SERGEI ZHAVORONKOV: THE SINGLE TAX ON IMPUTED INCOME IS BECOMING POINTLESS
The Moskovsky Komsomolets daily carried a column by Sergei Zhavoronkov, Senior Researcher on the consequences of the abolishment of the single tax on imputed income (STII).
Subsequent to the approval in the first reading of a large package of amendments to the Tax Code of the Russian Federation in July 2019, there have been active debates as regards the application of a special tax regime in respect of the small business, namely, the single tax on imputed income. In accordance with those amendments, in 2021 this special tax regime is to be cancelled. The Ministry of Finance stands for it, while Boris Titov, the RF President’s Business Ombudsman is against it. The business is divided on this issue, too: the Association of Retailing Companies (ARC) supports it, while the Opora Rossii opposes it.
The STII was introduced in 1998 amid the fiscal crisis. Strange as it may seem today, this regime was introduced to fight tax evasion. It was aimed at stimulating small business to “go out of the shadow” and pay taxes. The list of enterprises’ activities in respect of which the STII was applied has changed more than once. At present, it includes domestic services, motor maintenance services, retail trade and public catering (in both cases the customer area should not exceed 150 sq. meters), nonpermanent retail chains (market places and shopping centers), outdoor advertising and other. The STII is not applied to entities with the average annual number of more than 100 persons, filling stations, special regime payers of the unified agricultural tax, sales tax payers (it concerns primarily all the commerce in Moscow) and a number of other business entities. Fr om 2013, the switch-over to the STII has become voluntary, while before that it was mandatory. The size of the imputed income is set by local authorities with the guidelines of the Ministry of Finance taken into account on the basis of the ratios of its calculation in the amount of 15% of the imputed income. The STII payers are simultaneously relieved fr om paying the profit tax (legal entities), personal income tax (self-employed entrepreneurs), VAT (except for import operations) and the property tax (except for the property appraised on the basis of the cadastral value).
In 2018, the STII was used by over 2 million taxpayers, including 262,000 entities and 1.8 million self-employed entrepreneurs. Interestingly, after the abolishment of the mandatory application of this tax regime for small and mid-sized businesses, the number of the taxpayers which agreed to use the STII on a voluntary basis has decreased by one-third. It means that this regime is not advantageous to all small and mid-sized business entities. But it is advantageous to most of them, primarily, because there are no limitations as regards revenues and profit. Let it be Rb one billion worth of revenues. One may think that a kiosk never makes such big revenues? And what about, for example, the outdoor advertizing holding and, the more so, shopping centers and market place chains?
In practical terms, as compared to 1998 the application of the STII has become irrelevant. At that period, there were lots of sectors where the use of classical cash registers created substantial domestic inconveniences. For example, imagine a bus or a minibus taxi. In 1998 when the tax was introduced, passengers could not pay their fares by means of a bank card or transport card, while issuing of receipts took quite a time. The same situation used to prevail at market places where at present sellers buy on their own initiative cash registers for merchant acquiring because lots of customers do not use cash any longer. Also, the STII is becoming pointless because starting fr om July 1, 2019 the STII payers which have hired workers are obligated to use the cash-register equipment that facilitates control over the payers’ incomes.
Incidently, there is nothing like the STII in developed countries. To make sure, one can get familiar with the regular authoritative annual review of the EYWorldwide Corporate Tax Guide. There are no such taxes in the United States, the EU or Japan. China does not have it, either. However, similar taxes are actively used in very poor countries, roughly speaking, in Africa, India and poor countries of Latin America, that is, where online cash-registers and the Internet are unavailable.
