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Below, there is presented a review of federal law No. 120 FZ of August 20, 2004, On amendments to the Budget Code of the Russian Federation as concerns the regulation of interbudgetary relations. The new version of the RF Budget Code, which implements the principles and stipulations formulated in such federal laws earlier adopted in the frame work of the reform of federative relations and local government as federal law No. 95 FZ of July 4, 2003, On amendments to the federal law On the general principles of organization of legislative (representative) and executive authorities of RF subjects and No. 131 FZ of October 6, 2003, On the general principles of organization of local government in the Russian Federation contains the detailed regulation of the financial aspect of relations among all levels of the budgetary system of the Russian Federation15. Therefore, upon the adoption of law No. 120 FZ the legislative formation of the new system of interbudgetary relations in Russia has been completed.

Law No. 120 FZ envisages that the following amendments should be made in the RF Budget Code along the following key avenues:

more precise definition of the budgetary structure and general principles of organiza tion of the budgetary system of the Russian Federation;

assignment of sources of revenues to different levels of the budgetary system of the Russian Federation;

setting up of the procedures governing the assignment of expenditure obligations to different levels of the budgetary system of the Russian Federation;

regulation of provision of interbudgetary transfers;

setting up of the procedures governing the exercise of fiscal powers vested with state authorities of RF subjects and local governments in the case of introduction of a provi sional financial administration;

more precise definition of procedures governing the cash servicing of the execution of the budgets within the Russian budgetary system.

Below, there is presented a detailed description of changes introduced by law No. 95 FZ of July 29, 2004, On the amendments to Sections 1 and 2 of the Budget Code of the Russian Federation and invalidation of certain legislative acts (provisions of legisla tive acts) of the Russian Federation on taxes and fees. The key amendments to the RF Tax Code are directly related to the amendments made to the RF Budget Code as concerns the assignment of tax revenues to the budgets of different levels and in fact reproduce the Due to the approval of law No. 95 FZ, federal law No. 184 FZ of October 6, 1999, On the general principles of organiza tion of legislative (representative) and executive authorities of RF subjects was in fact presented in its new version, while federal law No. 119 FZ of June 24, 1999, On the principles and procedures of the division of jurisdiction and powers among the authorities of the Russian Federation and the authorities of RF subjects was abolished.

Since January 1, 2006, (i.e. from the moment of enactment of the key provisions of federal law No. 131 FZ) federal law No.

154 FZ of August 28, 1995, On the general principles of organization of local government in the Russian Federation and federal law No. 126 FZ of September 25, 1997, On the financial principles of local government in the Russian Federation become invalid. Therefore, during the transitional period from October of 2003 through January of 2006 two legislative acts will be simultaneously in force in the sphere of local government: old federal law No. 154 FZ of 1995 and new federal law No.

131 FZ. Both these laws regulate the same sphere of subjects. In spite of the fact that at present only a small part of provi sions of law No. 131 FZ are in force, the public authorities of all levels will have to turn to the provisions of law No. 131 FZ in order to bring the legislation of the Russian Federation (federal and regional), as well as regulatory acts of local governments in conformity with this law.

RUSSIAN ECONOMY in trends and outlooks structure of assignment of tax revenues to different budgets in the framework of tax legis lation. At the same time, law No. 95 FZ introduces a number of other amendments to the RF Tax Code reviewed in detail in the respective part of this section.

Federal law No. 120 FZ On amendments to the Budget Code of the Russian Federation as concerns the regulation of interbudgetary relations More precise definition of the budgetary structure and general principles of organization of the budgetary system of the Russian Federation The new version of article 10 of the RF Budget Code defining the structure of the RF budgetary system envisages the division of local budges in the following components:

budgets of municipal districts;

budgets of town okrugs;

budgets of intra city municipal entities of the federal cities of Moscow and St. Peters burg;

budgets of urban and rural settlements16.

At the same time, the law more precisely defines such terms as consolidated budget, local budget, budget of the RF subject, and federal budget (articles 14 of the RF Budget Code). The preceding version of the RF Budget Code the budgets were defined as the forms of organization and expenditure of financial resources earmarked for ensuring of objectives and functions assigned to the jurisdiction of different levels of au thority. However, the existing division of jurisdictions among the budgets of different levels did not permit to clearly and unambiguously determine the avenues of expenditure of budgetary funds. The new approach to the organization of the RF budgetary system un ambiguously linked the definitions of budgets with the concept of expenditure obliga tions17. The new versions of articles 14 16 of the RF Budget Code define budgets as the forms of organization and expenditure of financial resources earmarked for the fulfillment of expenditure obligations of the respective budgetary level (Russian Federation, RF sub jects, and municipal entities) within one financial year.

The consolidated budget of the Russian Federation comprises the federal budget and the budgets of other levels of the budgetary system of the Russian Federation without taking into account interbudgetary transfers among these budgets with the exception of budgets of the state extra budgetary funds and territorial state extra budgetary funds (ar ticle 16 of the RF Budget Code)18.

Among the innovations related to the definition of the concept of budget there should be noted the provision of article 14 of the RF Budget Code, which specifically pro hibits local governments to use any forms of organization and expenditure of financial re sources for the fulfillment of their expenditure obligations other than local budgets. How ever, the respective provisions concerning the federal budget and the budgets of RF subjects are less strict. In accordance with articles 15 and 16 of the RF Budget Code, the This regulation became necessary, since law No. 131 FZ set forth the new territorial organization of local government con sisting of municipal districts (town okrugs) (the upper level of local government) and urban and rural settlements (the bot tom level of local government).

