Tax Effects of Ruble Devaluation
- By Ulf Schneider
- Jul. 28 2009 00:00
The ruble devaluation at the end of 2008 came as a sudden surprise for many companies. When accountants presented the annual statements and tax returns for 2008 at the end of 2009, the next surprise was exchange rate differences that in most cases were relevant for Russian profit tax. It seems another devaluation of the ruble might come in the near future.
What are the tax and related effects of such exchange rate differences and why is this a topic much more relevant here than in the West? First of all the relevancy comes because many transactions have as underlying currency the dollar or euro, although payment might be in rubles. However, taxation is based on profit calculation in national currency (rubles), like in most other countries as well. Interestingly, Kazakhstan allows for instance profit tax calculation for certain industry sectors in USD.
To illustrate effects of exchange rate difference some practical examples are used further below.
Loan to an OOO in USD
Very often the Russian daughter company (OOO) is financed via a loan from the Western mother company (LLC). Such a loan is usually provided in foreign currency, for instance in USD. If we assume a devaluation of the ruble, then the obligation of the OOO increases in Rubles, thus in Rubles there is an exchange rate loss in the P&L. This loss is relevant for tax purposes and thus the taxable income decreases. So far so good, the OOO pays less profit tax. However, two problems might come up with this, beside the fact, that more rubles are required to re-pay the loan. First of all this might bring the company into a loss making position in rubles and the tax authorities might invite the General Director to the famous Loss-Commission. Secondly, such loss might bring the equity of the OOO much down and the company could fail the net asset test. Net assets, means the equity of the OOO, should be at least as high as the charter capital; if not, the OOO could eventually become subject to liquidation. If the company fails the net asset test, one should decide about further financing variants. Most often used is the so-called Contribution to Property of the OOO or in Russian Вклад в имущество организации.
Cash Assets of an OOO in USD
During crisis times, many companies in Russia try to have their cash assets not in rubles, but in foreign currency. We assume that the company has very little active business at the moment but a lot of cash on the bank account, which is held in USD. From operative activity there is about zero profit. However, the cash in USD is subject to revaluation and assuming the ruble devaluated strongly, the USD on the bank account are now much more expressed in rubles. This exchange rate gain is subject to taxation, what for many companies is a surprised, assuming that the operations itself did not make any profit. On the other hand this exchange rate gain increases the net assets (equity) and grants the OOO the possibility to distribute a dividend to the mother company.
Accounts Receivables of an OOO in USD
Similar to cash assets an OOO might have significant Accounts Receivables. We assume an invoice was issued in USD to a foreign client (what could also be the Russian branch of a foreign legal entity). Rather often it happens during crisis period the client does not pay for a long time. Meanwhile, the ruble devaluated and the Accounts Receivables in USD generate exchange rate gains with profit tax to be paid, although the gain is not realized yet. This case might look similar to the example above with Cash Assets, however, the difference is that here the OOO does not have the money yet that is subject to revaluation and there is no guarantee that the client ever pays.
The above examples demonstrate the importance of good currency mix planning, in particular during such crisis period like right now with constant rumor on the market about currency instability One might argue that the USD/Euro exchange rate over the last 10 years also made dramatic development, what is true, however, in Russia there are many daily operations that are not based on local currency and thus the question of currency-mix planning is of high importance. One should also take into account, that all examples assumed devaluation of the ruble. However, nobody knows, it might come exactly the other way round.