The following article is an excerpt from Awara Russian Tax Guide, the first comprehensive book offering a full overview of all Russian taxation laws and rules. Awara Russian Tax Guide provides insight into the general framework of the Russian tax laws, the Tax Code and its principles. It describes the general rules of the Tax Code Part I and each type of tax and tax regime of Tax Code Part II, among them: Profit Tax, VAT, Personal Income Tax, Property Tax, Employer’s Social Contributions. The book also covers the now so important case law and taxation principles set by court precedents.
Russian statutory accounting rules (RSA – also referred to as Russian Accounting Standards, RAS) are regulated by norms on a hierarchy of four levels. At the highest level there is the Accounting law (passed by the Russian parliament, the State Duma). At the second level there are the accounting standards (“PBU” in Russian, short for Polozheniya po Bukhgalterskomu Uchetu) issued by the Russian Ministry of Finance. The ministry derives its powers in this connection from the Accounting Law (article 4 of the new accounting law).
A new accounting law has been enacted in 2011 and will replace the now existing law from the beginning of 2013 (Federal law No. 402). The discussion in this chapter is in reference to the new law if otherwise not indicated.Â We list below the most important changes brought by the new law.
Recognition of possibility to outsource accounting. The new law now explicitly recognizes that outsourcing of accounting is an option alongside of employing an in-house chief accountant. Accounting outsourcing is, however, not available for banks.
The role and qualifications of chief accountant. The role and qualifications of the chief accountant have been clarified. For most companies, all limited liability partnerships (so-called “OOO companies”) and all joint stock companies of the closed type (“ZAO companies”), there are no special competence criteria set for the chief accountant. Statutory competence criteria have been set in respect to chief accountants of open stock companies (“OAO companies”), insurance companies, and various forms of investment companies. These are not, however, very demanding: higher professional education with a master’s degree in accounting and audit (this criterion is, however, waived if the person has 5 years experience of accounting and another form of higher education), 3 years experience, and no conviction for economic crimes. Hereby the law does not require that the person responsible for the accounting is particularly a chief accountant, recognizing the possibility that “another officer of the firm” can be entrusted this function. Thus the function could be given, for example, to a chief financial officer, or outsourced as it was said above.
The competence criteria for chief accountants of banks and credit institutions are set by the Central Bank.
Flexibility with source (primary) documents. An important change in the law has to do with source (primary) documents which must be in place to support the accounting transactions. The law scraps the earlier requirements to standardized document forms that are a hangover from the Soviet system. Now the template for source documents will have to be adopted by the company itself with approval by the chief executive officer. In other words, once the law comes into effect, every company will be free to use its own forms and documents. In addition, the law now allows for the primary accounting documents to be drafted in digital form and hence be approved by a digital signature. – See below for more details.
Entities exempt from keeping full statutory accounting records. After the new law individual entrepreneurs and private professionals are exempt from the duty to maintain accounts in conformity with the accounting laws and standards if they maintain their tax accounting records in conformity with the tax laws regulating their specific tax regimes.
Branches and representative offices (or other subdivisions) of foreign companies may waive the requirement to keep statutory financial accounting (bookkeeping) books as long as they follow the tax accounting rules prescribed by the Russian Tax Code (keeping of all the necessary tax ledgers for each type of tax applicable to the entity’s business). However if the business operations amount to a taxable permanent establishment, then full accounting is required.
The new law now removes the requirement that documents relating to monetary operations be approved jointly by the director and chief accountant, allowing for companies to adopt their own internal policy for such approvals.
The PBUs issued by the Ministry of Finance are largely based on International Financial Reporting Standards (IFRS), with each new amendment aimed at bringing RAS closer in principle to IFRS.
In addition to the PBUs the Ministry of Finance regularly issues detailed instructions as to the application of the PBUs in specific situations. Examples of such instructions are the compulsory unified chart of accounts that all Russian firms must use and the detailed instructions on how to calculate the cost of goods sold. The standard chart of accounts is prescribed for all Russian companies by the Ministry of Finance (Order No. 94n). According to the chart each balance sheet and income statement account is given a two digit number. This two digit coding must be adopted by each company and cannot be changed through adoption of internal accounting procedures, but naturally they may be adapted to specific requirements by introducing a needed amount of subaccounts.