Undoubtedly, the initiative of the Ministry of Finance is aimed at preventing a large-scale tax evasion through the STII. What is meant here is the splitting of the business, in which case, for example, the company is divided into several legal entities, which pay a tax on a small imputed income, rather than the profit tax, the VAT and other taxes. Also, it concerns companies with high and very high revenues with the minimal tax burden: a profit center operating in the STII regime is included in the actual informal holding. If earlier the participation in the STII regime was a kind of a lottery – one could go bankrupt if no profit was earned, while the tax is to be paid anyway – at present it is feasible to switch over fr om one taxation system to the other. Certainly, a kiosk does not have such high-skilled accountants, but for a holding with revenues worth billions of roubles it is not a problem to hire some. One cannot, but share concerns of the Ministry of Finance in this regard. It is noteworthy that the volume of funds in question is not small: in 2018 the imputed income amounted to over Rb 904bn, while tax levies on it, to Rb 64.5bn.
At the same time, the Ministry of Finance does not plan to abolish completely privileged taxation regimes. Anton Siluanov explained that the Government and the Ministry of Finance had agreed to start the explanatory work as regards the switchover of the business to other tax regimes. “We believe that the STII regime should not be extended, but all the necessary explanations need be prepared on how the relevant tax regime is to be closed and how to open new enterprises so that the business which operates in this format could avoid any discomfort and surprises with this regime abolished”, Anton Siluanov stressed.
By January 1, 2021, companies using the STII regime can switch over to the simplified system of taxation or the patent system of taxation wh ere they are exempted from paying a number of taxes, such as the corporate profit tax, the VAT, the individual income tax and the corporate property tax (for individuals), except for individual types of properties. Self-employed entrepreneurs operating without hired workers can switch over to the most favorable regime, that is, the tax on the earned income wh ere the tax rate of 4% is applied to incomes received from sales of goods (jobs, services and property rights) to individuals and the tax rate of 6%, in respect of incomes received from legal entities.
Some criticism of the draft law appears to be quite strange. For example, Boris Titov claims that with the law approved the tax burden increases minimum 2.4 times over, 1.7 million jobs are going to be cut and payments to the budget are expected to fall by 3.9%. The Stolypin Growth Economy Institute headed by Boris Titov has carried out the research to that effect. The researchers refer to the experience of Moscow as a constituent entity of the Federation wh ere the STII regime was abolished because of introduction of the sales tax. But what does one learn from Moscow’s experience? Payments to the budget have increased somewhat. The number of small and mid-sized enterprises has slightly decreased (the number of micro-businesses increased, while that of small and mid-sized ones fell). For reference, in accordance with the Russian laws the micro-business is an enterprise with the revenues of up to Rb 120m, small business – with the revenues of up to Rb 800m and the mid-sized business – with the revenues of up to Rb 2bn. Is it worth mentioning that most entrepreneurs have never held Rb 120m in their hands? It is necessary to say that in its present form, the STII may vary by a substantial margin (!) depending on the local authorities’ decisions. It is an explicit example of corruption. The tax legislation should be interpreted unambiguously. It is strange that the business ombudsman believes that one may interpret this legislation as one likes and not pay taxes.
So, it may appear that the abolishment of the STII entails no problems. However, there are problems for the very small business which actually has to survive and whose income has been for a long time much less that that at the public service or of hired workers. Such people should and must be supported. What is meant here, in particular, is the purchase of a cash-register (to be precise, an online cash resister). From 2018, most STII payers are expected to use online cash-registers, too. The price of such equipment starts from Rb 10,000. A tax deduction is envisaged, but only for the amount of no more than Rb 18,000 and from July 1, 2019 it stops to be granted. In our view, the Ministry of Finance could meet the business half-way and extend the period within which the tax deduction can be used, as well as increase its size. It is for sure that new businesses will be established.
Finally, those who are familiar with this sector are well aware of the fact that the main problem of the small business is not taxes alone. In large cities, primarily, Moscow, it is rental rates on sales premises due to the shortage thereof. They constitute the main cost for business because the small business engages mainly in commerce and not in nanotechnologies and supplies for the needs of large enterprises. Also, numerous unreasonable administrative limitations have been introduced (for example, a hundred meter zone wh ere the sales of spirits and tobacco are banned within a radius of 100 meters from education and healthcare institutions even if a concrete wall or a river is situated between such institutions and a retail trade outlet).
