Comments

The Ministry of Economic Development (MED) has admitted that national economic development is facing increasingly serious problems, because GDP may have been declining. For example, the MED doesn't rule out a 0-01% decline in GDP in Q2 2014. Two quarters of falling GDP implies a technical recession.

The Ministry of Finance of Russia  has  published  a blueprint of The Guidelines of the Fiscal  Policy of  the Russian Federation in 2014 and Planning Period of 2015 and 2016 and 2017.  Overall,  the  blueprint  contains  no  proposals  which  previously  were  not  considered.

At the  same time,  the  foregoing  document  contains  a few  proposals  which  may be  regarded as  material. In particular,  it has  been  suggested that  the  procedure  for  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) should be changed.  

The currently  applicable  procedure  for taxation of  individuals’ income  generated  from  the disposal  of assets  has  some  weak  points.  For example, even where  a single  residential  property  is owned at the moment of disposal of  the living  quarters  and  purchase  of  a new  residential  apartment,  if  the  former  has  been  owned  for  less  than  three  years,  the  owner as physical  body  is to  pay  the  tax.  In practice,  many  individuals (physical  bodies)  tended to  understate  the  value  of  purchase and sale  transaction  to  avoid  taxation  and  were exposed to  the  risk of  losing  their  property.  

The blueprint  suggests  the income generated from the disposal of  residential real  property  should be   exempted from  taxation  regardless of   ownership  period, provided that  the taxpayer  owns  no  residential  real  property  other than  this  one.  Should  the  physical  body (individual)  owns  more  than  one  real  property  at  the  moment  of  disposal of the  residential real  property,  the income from the  disposal  of the same  is  to be  exempted  from  taxation  if  the following  terms and  conditions  are  met:

• income generated from selling this real property is not beyond Rb 5m (the amount may be reduced by the government authorities of a constituent entity of the Russian Federation on whose territory the residential property for sale resides);
• the real property has been owned within three years or beyond (the government authorities of a constituent entity of the Russian Federation on whose territory the residential property for sale resides may extend the period up to 10 years).

It should  be noted  that  if  this  proposal  is  introduced  in the  Customs Union  member  countries,  the  terms of  taxation   of  individuals’ income  generated  from  the disposal  of assets would  look  less  appealing.  In Kazakhstan,  income from sold  assets   are  subject  to taxation,  provided that   the  real  property  is  owned  less than  a year, while in Belarus, to the  extent that  more  than one  real property of the same type  have been  sold  within 5 years, i.e. the  rule doesn’t  cover  the disposal of  a  residential  apartment  or  a dacha (country house).  

This  proposal  will  prevent  the usage  of  tax avoidance  schemes  where  no more than one residential property is owned,  however  residential apartments  may  become  less  appealing  in terms of  investment  while   revenues  from  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) are  expected  to  grow.

 Elena Velikova, a senior researcher of  Gaidar  Institute’s  Tax System Development Department  

The Ministry of Finance of Russia  has  published  a blueprint of The Guidelines of the Fiscal  Policy of  the Russian Federation in 2014 and Planning Period of 2015 and 2016 and 2017.  Overall,  the  blueprint  contains  no  proposals  which  previously  were  not  considered.

At the  same time,  the  foregoing  document  contains  a few  proposals  which  may be  regarded as  material. In particular,  it has  been  suggested that  the  procedure  for  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) should be changed.  

The currently  applicable  procedure  for taxation of  individuals’ income  generated  from  the disposal  of assets  has  some  weak  points.  For example, even wh ere  a single  residential  property  is owned at the moment of disposal of  the living  quarters  and  purchase  of  a new  residential  apartment,  if  the  former  has  been  owned  for  less  than  three  years,  the  owner as physical  body  is to  pay  the  tax.  In practice,  many  individuals (physical  bodies)  tended to  understate  the  value  of  purchase and sale  transaction  to  avoid  taxation  and  were exposed to  the  risk of  losing  their  property.  

The blueprint  suggests  the income generated from the disposal of  residential real  property  should be   exempted from  taxation  regardless of   ownership  period, provided that  the taxpayer  owns  no  residential  real  property  other than  this  one.  Should  the  physical  body (individual)  owns  more  than  one  real  property  at  the  moment  of  disposal of the  residential real  property,  the income from the  disposal  of the same  is  to be  exempted  from  taxation  if  the following  terms and  conditions  are  met:

• income generated from  selling  this  real  property  is not  beyond Rb 5m (the amount may be  reduced  by  the  government  authorities  of  a constituent  entity of the Russian Federation on whose territory the residential  property for sale resides);
• the  real  property  has  been  owned  within  three years  or  beyond  (the  government  authorities of  a constituent entity  of the  Russian Federation  on whose territory the  residential  property for  sale resides  may  extend  the  period  up to 10 years).  

