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The extention of the Russian tax system: the currency purchasing tax.

 

A new tax was included in the list of federal taxes, raising in the Russian Federation, by The foreign banknotes and instruments of payment in foreign currency purchasing tax Law, which was approved by Russian parliament in July 1997. At the same time the place of this new tax in the Russian tax system was secured by approving of the Law, which introduced amendments into the Russian Federation Tax System Law.

These two Laws were approved to increase the budget revenue approximately by a trillion roubles (all sums are mentioned without regard for denomination). It was presumed to use for the fiscal purposes the situation when residents prefer to convert their incomes into dollars.

The Bank of Russia has published the information about the foreign currency mouvement in the Russian Federation in the First quarter of 1997. The total amount of the freely convertible currency, imported into the Russian Federation in the mentioned period was 9,1 billion US $ (in the I quarter of 1996 - 7,2 bln US dollars). The amount of the residents' cash freely convertible currency increased by 2,7 bln US $ (including non-financial enterprises and households - by 2,4 bln US $). At the beginning of 1997 citizens spent 23,6% of their pecuniary income to buy the foreign currency.

The Ministry of Economy published the information that citizens convert in foreign currency up to 90% of their savings. In 1992 they spent 0,5 % of their pecuniary income to buy the currency, in 1995 - 14,3% and in 1996 - 18,5%.

In 1996 Russians spent on currency purchassing four times more savings then transfered to their rouble accounts. According to the State Statistics Commitee every fifth rouble is converted into foreign currency: residents spent about 159,8 trillion roubles or 20,8% of their pecuniary income to buy the foreign currency in the first six months of 1997. During 1996 banks sold 51,6 bln US $ in cash and they bought 24,1 bln US $. On the average 33 million of transactions with the currency were concluded in 1996.

The situation in the internal currency market changed a lot on 29 July 1997, when The currancy purchasing tax Law became operative. The rate of exchange of the US dollar increased by 30-50 roubles this day. It was possible to predict these changes. Before the establishment of the new tax the banks sold US dollars at the rate of 5800 roubles. The Law specifies that the currency purchasing rate is 0,5% of the amount in roubles, which is paid at the moment of the cash currency purchasing: 5800 x 0,5/100 = 29 roubles.

The currency purchasing tax has influenced the rate of exchange. In 1997 banks, buying the currency, had to pay the tax, which rate was 0,5%. The dollar exchange operations were not very profitable and the banks included the new tax into the rate of exchange. It was reduced by 30-50 roubles.

The internal currency market became unbalanced because of the new tax and the currency margin was increased. The rythmical work of the non-exchange currency market was disturbed. The Moscow market reacted the first. It may be explained by the fact that in Moscow itself and in Moscow region is sold and bought about 70% of the currency in cash. According to Bank of Russia there were 5328 exchange offices in Moscow in July 1997.

The situation in the currency market became complicated because of different legal defects. Article 8 of The foreign banknotes and instruments of payment in foreign currency purchasing tax Law stipulates that this Law becomes operative from the date of its publication. As there was no mechanism of the new tax collection, banks during a short period of time decided themselves different questions about the currency purchasing tax collection. Article 7 of the Law stipulates that during 14 days from the date of its publication the State Tax Service in cooperation with the Ministry of Finance should elaborate special instruction how to put statutory provisions into practice. This instruction was drawn up on 7 August 1997 and registred by Ministry of Justice on 25 August 1997. The instruction was published only after its registration and became operative after the expiration of 10 days from the date of its publication. During this period of time the banks used their own rules of the tax collection.

The Law prescribes that the new tax is collected by a bank or an exchange office at the moment of the exchange operation. The account to which banks should transfer the amount of collected taxes was not pointed out. The information about this account was published only on 1 August 1997 in the joint letter of the Ministry of Finance and the State Tax Service "How to pass to an account the foreign banknotes and instruments of payment in foreign currency purchasing tax". It was not stipulated how to certify the fact of the tax collection. Some banks affixed a stamp or made special entries on the certificate, which certified the fact of the exchange operation. Other banks drew special cheques. The third way of the aknowledgement of the tax collection had anology with the income tax, wich collection did not require special registration. It means that the tax payment was not certified by special instrument and banks included the amount of the tax in the currency rate. Only on 1 August 1997 the Bank of Russia by the Letter ?496 introduced amendments into its instruction ?27 on 27 February 1997 "About exchange offices activity in the Russian Federation and about the accounting of the currency exchange operations performed by authorised banks". The amount of the collected tax should be attested by special words "Tax deduction..." in the certificate form ?0406007.

The banks spontaneous activity in this sphere was forced by lame statutory provisions. The Law has become operative since its publication, therefore the duty of the tax collection started this day. Under existing conditions if the banks had been inactive until the publication of the instruction by the State Tax Service, they would have paid the new tax from their own resources.