It would be prudent if the Ministry of Finance could support within the frameworks of interdepartmental networking the small business in this regard, too. If the Ministry of Finance succeeds in it, their initiatives in the fight against the evasion of taxes on super profits concealed by means of various accounting methods will be widely understood.
The STII was introduced in 1998 amid the fiscal crisis. Strange as it may seem today, this regime was introduced to fight tax evasion. It was aimed at stimulating small business to “go out of the shadow” and pay taxes. The list of enterprises’ activities in respect of which the STII was applied has changed more than once. At present, it includes domestic services, motor maintenance services, retail trade and public catering (in both cases the customer area should not exceed 150 sq. meters), nonpermanent retail chains (market places and shopping centers), outdoor advertising and other. The STII is not applied to entities with the average annual number of more than 100 persons, filling stations, special regime payers of the unified agricultural tax, sales tax payers (it concerns primarily all the commerce in Moscow) and a number of other business entities. Fr om 2013, the switch-over to the STII has become voluntary, while before that it was mandatory. The size of the imputed income is set by local authorities with the guidelines of the Ministry of Finance taken into account on the basis of the ratios of its calculation in the amount of 15% of the imputed income. The STII payers are simultaneously relieved fr om paying the profit tax (legal entities), personal income tax (self-employed entrepreneurs), VAT (except for import operations) and the property tax (except for the property appraised on the basis of the cadastral value).
In 2018, the STII was used by over 2 million taxpayers, including 262,000 entities and 1.8 million self-employed entrepreneurs. Interestingly, after the abolishment of the mandatory application of this tax regime for small and mid-sized businesses, the number of the taxpayers which agreed to use the STII on a voluntary basis has decreased by one-third. It means that this regime is not advantageous to all small and mid-sized business entities. But it is advantageous to most of them, primarily, because there are no limitations as regards revenues and profit. Let it be Rb one billion worth of revenues. One may think that a kiosk never makes such big revenues? And what about, for example, the outdoor advertizing holding and, the more so, shopping centers and market place chains?
In practical terms, as compared to 1998 the application of the STII has become irrelevant. At that period, there were lots of sectors where the use of classical cash registers created substantial domestic inconveniences. For example, imagine a bus or a minibus taxi. In 1998 when the tax was introduced, passengers could not pay their fares by means of a bank card or transport card, while issuing of receipts took quite a time. The same situation used to prevail at market places where at present sellers buy on their own initiative cash registers for merchant acquiring because lots of customers do not use cash any longer. Also, the STII is becoming pointless because starting fr om July 1, 2019 the STII payers which have hired workers are obligated to use the cash-register equipment that facilitates control over the payers’ incomes.
Incidently, there is nothing like the STII in developed countries. To make sure, one can get familiar with the regular authoritative annual review of the EYWorldwide Corporate Tax Guide. There are no such taxes in the United States, the EU or Japan. China does not have it, either. However, similar taxes are actively used in very poor countries, roughly speaking, in Africa, India and poor countries of Latin America, that is, where online cash-registers and the Internet are unavailable.
Undoubtedly, the initiative of the Ministry of Finance is aimed at preventing a large-scale tax evasion through the STII. What is meant here is the splitting of the business, in which case, for example, the company is divided into several legal entities, which pay a tax on a small imputed income, rather than the profit tax, the VAT and other taxes. Also, it concerns companies with high and very high revenues with the minimal tax burden: a profit center operating in the STII regime is included in the actual informal holding. If earlier the participation in the STII regime was a kind of a lottery – one could go bankrupt if no profit was earned, while the tax is to be paid anyway – at present it is feasible to switch over fr om one taxation system to the other. Certainly, a kiosk does not have such high-skilled accountants, but for a holding with revenues worth billions of roubles it is not a problem to hire some. One cannot, but share concerns of the Ministry of Finance in this regard. It is noteworthy that the volume of funds in question is not small: in 2018 the imputed income amounted to over Rb 904bn, while tax levies on it, to Rb 64.5bn.
