Caucasus and Central Asia in the Globalization Process
286
Improving energy efficiency in Russia should
be seen as an opportunity to improve the
productivity of the economy and of individual
businesses. Innovation can create new markets and
increase competitiveness through greater resource
efficiency and new investment opportunities. The
policy and investment decisions taken in Russia
with regard to not only the future of its export-
oriented industries but also the massive application
of technologies that improve energy efficiency
could have significant implications.
9
Russia
therefore needs to attract more FDI in other
sectors than energy sector.
Energy taxes that affect energy supply and
demand are used as an instrument of an energy
policy. Government interventions in energy mar-
kets can be rationale to generate externalities,
national security, market failures and barriers in
energy conservation markets, and rent expro-
priation.
10
The Russian tax system has seen many
changes, moving towards what is now recognized
as a stable and reasonable tax system. For
example, VAT on capital investments has fallen to
18 %; the Russian Government has introduced
temporary import duty exemptions for certain
types of technological equipment, which may
apply for oil and gas activities. Transfer pricing
legislation and practice for these countries have
been evolved.
3. COMPERATIVE ANALYSIS OF
RUSSIAN AND AZERBAIJAN TAX
SYSTEMS AND TAX
ADMINISTRATIONS
a. Structure of Corporate Profit Tax
A normal corporate income tax is needed to
minimize transfer of revenue to the home tax
jurisdictions of investor companies. This requires
tax payments to be creditable, as far possible,
against home tax liabilities. In the case of the
USA, a foreign tax may be creditable if it meets
two key criteria: (1) that it is a tax – charged under
taxing powers and not levied in return for some
direct or indirect economic benefit; (2) that its
character is that of an income tax in the US sense
(it should tax “net gain” meaning, roughly,
realized gross receipts reduced by recovery of
Trajectories, Transition Progress and Putin’s Merits”, Post-
Communist Economies, Vol. 18, No. 2, June 2006, pp.123-
138.
9
Vladimir I. Ivanov, “Russia’s Energy Politics: Focusing
On New Markets in Asia”, The Symposium of New
Paradigms for Transpacific Collaboration, KIEP- KEI, 16–
18 October 2005, Seattle.pp. 61-79.
10
Gilbert E. Metcalf
, “Federal Tax Policy Towards Energy”
National Bureau of Economic Research, NBER Working
Paper No. 12568, 2006. pp. 2-6.
costs and expenses attributable to generation of
those gross receipts).
11
The current profits tax rules in Russia restrict
both the time period for loss carry forward and the
proportion of annual profits that may be relieved
using losses carried forward (30 %). Both these
restrictions require review on the grounds that
they add to risk in undertaking exploration and
development
expenditure
by
potentially
lengthening the period needed for recovery of
investment outlays (payback period).
Due to substantial restrictions on the deducti-
bility of many business expenses, the tax base for
the Russian profits tax has been and still is larger
than the comparable corporate tax base in other
industrialised countries, often resulting in a higher
- sometimes much higher - effective profits tax
rate than the nominal statutory rate. As many of
the major expenses subject to restricted deductibi-
lity are those incurred by businesses in a market
economy (such as advertising, interest payments,
training and insurance) this has had a significant
negative effect on investment. It is clear that the
manner of determination of the profits tax base
has consistently provided investors with the wrong
incentive from the point of view of transforming
productive resources in ways to unleash economic
growth.
12
b. Transfer Pricing Rules
Table 2 shows some of the key transfer pricing
rules in these two countries. First of all, there are
four types of transaction described in transfer
pricing rules of these countries. Transactions
between related parties; barter transactions, export-
import transactions and transactions where the price
deviates from a specific corridor defined by
reference to market price as applicable to the same
or similar types of goods, works and services.
Fourth type of transaction referred to as the “safe
harbor” rule. Safe harbor corridor, 20 % in Russia
and 30% in Azerbaijan.
11
Daniel & Fernando, (2004), p.24.
12
OECD, “The Investment Environment In Russian Federa-
tion: Laws, Policies and Institutions - The Institutional and
Policy Environment for Investment: Summary and
Recommendations”, May 2001, p.23.
II International Congress
287
Table 1: Corporate Profit Tax and Determination of Taxable Profit in Azerbaijan and Russia
AZERBAIJAN
RUSSIA
CORPORATE PROFIT
TAX: DETERMINATION
OF TAXABLE PROFIT
Tax Payers
Enterprises carrying on activities in Azerbaijan,
including enterprises with foreign investment
and foreign legal entities operating though a
permanent establisment.
Russian legal entities and foreign legal entities
operating through permanent establishments and
(or) receiving income from Russian sources.
Object of Taxation
(Taxable Profit/Income)
Gross worldwide income
(for Azerbaijani legal entities) of profits earned
through a permanent establishment (for foreign
legal entities) adjusted for certain items.
Gross income of the entity reduced by
economically
justified
and
documented
expenses.
Gross Profit /Income
Composition
Trading profit (loses); Capital gains (capital
loses can be offset against total income); Profits
from financial activities; Other profits.
Profit (losses) from the sale of goods (work
services), fixed assets and other property,
income from non-sale operations.
Years of Loss Carry-
Forward (Back)
3 (0)
10 (0)
Types of Income Taxed
According to Special Rules
None
Income from a share participation (dividends
from Russian organizations by Russian
organizations 9 %, from Russian organizations
by foreign organizations (or vice versa) 15 %);
income from fiduciary management of assets;
income from a participation in simple
partnerships; interest on State and municipal
securities (15 %, 9 % and 0 % for operations
involving particular types of debt obligations);
profits from production sharing agreements.
Deductible Reserves
None for none insurance companies.
Expenses for the formation of doubdful debt
reserves, warranty reserves.
Tax Exemptions
Insurance proceeds, except for any amount that
covers a deductable loss.
None
Basic Tax Rate
22 %
24 %, 6.5 % to the Federal budget 17.5 to the
regional budget
(may be decreased to 13.5 %)
Tax Credits
Tax withheld on dividents from other
Azerbaijani enterprises. Foreign income tax may
be credited against Azerbaijani tax imposed on
the same income, limited to the amount of such
Azerbaijani tax.
Withholding income taxes paid in foreign
countries may be credited against Russian tax
imposed on the same income, limited to the
amount of Russian profits tax, only if envisaged
by a relevant double tax treaty.
Method of Calculating
Profit (Loss) from Sale of
Goods (Work and
Investment)
Annual income reduced by all business expenses
except for those specially disallowed by the tax
code.
Revenues from sales of goods (work, service)
less VAT, excise, duties, customs duties, sales
tax and expenditures.
General Rule for
Composition of
Deductible Production
Expenditures
All expenditures connected with
the
receipt of income, except for expenses on capital
assets,
which must be deducted through
depreciation.
Expenses are deductible for profits tax purposes
if economically justified and documented. The
Tax Code provides an open list of expenses
which are deductible for tax purposes. For
expenses incurred in
Russia,
documents
adhering to Russian statutory documentation
standards must exist.
Composition of Sales
Expenditures
Not specified in the legislation. Presumably
includes packaging, storage, transportation,
loading, advertising.
Packaging, storage, delivery, loading, many adver-
tising expenses, consulting or similar services,
management services, legal services, etc.
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