Obviously, such legal practice in the tax sphere can not be satisfactory. The Law should accurately stipulate the main tax elements and the way of its collection. If some questions need special interpretation in the instructions of The State Tax Service, The Bank of Russia etc. it is necessary to postpone the beginning of the duty to pay the tax until mentioned legal acts publication.

Let's speak about main elements of the currency purchasing tax.

The tax payers are individuals, organisations, their branches and representative offices, residents and non-residents, which carry out currency purchasing operations. Therefore foreign individuals and legal entities, established in accordance with foreign legislation, should pay the tax if they carry out currency purchasing operations in Russia.

Commercial banks are tax payers when they buy the currency and if they sell it they are acting as tax-collectors.

All organisations which activity is completly financed from all kinds of budget and the Bank of Russia are not payers of the currency purchasing tax.

The tax object is the cash foreign currency convertation operations. The term "cash foreign currency" means foreign banknotes and instruments of payment in foreign currency. The instruction gives the definition of the term "instruments of payment in foreign currency": "For the purpose of this instruction the instruments of payment are cheques, letters of credit and similar documents in foreign currency". The list is not limited because new forms of instruments of payment may appear as a result of the bank services perfection.

The duty to pay the tax depends on the currency of the instruments of payment. If the traveller's cheques, bank cheques, bills of exchange in roubles holder wants to receive their equivalent in foreign currency, the currency purchasing tax is collected. If the instruments of payment in foreign currency holder receives foreign banknotes, the tax is not collected. The currency purchasing tax is imposed on currency exchange operations.

Statutory definition of the term "foreign currency in cash" is not complete. It is used to identify foreign banknotes and instruments of payment in foreign currency. Besides that the currency purchasing tax is imposed on non-cash currency remittance operations. For example, under a foreign trade contract a legal entity pays for delivered goods (some works or services) and transfer a sum of money in foreign currency through an authorised bank. But the amount of its foreign currency account is insufficient. This legal entity applies for the foreign currency purchasing and the bank transfer the required sum in roubles from its rouble account. The mentioned operation is the object of the currency purchasing tax.

The tax is not imposed on payments in foreign currency from bank deposits in foreign currency, including payments in cash foreign currency from foreign currency accounts.

Banks are not tax payers if they buy foreign currency in cash from the Bank of Russia or other banks which have the cash and non-cash foreign currency purchase and sale license.

The tax basis is a sum of money in roubles, which is paid during the cash foreign currency convertation, including sums, which are written down the plastic card owners rouble accounts as a compensation for the foreign banknotes, received by them. The tax basis includes the amount of the rouble bank deposits repayment, including calculated interest, if they are redeemed in cash foreign currency.

In 1997 the tax rate was 0,5% of the tax basis. In some European countries the rate of the analogous tax is about 5-7%.

Let's speak about the tax collection and its payment into the budget. The tax is collected by banks when the cash foreign currency is received by buyers. But in practice some banks include the amount of the tax into the rate of exchange and increase it. Their clients buy the currency at the new rate but all the same they are obliged to pay the currency purchasig tax. This practice causes different abuses. Very often the client doesn't want to take the certificate form ?0406007 and buys the currency at the rate of exchange increased by the amount of the tax. As a result the money are not transfered to the budget and they are misappropriated by some individuals. The amount of the tax is transfered into federal budget and budgets of the Russian federation political subdivisions, where the exchange operations have been done. The tax is transfered into the budgets the day after the exchange operation day. If the tax is not or lately transfered the tax payer incurs liability. 60% of the collected tax is transfered into the federal budget and 40% - into the budgets of political subdivisions. The parlements of a political subdivision may transfer their part of the collected tax into local budgets.

Acording to The foreign banknotes and instruments of payment in foreign currency purchasing tax Law and paragraph 20 of the Regulations of the base of the profit tax paid by banks determination, aproved by the Russian Government decree ?490 of 16 May 1994, the cost value dosen't include the expenses on the currency purchhasing tax payment. Therefore the tax is paid by banks from the profit, which is left after all taxes payment.

As far as other organisations tax payers, the question about this tax payment should be governed jointly by State Tax Service and Ministry of Finance.

The future of the new tax in Russian tax system depends on the new Tax Code, which draft was worked out in 1997. The Tax Code had been approved by the State Duma in the first reading before the foreign banknotes and instruments of payment in foreign currency purchasing tax Law became operative. Because of it the tax system specified in the draft doesn't include the currency purchasing tax. Obviously, the future of this tax depends on its efficiency. According to the Ministry of Finance the amount of the currency purchasing tax transfered into the budget was 95,9 billion roubles on 1 September 1997 and 224,8 billion roubles on 1 October 1997. The Russian Government fiscal plans include the currency purchasing tax collection.