We may consider as the fourth level of regulations the rules that the company (or entrepreneur) establishes within the framework permissible by the government regulations. These concern areas which are not completely covered by the law, or where the company is left with a choice. The regulations individual to the company are set in its ‘accounting policy.’
The Russian Tax Code requires taxpayers as well as permanent establishments (PEs) to keep separate accounting records for tax purposes. As with many other countries, tax accounting rules differ from statutory financial accounting principles. This can create major differences in calculations, specifically for example in regards to the treatment of depreciation, reserves, interest expenses (capitalization or deductions of interests) and losses. For many companies the existence of separate Tax Accounting rules means a third set of books must be kept alongside the Russian Statutory Accounts in addition to the books kept in accordance with some international accounting principles such as IFRS and US GAAP.
Examples of the Russian Tax Code providing for the application of individual company accounting policies are the requirements to adapt rules for ‘ keeping of tax records’ and ‘determination of the tax base.’ In this regard, the Russian Tax Code (art.313, 167) allows an option for a company to choose amongst tax accounting principles, however the Russian Tax Code also details a fall back set of principles should the company choose not to adopt its own set of custom principles. Companies must also consistently maintain their adopted tax accounting policies from one year to the next, unless legislation prescribes otherwise or the company develops a superior method of maintaining accounting policies and sees fit to change them. It is necessary that in both of these situations that the newly adopted policies take effect from the beginning of the financial year.
It should be noted that a company must issue separate regulations on financial accounting policy and tax accounting policy, respectively.
During the time of the Soviet Union, accounting in Russia was traditionally used for statistical purposes. All enterprises reported only to the state and accounting was largely put in place for the benefit of the state only.
Since the break-up of the Soviet Union in 1992, Russia has undergone radical changes to shift from a centrally planned economy to a market economy. In doing this, the shift in accounting policy had to reflect a shift in process for accounting, from a system of state economic administration to a process of the private business community. This posed problems for the traditional accounting system, as a shift also had to occur in regards the end use of accounting records. With the new market economy, financial reporting had to be put in place that satisfied the requirements of investors, creditors and other interest holders. This contrasted to the previous state system.
In more recent years, this initial transition has been accelerated even further through by the Russian Government identifying the necessity to align Russia’s accounting principles with those of IFRS. Although this alignment has taken place to some degree, the previous state-centered traditions have still negatively affected the contemporary development of accounting policy. While there are now some principles resembling those of IFRS, the implementation of these principles in practice still have some flaws.
The problems are often caused by the restrictions that prescribe that a source document has to be in place before specific accounting entries can be made. As a consequence, accounting statements prepared according to RAS do not necessarily show the true account of accruals and do not convey a true and fair value of the assets or liabilities of the entity. Therefore, in order to understand the financials of a Russian company in a true and fair view, the statements need to be restated in international accounting standards such as IFRS (International Financial Reporting Standards), US GAAP (US Generally Accepted Accounting Principles) or any other standard used by the parent company. In doing so, there are a number of difficulties to overcome.
The main shortfall in the development of RAS in comparison with IFRS arises from the fact that the accounting principles still favor the tax authorities as the main recipient of the information. This is in direct contrast to IFRS basic root principles, in that financial and accounting information should be produced specifically in the interests of accuracy and fairness towards shareholders and relevant stakeholders.
Form over substance – Russian administrative practice in all fields of activities and life is quite formalistic. As a consequence of this obsession with form, Russian accounting practice has been quite slow to adapt to IAS rules where subjective judgment is often needed. In addition to this, RAS is in theory ‘substance over form;, whereas in reality it is ‘form over substance’.
RAS does not provide guidance on the procedure for consolidations, business combinations, purchase price allocation, impairment of property, plant & equipment, share-based payments or employee benefits.
This means that in fact a professionally managed Russian subsidiary company has the needed to make financial reports on four different levels:
Some categories of companies in Russia will have to keep their accounts according to IFRS following recent changes in law: Ministry of Finance order On Implementation of IFRS and Interpretation of IFRS in Russia (n160 of 25.11.2011) and Law on Consolidated Financial Statements (No. 208-FZ of 27 July 2010). IFRS will become mandatory for banks, insurance companies and other companies listed on a Russian stock exchange, and companies intending to offer shares to the public (to more than 500 investors) (Federal law N 39 – FZ ‘On securities market’ of 22.04.96, art. 30(4)2) and regulation of Federal Service for Financial Markets N 11- 46/pz-n ‘On disclosure of emitters’ information regarding issuance of securities’).