It should  be noted  that  if  this  proposal  is  introduced  in the  Customs Union  member  countries,  the  terms of  taxation   of  individuals’ income  generated  from  the disposal  of assets would  look  less  appealing.  In Kazakhstan,  income from sold  assets   are  subject  to taxation,  provided that   the  real  property  is  owned  less than  a year, while in Belarus, to the  extent that  more  than one  real property of the same type  have been  sold  within 5 years, i.e. the  rule doesn’t  cover  the disposal of  a  residential  apartment  or  a dacha (country house).  

This  proposal  will  prevent  the usage  of  tax avoidance  schemes  where  no more than one residential property is owned,  however   residential apartments  may  become  less  appealing  in terms of  investment  while   revenues  from  taxation of  individuals’ income  generated  from  the disposal  of assets  (property) are  expected  to  grow.

 Elena Velikova, a senior researcher of  Gaidar  Institute’s  Tax System Development Department  

Late in April 2014,  Head of  International Monetary Fund in Russia  Antonio Spilimbergo officially  announced  that  the  Russian economy had  entered  a recession  phase.

On April 25, 2014, the Bank of Russia desided to lift by 0.5 p. p. the key interest rate to 7.5% from 7% p. a., as well as the entire spectrum of interest rates on instruments designed provide and absorb liquidity.

Standard & Poor’s has downgraded Russia’s long-term foreign exchange ranking on liabilities denominated in foreign currency to BBB- from ВВВ, which a forecast ranking being “negative”. The long-term ranking denominated in the national currency was downgraded to BBB from ВВВ+, with a forecast ranking being “negative” too.

The Federal Law of 20.04.2014, No. 81-FZ On the Amendments to the Second Part of the Tax Code of the Russian Federation makes certain amendments aimed at simplifying tax accounting by approximating the same to bookkeeping.

Minister of Economic Development Alexey Ulyukayev has presented the results achieved in Q1 2014 result, showing that GDP increased 0.8% comparing to the corresponding period in 2013. However, the first quarter saw a decline of 0.5% due to a seasonal factor.

On April 15, 2014, The Ministry of Economic Development of Russia presented its so-called draft version of a mid-term projection of the economic development in Russia including forecast parameters   for the implementation until 2017 of   the Presidential Decrees issued in May 2014.

Stockholm International Peace Research Institute (SIPRI) published its review (Trends in World Military Expenditure, 2013) on April 14, 2014.

The Ministry of Economic Development of Russia has prepared a baseline scenario of macroeconomic projection for 2014–2016 which provides for easing the budgetary rule in 2014, which is determined by growth in budget expenditures in response to the accession of the Crimea as a constituent entity of the Russian Federation.

According to the data provided by the Bank of Russia, the Ministry of Finance and the Federal Treasury of Russia are to resume on April 14, 2014 foreign exchange transactions associated with transferring to the Reserve Fund extra oil and gas federal budget revenues generated at the 2013 year end. Therefore, on April 11, 2014 the Bank of Russia will resume its operations (with the maturity date falling on the following business day) in the foreign exchange market based on the amount of foreign exchange the Federal Treasury plans to buy.

Retail bank accounts and deposits were shrinking at fast rates in Q1 2014.

On April 8, 2014, European Union filed a request to the World Trade Organization (WTO) on undertaking of consultancies with Russian Federation on measures concerning import of pigs, pork, and pork products from the EU member countries.

The initial estimation of Russia’s balance of payments in Q1 2014 was published on April 8, 2014. This helps understand the scope of changes made to the structure of foreign economic operations.

The Ministry of Economic Development of Russia has unsurprisingly changed its official economic growth projection for Russia in 2014. For example, the projected baseline scenario shows that GDP in 2014 is going to grow at a rate of 1.1% rather than 2.5% comparing to the previous year.

A few days ago Rosstat published its revised results of economic growth in Russia in 2013, showing that the Russian economy is facing accelerated growth rather than stagnation or recession.