For details on the new division of expenditure powers between the levels of authorities and the term expenditure obliga tion see below.

Similarly, the consolidated budget of the RF subject is formed by the budget of the RF subject and the budgets of municipal entities in its composition (without taking into account the interbudgetary transfers between these budgets) (article 15 of the RF Budget Code). The consolidated budget of the municipal district is formed by the district budget and the budgets of ur ban and rural settlements (without taking into account the interbudgetary transfers between these budgets) (article 14 of the RF Budget Code).

Section 2.

Monetary and budgetary spheres state authorities of RF subjects should have the right to use other forms of organization and expenditure of their financial resources for the fulfillment of their expenditure obliga tions being in compliance with the RF Budget Code, while the federal authorities should have the right to use other forms of organization and expenditure of their financial re sources in accordance with other federal laws. In other words, the RF Budget Code con tains a direct prohibition to create any extra budgetary funds at the local level; however, it permits the existence of other than budgets forms of expenditure of public financial re sources at the level of RF subjects (somewhat limited), and at the level of the Russian Fed eration.

Assignment of tax revenues to different levels of the budgetary system of the Russian Federation The following group of changes and amendments introduced to the RF Budget Code by law No. 120 FZ concerns the fixation of assignment of the sources of revenues to the different levels of the RF budgetary system (article 6 of the RF Budget Code).

The Code more precisely defines the term own revenues of budgets, which, in accordance with the new version of article 47 of the RF Budget Code, include tax and non tax revenues, as well as the revenues obtained as free and irrevocable transfers with the exception of subventions granted from the Federal Compensatory Fund and regional com pensatory funds19. Therefore, at present own revenues of budgets include all types of revenues with the exception of subventions transferred to the lower level budgets for the execution of delegated powers, i.e. the powers execution (administration) of which is de volved from the superior level of authority to the lower level together with the transfer of the respective financial resources (subventions).

Until recently (prior to the amendments made to article 6 of the RF Budget Code by law No. 120 FZ), the key concept of distribution of revenues among the levels of the Rus sian budgetary system was regulatory revenues, i.e. federal and regional taxes and other payments subject to the standard rates of assignment to regional and local budgets set forth each year for not less than 3 years20. In spite of the fact that tax revenues of regional and local budgets were also financed from such sources of revenues as own taxes (re gional and local), the overwhelming majority of tax revenues of the budgets of RF subjects and municipal entities were defined as regulatory revenues, i.e. the terms of assignment of such taxes and the regulation of setting of different elements of taxation were controlled by either federal authorities or authorities of RF subjects. Therefore, subnational budgets lacked significant sources of revenues formed at the expense of own taxes and non tax payments. On the one hand, this was a very negative circumstance, since in this situation the fiscal autonomy of regional and local authorities was very limited, what had negative impact on the incentives for pursuit of efficient budgetary policies. On the other hand, this situation was determined by objective factors and it may be surmised that in that situation a significant enhancement of fiscal autonomy of regional and local authorities was impos sible.

A principal innovation contained in article 6 of the RF Budget Code is the assignment of tax revenues to budgets of all levels on a long term basis and the rejection of the splitting of revenues generated by regional and local taxes among the budgets of different level via federal laws. All major taxes (VAT, income tax on individuals, profit tax on organizations, and excises) are retained as federal taxes, however, in contradistinction to the previous Financial aid in the form of grants and subsidies was not included in the composition of own revenues of budgets in the previous version of item 3 of article 47 of the RF Budget Code.

Article 48 of the RF Budget Code, the version not amended by law No. 120 FZ.

RUSSIAN ECONOMY in trends and outlooks status of regulatory tax revenues, in accordance with the new procedure the rates of as signment of such federal taxes are not subject to annual changes and are fixed directly in the RF Budget Code (see article 50, p. 2, article 56, p. 2, article 61, p. 2, article 61.1 p. and article 61.2 p. 2) (see Table 11). At the same time, RF subjects received the powers concerning the setting of the rates of assignment of own (regional) taxes and other tax revenues due to regional budgets (including revenues generated by federal taxes), the budgets of municipal districts and settlements21. The only requirement set forth by the fed eral legislation in this case is that a law of the RF subject set uniform (for all municipal enti ties of the same type) rates of assignment for an indefinite period of time (the setting of these norms by laws of RF subjects for a limited period of time is prohibited by item 1 of article 58 of the RF Budget Code). Similar requirements are set with respect to the proce dures governing the transfer of tax revenues of municipal districts to the budgets of set tlements (article 63 of the RF Budget Code).

These requirements do not concern only the income tax on individuals, since the ad ditional rates of assignment of this tax (in contradistinction to the minimal rates of assign ment of this tax set forth by the RF Budget Code22) can be differentiated and set forth by laws of RF subjects for a limited period of time (item 2 of article 58 of the RF Budget Code).

Regional authorities are also granted the right to take decisions with respect of the addi tional rates of assignment of the revenues generated by the income tax on individuals choosing between uniform rates (set for indefinite period of time) and additional rates (set for the respective financial year) of assignment of this tax.

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