The official date of transition (for these types of companies) is 1 January 2011 (if they have not applied IFRS previously). The first IFRS consolidated financial statements must be audited and filed by 30 April 2013 and published by 31 May 2013.
If a listed company is presently reporting under other internationally recognized standards, for example, US GAAP, then such a company must prepare its first consolidated financial statements according to IFRS for 2015.
As said above, the new accounting law, effective from 2013 will introduce considerable flexibility in regards to the form of supporting primary (or source) documents and abolish the strict and confusing rules presently in force in Russia.
Now the template for source documents will have to be designed and adopted by the company itself with approval by the chief executive officer. In addition, the law now allows for the primary accounting documents to be drafted in digital form and hence be approved by a digital signature.
Each operation has to be supported by an appropriate source document or a set of documents. According to the new accounting law the source documents must contain at least these mandatory requirements:
For example, if one company provides services including consulting or legal services to another company in Russia, it must draw up a specific source document, including all the above reference details. In practice, such a document is called a ‘certificate of acceptance of services’. This certificate should be signed by both the service provider and the client.
Although the new accounting law now contained the welcome reform of abolishing the mandatory templates for source documents there is now a risk that the tax authority is now trying to fulfill the vacuum and claim the right to impose new mandatory forms on taxpayers. The Federal Tax Service has already issued numerous such template source documents. One of these is the template for a so-called “Consignment Note” (form TORG-12) which according to the practice the tax authority adheres to is considered as a mandatory accounting document for justifying expense and VAT deductions in connection with sale of goods. The tax authority requires that such a consignment note is signed by both the purchaser and the seller. For the purpose of supporting sales of fixed assets the tax authority has issued another template document called “Certificate of Acceptance of Fixed Assets” (form OS-1). In addition to these the tax authority has also issued templates for a waybill (Form 1-T).
The Russian Tax Code mandates that for tax compliance purposes the transactions will have to be supported by the same source documents as those required by the Accounting Law. According to the profit tax laws the deductibility of expenses is subject to proof that they are economically justifiable and properly documented. Concerning expenses that have been incurred in another country the source documents have to be drawn up in accordance with ordinary business practices applicable in the relevant state.
Recent court practice has supported a tendency of judging the accuracy of source documents not strictly in reference to the state sponsored source documents (under the old accounting law) and instead considering the extent of documentary support on more substantial criteria. The Supreme Commercial Court has determined that the taxpayer may refer to any documentary evidence in support of confirmation of the conditions of deductibility, and that all the evidence must be considered as a whole (Supreme Commercial Court Determination No. VAS-5445/09 of 17.06.2009; see also ,for example, Resolution of the Federal Commercial Court of the Central District dated February 18, 2010 on Case No. А35-5033/08-С21).
The law does not impose strict regulations in respect to the form and flow of electronic primary accounting source (as is the case with electronic VAT invoices).
As of May 2012 electronic VAT invoices may be issued in Russia (please refer to chapter VAT for more details).
According to the Tax Code (art. 23), accounting records as well as taxation documents including tax receipts must be stored for 4 years Art23(1)(8). However, it should be noted that the storing period specified in the 1996 Law on Accounting (art. 17) is 5 years. When claiming Deductions for losses relating to prior periods (Loss-Carried-Forward Rule), the corresponding accounting records will have to be available for all those periods to which the loss carried forward refers to. The Loss-Carried-Forward rule allows for the Deduction of losses relating to periods as far back as ten years (art. 283(2), Tax Code).
The Russian Law requires that the following entities have their accounting records fully audited by a licensed auditor (article 5 of the Russian Audit Law):
A Russian audit requires not only a systematic verification of the accounts, but also a meticulous examination of the procedures and accounting procedures of the enterprise to ensure that the books have been kept in the manner prescribed by the law as per the accounting and tax law.
For further information, please contact the authors:
Jon Hellevig, Partner of Awara Group
Eugeny Isaev, Executive Partner of Awara Group