Special VAT accounts in Russia: an analysis of possible consequencesAt present, in Russia there are actively debated the prospects of the introduction of special accounts to be used for payment of the value added tax. On December 1, 2003, the RF Finance Ministry submitted to the RF Government the respective draft legislative acts aimed at the introduction of special VAT accounts. We have briefly analyzed possible positive and negative consequences of the introduction of this system.
1. The RF Finance Ministry proposals as concerns the introduction of the VAT accounts system In accordance with the RF Government’s instructions, the RF Finance Ministry has worked out and presented to the Cabinet of Ministers on December 1, 2003, the respective draft legislative acts aimed at the legislative substantiation of the introduction of special accounts for payment of the added value tax. The RF Government has received for consideration draft federal laws “On amendments to the Tax Code of the Russian Federation” and “On amendments to certain legislative acts of the Russian Federation in connection to the amendments made to the Tax Code of the Russian Federation.” These draft laws are aimed to introduce the following amendments in the Russia’s tax legislation:
(1) There should be introduced such a tool of administration of the value added tax as VAT accounts.
These accounts should function under a special regime: for instance, it is envisaged that only financial resources pertaining to operations relating to VAT payments to the budget and other taxpayers should be entered to and charged off these accounts. In particular, it is stipulated that financial resources should be entered to a VAT account:
- from VAT accounts of other persons in the course of payments for goods (works, services);
- from the current account, which the owner of the VAT account has with the same bank;
The considerations presented in this material are a generalization of the Institute for the Economy in Transition (IET) studies focusing on the analysis of the impact of the possible introduction of special accounts for VAT payments in the Russian Federation (in particular, such materials as “On the use of short-lived enterprises with the purpose of the value added tax evasion and the use of special bank accounts for fighting this type of tax evasion,” “Using special VAT accounts in the Republic of Bulgaria: key conclusions for Russia,” “A preliminary assessment of withdrawal of enterprises’ working capital as a result of the introduction of special VAT accounts”) presented to the RF Finance Ministry, the RF Ministry for Economic Development and Trade, and those published on the IET web site: www.iet.ru - from other VAT accounts of the owner of the VAT account;
- from the budget in the case of refund of VAT and penalties;
At the same time, financial resources should be charged off a VAT account:
- to VAT accounts of other persons in the course of payments for goods (works, services) or refund of amounts entered to the VAT account without grounds for such a transfer;
- to other VAT accounts of the owner of the VAT account;
- to the budget in the course of payment of VAT and penalties, as well as in the case VAT and penalties are exacted without recourse to the court, or in a way of completion of the liquidation or bankruptcy proceedings.
(2) Opening of at least one special VAT account in addition to the current account should be mandatory for all persons engaged in entrepreneurial activities, including the persons exempted from taxpayer’s obligations. At the same time, it is also envisaged that state authorities (local governments) should also open VAT accounts in order budget organizations could conduct their VAT related transactions.
(3) Any exaction of funds from VAT accounts should be enforced only on the account of VAT related liabilities and penalties imposed for non-prompt payment of VAT. At the same time, in the case an organization is liquidated, the balance of funds on the VAT account after the liquidated organization pays the value added tax and penalties should be transferred to the budget.
The proposed amendments to the laws “On execution proceedings” and “On insolvency (bankruptcy) of credit organizations” in fact envisage that in the case there are initiated bankruptcy proceedings, the funds in the debtor’s account may be transferred to other VAT accounts only in accordance with the demands for transfers of the value added tax, while after the completion of bankruptcy proceedings the debtor’s VAT account should be closed and the balance transferred to the budget.
(4) The draft law does not envisage that financial resources transferred from the master current account of an enterprise to its VAT account may be returned to its current account. However, there exists a possibility to obtain a VAT refund from the budget in the specified cases (for instance, in the case of taxation at the zero rate, excess of tax deductions over the size of the tax base) to be transferred both to the VAT account, and the current account of an enterprise.
(5) Repeated infringements of responsibilities related to the management of VAT accounts should be a ground permitting tax authorities to apply for the recall of the banking license.
(6) Banks should have no right to conduct expenditure operations relating to newly opened VAT accounts before receiving from the tax authority an acknowledgement that it received the notification of the opening of a VAT account by the respective person.
(7) Banks should submit to the tax authorities (not later than on the 5th of the month next to the preceding month) a report in electronic format about all transactions related to VAT accounts, including a personal bank account statement and the documents (indicating product codes, invoice numbers and dates), basing on which all entries relating to the VAT account were made. Repeated infringements of this responsibility should be a ground permitting tax authorities to apply to the Central Bank for the recall of the banking license, as well as take a decision prohibiting such banks to conduct operations concerning the opening of and making payments relating to VAT accounts.
(8) Funds may be transferred from one VAT account to any other VAT account even in the case such transfers are not related to payments for taxable goods (works, services). However, the owner of the VAT account, into which an amount was entered on the grounds other than the payment of VAT, or without a relevant ground, should transfer this amount back into the payer’s VAT account within 14 days after receiving this amount.
(9) There is introduced the concept of invoice registers, which should include all issued and received invoices. These registers should be submitted to the tax authorities in electronic format and on paper medium, while an invoice not included in such a register can not be a ground permitting to accept the amount of VAT presented for refund or deduction.
