Dmitry Fadeev admits, “the already known 10-12 companies that meet them will not be able to significantly change the criteria (for classifying holdings as a corporate group - Ed. ). “Our proposals will not be able to radically change the concept of the bill. We must be aware of this,” Mr. Fadeev concluded the discussion.