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. Last Updated: 07/27/2016

Tax Decree Tackles VAT

A recent presidential decree aiming to streamline Russia's taxation system could result in savings for taxpayers by allowing the immediate recovery of value-added tax payments, while other changes could be more detrimental, financial advisers said.

Decree No. 746, "Concerning Immediate Measures for the Improvement of the Tax System of the Russian Federation," signed by President Boris Yeltsin on July 21 and in force since Wednesday, instructs the government and other federal agencies to submit to parliamentary proposals "easing the tax burden and defending the rights of taxpayers."

One proposal calls for the government to draft a law within three months, setting forth the procedure for the VAT paid for the purchase of fixed assets -- including the construction of buildings -- to be recoverable at the point of operation.

"This proposal will make VAT completely neutral on acquisition of existing assets and on the construction of plants and facilities in the Russian Federation," said Bill Henry, a senior tax manager at Ernst & Young. "We consider that an excellent proposal."

Currently, VAT on assets acquired or built in Russia can only be recovered within six months, meaning a buyer collects from customers the VAT paid for the purchase in monthly installments, offsetting the entire cost in half a year, he said.

VAT on the import of fixed assets and the purchase of services may be offset immediately.

If implemented, the law would "speed up the time you get the VAT back, which is beneficial, certainly," said Scott Antel, a manager of the tax and legal division at Arthur Andersen. "It would be more in line with matching your purchases and the expense."

But Steve Hasson, a tax partner at Price Waterhouse, said implementing new VAT rules in Russia would be a tall order.

"There is a great deal of work to be done to make a draft VAT law based on these proposals workable," he said. "Now the accounting system is not really geared toward such a system."

More worrisome, analysts said, the decree calls for establishing a system whereby sales income is recognized when the invoice is issued, rather than when payment is deposited in a firm's bank account.

"For tax purposes this would decrease your tax break because you're not getting the money until later," said Antel. "Because of inflation you end up paying more tax."

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