Annexs It should be noted that the option to use adjustments does not dispense or ganizations from the duty to maintain tax accounting, since in order to obtain any adjustment it is necessary as a rule to first have the data on the object of such ad justment both in terms of financial accounting and terms of accounting maintained in accordance with the rules set by the tax legislation. Foreign practices demon strate42 that adjustments are used in order to reconcile the amounts of taxes pay able (as per accounting records) and real tax payments (as per tax returns) in the framework of accounting and financial reports and not to make the accounting pro cedures used by companies less complicated.
At the same time, the number of necessary adjustments may be reduced in the case the rules of financial and tax accounting could be converged. In the case the respective provisions are in place in both the financial and tax accounting legis lation this issue may be coped with at the level of an organization’s accounting poli cies.
The introduction of an open list of direct expenses in the Tax Code (see item of article 318 of the RF Tax Code) and changes in the regulations concerning the procedures governing the evaluation of work in progress, which now may be set by an organization at its own discretion with respect to its accounting policies for taxa tion purposes (see item 1 of article 319 of the RF Tax Code), may be classified among the measures already implemented in this sphere. The said changes were introduced in the RF Tax Code by federal law No. 58 FZ of June 6, 2005, “On the introduction of amendments to Part Two of the Tax Code of the Russian Federation and certain other acts of tax and levy legislation of the Russian Federation.” At the same time, this federal law introduced to the RF Tax Code a provision (contained in item 1.1 of article 259), in accordance with which taxpayers (as con cerns organizations) should have the right to include expenditures associated with capital investments amounting to less than 10 per cent of the initial costs of fixed assets (with the exception of those acquired on the gratis basis), as well as ex penses for additional construction, additional equipment, modernization, technical upgrade, and partial liquidation of fixed assets to the composition of expenses borne during a reporting period. In the case organizations use this amortization premium, it will form a time lag in financial accounting, since it is accrued only in the framework of tax accounting. Of course, organizations may refrain from using this provision in order to converge financial and tax accounting; however, in this case their expenditures for the acquisition of fixed assets will be accepted for deduc tions for taxation purposes later than in the case they use the amortization pre mium.
The example discussed above demonstrates that even in spite of the potential reduction of expenditures organizations bear with respect to bookkeeping, it is im possible to completely converge financial and tax accounting. These types of ac counting serve different purposes and as a rule have different users of reporting data; respectively, companies developing their accounting policies pursue different See: Nalogovaya reforma v Rossii: problemy i resheniya (Tax Reform in Russia: Problems and So lutions). Working Papers No. 67R. M.: IET, 2003. Chapter 10.
RUSSIAN ECONOMY IN trends and outlooks purposes by choosing one or another method (means) of accounting with respect to certain events and operations.
Yet another problem encountered in the course of analysis of correlation be tween financial and tax accounting is associated with the sphere of regulation. Arti ficial convergence of tax and financial accounting via a regulatory system (use of accounting ledgers for calculation of tax liabilities, lack of a separate regulatory base of regulation of tax accounting and respectively use of financial accounting and reporting data for the purposes of tax administration and control) creates pre requisites for the inclusion of a control function in the sphere of accounting infor mation, what infringes on its neutrality and therefore reliability. Consequently, as concerns the creation of favorable conditions for compliance with qualitative char acteristics of reporting information accepted in the international practice43, the separation of financial and tax accounting appears to be feasible.
Among other measures, the separation of financial and tax accounting envis ages the development of a separate regulatory base for tax accounting as a full fledged sphere with own objectives, tasks, users, and accounting policies. The definition of accounting policies for taxation purposes set in the text of the RF Tax Code may be viewed as a step towards an increasing independence of tax account ing; however, at the same time it appears that this step has been taken as a meas ure aimed at the creation of a conceptual framework of the tax legislation.
It should be noted that a full fledged legal regulatory framework with respect to tax accounting will permit in the future to settle the issue of granting certain group of subjects an option to submit individual (unconsolidated) financial state ments directly formed in accordance with the International Accounting Standards (IAS)44, what appears to be a more efficient way to reduce the costs borne by or ganizations in connection with bookkeeping than conversion of methods (means) used in the framework of financial and tax accounting.
The exclusion of references to financial accounting from the tax legislation is a necessary measure aimed at the withdrawal of financial reporting of Russian com panies from the sphere of tax administration and control; however, it should be noted that this measure alone is not sufficient for this purpose. In order to avoid ex cessive interference of control functions in the sphere of financial reporting and maintain financial discipline all necessary tools should be directly set in the tax leg islation.
Understandability, relevance, reliability and comparability of reporting information in the context of different hierarchy of components are indicated both in the framework of the International Account ing Standards (see the Framework for Preparation and Presentation of Financial Statements), and in the framework of the US Generally Accepted Accounting Principles (see the Statement of Financial Accounting Concepts № 2. Qualitative Characteristics of Accounting Information).
The Concept of development of accounting and reporting in the Russian Federation in the medium term perspective envisages that in the future the option to form individual financial reporting in ac cordance with IAS in stead of Russian Accounting Standards may be granted to a certain group of economic agents (see Section 3 “Stages of development of accounting and reporting in the medium term perspective”).
Annexs In this connection, it should be noted that the draft of the federal law “On offi cial accounting,” 45 which should replace federal law No. 129 FZ of November 21, 1996, “On accounting” currently in force, abolishes companies’ obligations to submit their financial accounting records to the tax authorities. According article of this draft law, companies should be still obliged to present their accounting re cords only to the statistical authorities responsible for the places, where compa nies are officially registered. However, tax authorities have negative attitude to wards this innovation referring to the fact that they need accounting data for their work46.