(10) There is established a procedure, according to which operations relating to transfer of VAT to suppliers should be carried out exceptionally as transfers of funds from the buyer’s VAT account to the VAT account of the supplier notwithstanding the form of payment stipulated by the respective transaction (barter, offset, letter of credit, check, promissory note, etc.).
(11) Only the VAT amounts transferred from the buyer’s VAT account to the VAT account of the supplier for taxable goods (works, services) should be accepted for deduction. The amounts of the value added tax paid to suppliers in cash should be not deducted from the taxpayer’s tax base with the exception of VAT amounts paid in relation to travel subsistence expenses and hospitality costs, but included in the expenses accepted for deduction as concerns the tax on the profit of organizations. At the same time, VAT amounts paid as cashless transfer of funds not from the VAT account of an organization or an individual entrepreneur should be neither deducted from the tax base, nor included in the composition of expenditures related to the profit tax, but included in the composition of extraordinary charges for organizations or not included in the expenditures (occupational deductions) for individual entrepreneurs.
(12) Deduction of VAT amounts paid in relation to import of goods should be allowed as an exception without the transfer of VAT amounts to the budget from the VAT account. Therefore, the procedure currently in force remains unchanged, as it envisages that the importer may advance the VAT and customs duties to an authorized person with the purpose that these amounts be later transferred to the budget in the course of the customs clearance of imported goods. A similar exception is retained for deduction of VAT amounts paid for goods imported from the territory of the Republic of Belarus since the Russian Federation and this country trade under the regime envisaging VAT collection at the rates of the country of origin.
(13) As a compensating measure, the draft law envisages liberalization of the procedures governing refund of VAT collected at the 0 per cent rate, as well as the transition to acceptance for deduction of VAT amounts paid for capital construction operations under the general procedures (at present, deduction of VAT amounts paid by the supplier in the course of capital construction operations is made not earlier than the commissioned capital construction object is registered).
2. Advantages of the special VAT accounts system The major argument in favor of the introduction of special VAT accounts is the necessity to take tax administration measures preventing VAT evasion via short-lived enterprises. At the same time, in the case there is chosen the variant recommended at the moment by the Finance Ministry, the following advantages of VAT accounts expected by supporters of the introduction of such accounts may be listed.
(a) an increase in VAT generated revenues at the same tax rate;
(b) elimination of the present distortions, using which unscrupulous taxpayers, whose tax evasion costs are relatively low, have competitive advantages over conscientious taxpayers fully meeting their tax relating obligations;
(c) the new regime would not result in a significant rise in taxpayers’ compliance costs;
(d) the overall efficiency of tax administration will improve due to the higher transparency of the VAT system;
(e) in the short term outlook, there are no other methods of prevention of the currently used tax evasion methods.
3. Major disadvantages of the VAT accounts system Opponents of the proposed introduction of special VAT accounts doubt items 1 (a) – 1 (e), stated by supporters of VAT accounts. At the same time, it should be noted that neither supporters, nor opponents of VAT accounts have reliable results of studies along two avenues necessary to either confirm or reject the trueness of statements 1 (a) – 1 (c). There should be analyzed the following aspects of this problem:
(a) the present scale of VAT evasion basing on the use of short-lived enterprises (i.e., the only type of tax evasion to prevent which VAT accounts are intended);
(b) the scale of increase in compliance costs (in particular, the costs the taxpayer will bear for administration of special accounts and tax authorities’ costs for tax administration).
It is impossible to evaluate the trueness of statements 1 (a) – 1 (b) without answering the first question.
The lack of correct evaluations pertaining to the second avenue of research does not permit to evaluate the trueness of statement 1 (c). At the same time, a preliminary study of revenues generated by the value added tax in a number of economies in transition and developed countries conducted by the Institute for the Economy in Transition indicated that the amount of VAT budget revenues in the Russian Federation, which makes 6.5 per cent to 7 per cent of GDP, is at an average level among the countries included in the study taking into account the average tax rate, level of economic development, and other factors.
4. Certain trends in changes of the indicators characterizing charging and payment of the value added tax in Russia Unfortunately, numerous changes in the structure of reporting on tax payments transferred to the budget system, published by the RF Revenue Ministry (previously, the State Tax Service) over the last 5 to 8 years, do not permit to thoroughly analyze the trends observed in the key indicators of the value added tax in a medium term outlook. An analysis of such indicator as VAT generated revenues of the RF consolidated budget reveals that since 1993 have made from 6 per cent to 7 per cent of GDP reaching the minimum (5. per cent of GDP) in 1998 and the maximum (7.1 per cent of GDP) in 2001. According to our estimates, such a level of budget revenues generated by the value added tax at the respective tax rates corresponds to the level of development of the Russian economy and tax system. At the same time, since 1992 there has been observed an insignificant decline in the VAT generated revenues of the federal budget and at present it is impossible to judge if this decline is a stable trend (taking into account the growth registered in 2001).
Basing on the reporting data (Form 5nbn) for 2001 through the first six months of 2003 published by the RF Revenue Ministry, there can be presented the following information concerning the amounts of accrued VAT and respective tax deductions in the first six months of 2001 through 2003 (see Table 1).
Table Data on the accrued VAT and the amount of VAT presented for deduction in the first six months of 2001 through As on 1 July, 2001 As on 1 July, 2002 As on 1 July, Rub. thous. % GDP Rub. thous. % GDP Rub. thous. % GDP Total accrued VAT 1 355 200 461 33,5% 1 622 648 501 33,9% 2 167 179 202 36,0% including:
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