Changes in Procedures of Computation of the Corporate Profit Tax

Federal Act of November 26, 2008 г. № 224-FZ has introduced amendments to sections 1 and 2 of the Tax Code of RF and other legislative acts.

The changes concerned in particular some provisions of the law that regulates procedures of identification of tax obligations associated with the corporate profit tax.

Specifically, the depreciation premium with respect to capital assets which, according to the classification of capital assets approved by the RF Government, fall under the third-seventh groups, including in the event of their upgrading, re-equipping, reconstruction, modernization, technical re-equipment, partial liquidation, is increased from 10 up to 30% effective as of January 1, 2009. Meanwhile, a procedure has been set, according to which in the event of sale of capital assets earlier than upon 5 years from the moment of placement in operation of the capital assets with regard to which the depreciation premium was applied, the respective amounts of costs are subject to reinstatement and inclusion in the tax base of the corporate profit tax. This procedure is aimed at reducing possibilities for an abuse associated with resale of capital assets, including between mutually dependent organizations for the sake of a multiple application of the depreciation premium under each resale and, accordingly, a new registration of the object of capital assets.

It should be noted that the application of the depreciation premium means that under the increase of the accrued depreciation in the first year of operation of a given capital asset, the amounts of the respective depreciation premiums in the subsequent periods should fall, which means the enterprise will benefit solely from the perspective of the present value of the respective payments due. Meanwhile, a greater depreciation premium may play a positive part in the conditions of a high and/or rising inflation.

In addition to the above, since January 1, 2009, the rate of the corporate profit tax will make up 20% instead of 24%, thanks to the lower rate of the part of the tax due to the federal budget (2.5% instead of the former 6.5%). Overall, the cut in the corporate profit tax finds itself in the frame of global trends of taxation reforms. For example, in 1982 the average corporate profit tax rate of the 17 OECD countries1 was 50.9%, in 1990 – 41.8%, in 1997 – 38.3%, and in 2006 – 30.8% (Fundamental Reform of Corporate Income Tax. OECD, 2007). As a rule, tax rates cuts are viewed as a factor that contributes to a greater attractiveness of an economy in the conditions of the international tax competition. However, under the ongoing slump in business activity and shrinking corporate profits it appears impossible to estimate efficacy of this move.

Also, Federal Act № 224-FZ sets a special procedure of making monthly advanced payments on the corporate profit tax due for the 4th quarter 2008. The taxpayers have been granted a possibility to effect the said payments for this particular period basing on the actual amount of profit calculated on an accrual basis from the start of the tax period until the end of the month that precedes the one in which the advance payment shall be made. The sum of advance payments due to the budget is identified with account of earlier accrued amounts of advance payments. Should an organization opt for resorting to this provision, the respective change in the procedure of computation of advanced payments on the corporate profit tax should be reflected in its accounting policy for taxation purposes.

Presently, the monthly advance payments are computed proceeding from results of prior periods (Art. 286 of the Tax Code of RF). It is believed that payment of advance payments on the basis of the actual profit simplifies calculation of tax obligations and reduces the respective administrative and compliance costs. This is becoming increasingly evident under the contraction of the taxed base in the conditions of the decreasing business activity in the economy: by making advance payments on the basis of the actual profit, taxpayers do not credit the budget, to be granted a respective off-set in subsequent periods.

T. Malinina – senior research fellow of the division "Macroeconomics and Finance"

1 Japan, USA, Germany, Italy, Spain, France, Belgium, Australia, UK, the Netherlands, Greece, Norway, Sweden, Portugal, Finland, Austria, Ireland