Creation of a separate regulatory base of tax accounting should not be viewed as discontinuation of regulation of financial accounting including its technical as pect, i.e. the documenting of operations, keeping of ledgers and so on. Both finan cial and tax accounting as a rule serve to reflect the same facts of financial and economic activities and base on the same raw data. Therefore, a reasonable sepa ration of financial and tax accounting in no way restricts possibility of tax control, moreover, after incentives for efficient functioning of the sphere of accounting and reporting are in place and there are interested users of such information tax control is supplemented with public control as well.
Let us get back to the discussion of the example of the open list of direct ex penditures set in the RF Tax Code (item 1, article 318). On the one hand, the RF Tax Code does not set any restrictions as concerns the procedures governing the clas sification of expenditures borne by organizations as direct or indirect, i.e. formally taxpayers have the right to indicate in their accounting policy for taxation purposes that all expenditures associated with production and sales are indirect in order to account for them in the current period in the course of computation of the profit tax. On the other hand, restrictions related to the feasibility of such actions never theless exist, since tax authorities may compare lists of direct and indirect expendi tures used by organizations in the framework of financial and tax accounting. The fact that in spite of the introduction of the open list of direct expenditures in the tax legislation organizations should have sound reasons to classify expenditures as di rect or indirect in the framework of financial and tax accounting is confirmed both by the RF Finance Ministry47 and the Russian Federal Tax Service48.
As published on the web site of the RF Finance Ministry, http://www1.minfin.ru/buh/ pzinpa_prj.doc.
See, for instance, Khvorikov V. P. Novyi zakon o bukhuchete nazhil vliyatelnykh protivnikov (The new law on accounting has made influential adversaries). IA “Federalnoye agentstvo finansovoi in formatsii.” November 27, 2006 (http://www.lawlinks.ru/view_obzors.phpid=62529), and Nalogoviki ne khotyat lishatsya prava proveryat bukhgalterskuyu otchetnost (Tax officials do not want to loose the right to audit accounts). “Glavbukh.” December 6, 2006 (www.glavbukh.ru/news/4664, http://www.nalogforum.ru/news.htmlidnews=153).
“Procedures governing the inclusion of expenditures for production and sales carried out within the reporting (tax) period in the composition of expenditures as defined for taxation purposes should be set similarly to the procedures used by the organization for general accounting purposes” (letter of the RF Finance Ministry No. 03 03 04.1.176 of March 2, 2006).
In the publication by Popova E. Yu., State Counsellor 1st rank, it is, among other things, stated the following: “The cases, where for the purposes of computation of the profit tax taxpayers include in RUSSIAN ECONOMY IN trends and outlooks At the same time, it should be noted that these restrictions could be more effi cient in the case the general (financial) accounting of Russian organizations prop erly performed its chief function serving as a source of information useful for taking reasonable economic decisions by users outside such organizations. In this case tax control could be supplemented by control on the part of interested users of fi nancial statements; such mechanisms have been developed and are in place in foreign countries49.
Prior to 2002, when functions of financial and tax accounting were not signifi cantly separated, regulation had been predominantly carried out via legislation on accounting. For instance, the document systemizing accounting policy require ments was the Regulations on accounting “Accounting policy of organizations” (RA 1/98)50.
These Regulations are the fundamental document regulating accounting at the level of organizations. Therefore, having no information on the accounting pol icy adopted by an organization it is impossible to fully and thoroughly analyze its reporting indicators. The same is true as concerns tax accounting.
At present, tax accounting is a separate sphere and is regulated by tax legisla tion; therefore it is necessary to systemize requirements to accounting policy for taxation purposes, moreover taking into account the fact that financial accounting can not substitute for tax accounting due to the differences in the organization, ob jectives and users of these two types of accounting.
Accounting policy for taxation purposes and issues of tax administration Introduction of the definition of accounting policy in the RF Tax Code is a measure aimed at the systematization of the conceptual framework of the Russian tax legislation and may be viewed as a prerequisite of systematization of account ing policy for taxation purposes per se. However, it is only the first step, since fed eral law No. 137 FZ of July 27, 2006, “On the introduction of amendments to Parts One and Two of the Tax Code of the Russian Federation and certain other legisla tive acts of the Russian Federation in connection with the implementation of meas ures aimed at the improvement of tax administration” has only defined accounting policy for taxation purposes leaving unresolved the issues arising in connection with the ambiguousness of provisions of the tax legislation concerning accounting policy.
the composition of indirect expenditures the expenditures, which in fact are direct expenditures for the respective organizations and form self costs of production in the framework of financial account ing, are rather widespread. However, in such situations organizations should be ready to explain such formation of its direct expenditures.” (see: Rossiyskiy nalogovyi kuryer. 2006. No. 9).
For instance, in the USA it is permitted to use LIFO method for the computation of raw materials reserves in tax accounting only in the case this method is used by the company in the framework of its financial accounting (see Internal Revenue Code, § 472 (c)). In Germany, even is the cases where the tax legislation of this country provides for taxpayers a more favorable way to reflect certain items in the accounting, this provision can not be used in the framework of tax accounting if it is not used in financial accounting of the company. (see Tax Law Design and Drafting. IMF, 1998. P. 677).
Approved by Order No. 60n of December 9, 1998, of the RF Finance Ministry.
Annexs The ambiguousness of the respective provisions of the tax legislation results in the lack of system in requirements concerning organization of accounting policy for taxation purposes, its contents, the lack of conditions necessary to implement a consistent application of methods (means) of tax accounting, limited access of tax authorities to the information on accounting policies for taxation purposes pursued by organizations.
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