At the same time, the Ministry of Finance does not plan to abolish completely privileged taxation regimes. Anton Siluanov explained that the Government and the Ministry of Finance had agreed to start the explanatory work as regards the switchover of the business to other tax regimes. “We believe that the STII regime should not be extended, but all the necessary explanations need be prepared on how the relevant tax regime is to be closed and how to open new enterprises so that the business which operates in this format could avoid any discomfort and surprises with this regime abolished”, Anton Siluanov stressed.
By January 1, 2021, companies using the STII regime can switch over to the simplified system of taxation or the patent system of taxation wh ere they are exempted from paying a number of taxes, such as the corporate profit tax, the VAT, the individual income tax and the corporate property tax (for individuals), except for individual types of properties. Self-employed entrepreneurs operating without hired workers can switch over to the most favorable regime, that is, the tax on the earned income wh ere the tax rate of 4% is applied to incomes received from sales of goods (jobs, services and property rights) to individuals and the tax rate of 6%, in respect of incomes received from legal entities.
Some criticism of the draft law appears to be quite strange. For example, Boris Titov claims that with the law approved the tax burden increases minimum 2.4 times over, 1.7 million jobs are going to be cut and payments to the budget are expected to fall by 3.9%. The Stolypin Growth Economy Institute headed by Boris Titov has carried out the research to that effect. The researchers refer to the experience of Moscow as a constituent entity of the Federation wh ere the STII regime was abolished because of introduction of the sales tax. But what does one learn from Moscow’s experience? Payments to the budget have increased somewhat. The number of small and mid-sized enterprises has slightly decreased (the number of micro-businesses increased, while that of small and mid-sized ones fell). For reference, in accordance with the Russian laws the micro-business is an enterprise with the revenues of up to Rb 120m, small business – with the revenues of up to Rb 800m and the mid-sized business – with the revenues of up to Rb 2bn. Is it worth mentioning that most entrepreneurs have never held Rb 120m in their hands? It is necessary to say that in its present form, the STII may vary by a substantial margin (!) depending on the local authorities’ decisions. It is an explicit example of corruption. The tax legislation should be interpreted unambiguously. It is strange that the business ombudsman believes that one may interpret this legislation as one likes and not pay taxes.
So, it may appear that the abolishment of the STII entails no problems. However, there are problems for the very small business which actually has to survive and whose income has been for a long time much less that that at the public service or of hired workers. Such people should and must be supported. What is meant here, in particular, is the purchase of a cash-register (to be precise, an online cash resister). From 2018, most STII payers are expected to use online cash-registers, too. The price of such equipment starts from Rb 10,000. A tax deduction is envisaged, but only for the amount of no more than Rb 18,000 and from July 1, 2019 it stops to be granted. In our view, the Ministry of Finance could meet the business half-way and extend the period within which the tax deduction can be used, as well as increase its size. It is for sure that new businesses will be established.
Finally, those who are familiar with this sector are well aware of the fact that the main problem of the small business is not taxes alone. In large cities, primarily, Moscow, it is rental rates on sales premises due to the shortage thereof. They constitute the main cost for business because the small business engages mainly in commerce and not in nanotechnologies and supplies for the needs of large enterprises. Also, numerous unreasonable administrative limitations have been introduced (for example, a hundred meter zone wh ere the sales of spirits and tobacco are banned within a radius of 100 meters from education and healthcare institutions even if a concrete wall or a river is situated between such institutions and a retail trade outlet).
It would be prudent if the Ministry of Finance could support within the frameworks of interdepartmental networking the small business in this regard, too. If the Ministry of Finance succeeds in it, their initiatives in the fight against the evasion of taxes on super profits concealed by means of various accounting methods will be widely understood.