Windfall tax – almost determined

26 July 2023
Tax Messenger
On 21 July 2023, the State Duma passed in the third reading the draft Federal Law "On Windfall Tax" and the draft Federal Law "On Amendments to Part One and Article 270 of Part Two of the Tax Code of the Russian Federation" (hereinafter, the "Draft Laws").

In this alert, we address key specifics of windfall tax introduced by the Draft Laws.

Windfall tax payers include:

  • Russian organizations
  • Permanent establishments of foreign companies
  • Foreign companies that are deemed Russian tax residents
Windfall tax payers do not include:

  • Russian organizations established after 1 January 2021 (excluding those established through reorganizations)
  • Foreign companies operating in the Russian Federation via permanent establishments from 1 January 2021
  • Organizations included in the register of small and medium-sized enterprises (SME) as at 31 December 2022
  • Participants of a consolidated group of taxpayers (CGT) (if the group includes companies engaged in hydrocarbon production/coal mining or oil stock processing, subject to certain conditions)
  • Organizations engaged in the following types of activities (subject to certain conditions): hydrocarbon production, coal mining, oil stock processing, production and export of liquefied gas
  • Organizations that paid unified agricultural tax (UAT) continuously in 2018−22
  • Russian organizations holding a participation interest of at least 75% in subsidiaries that were engaged in hydrocarbon production or oil stock processing in 2022 (subject to certain conditions)
  • Organizations with no sales income for 2018−19
  • Credit/non-credit financial institutions that were subject to bankruptcy prevention measures as at 1 January 2023
  • Developers using escrow accounts that did not pay dividends in 2021−22

Tax base

The tax is levied on excess profits defined as an excess of the arithmetic mean of profits for 2021−22 over the same indicator for 2018−19.
Profits are defined as the sum of profits tax bases (subject to the deductions below).

The tax base is equal to zero if:

  • The arithmetic mean of profits for 2021−22 is less than the same indicator for 2018−19
  • The arithmetic mean of profits for 2021−22 does not exceed RUB 1 billion (except for CGTs)
The tax base is limited to ½ of profits for 2022 if:

  • The ratio of the arithmetic mean of profits for 2021−22 to the same indicator for 2018−19 appears to be less than the ratio of the arithmetic mean of the carrying amounts of assets (CAA) as at the end of the 2021−22 period to the same indicator for 2018−19
Deductions from the tax base

The following components are deducted from the profits tax base:

  • Profits of controlled foreign companies (CFCs)
  • Profits of parties to federal special investment contracts (SPIC) paid to the federal budget
  • Profits of parties to agreements on protection and promotion of capital investments generated from investment projects
  • Dividends received
  • Certain income of international holding companies (IHC)
  • Certain debt liabilities
  • Gains on disposal of interests in/shares of subsidiaries
  • Profits of the CBR received as a result of acting in accordance with the Federal Law "On the Central Bank of the Russian Federation (the Bank of Russia)"

Accounting for prior year losses

The tax base includes prior year losses.

Amended tax returns and additional accruals resulting from tax audits

Amended profits tax returns and additional accruals resulting from profits tax audits are taken into account for tax base calculation purposes.

Reorganizations

Specific procedures are established to calculate the profits tax base for companies formed through reorganizations in 2018−22.

Tax calculation

  • The windfall tax rate is set at 10%, and the tax amount is payable to the federal budget.
  • A company is entitled to provide a tax-related security deposit during the period from 1 October through 30 November 2023. The amount of the security deposit is considered to be the amount of tax from the date of tax payment.
  • A taxpayer is entitled to reduce the amount of tax by applying a tax deduction, which is assumed equal to the amount of the security deposit. The amount of the tax deduction cannot exceed ½ of the amount of calculated tax. The tax deduction is assumed equal to zero if the security deposit is returned (in full or in part) upon the payer’s application.
  • The tax and the security deposit are not recorded in profits tax expenses.

Payment procedure and due dates

  • From 1 October 2023 through 30 November 2023 — provision of the security deposit (optional)
  • Until 25 January 2024 — submission of a windfall tax return (the tax return is not required if tax amounts to zero). The form of the profits tax return has not been published yet.
  • Until 28 January 2024 — tax payment
Matters that remain unclear:

  • Application of the effective rate of 5%. The adjusted mechanism for providing the security deposit and applying the tax deduction still leaves room for interpretations regarding the application of the effective tax rate of 5%, i.e., the possibility to offset the security deposit using the ratio of 2.
  • Return of the security deposit. If the security deposit is returned in part or in full, the tax deduction becomes equal to zero (i.e., the application of the tax deduction may become impossible in case of partial return of the overpaid security deposit).
  • Effective dates. The regulation on the provision of the security deposit will come into effect one month after the date of publishing the Draft Laws. However, the Federal Law "On Windfall Tax" (to be in force from 1 January 2024) regulating the mechanism for the provision of the security deposit, its return, etc. will not be in effect at the date of provision of the security deposit.
  • Tax credit and unified tax account. There are unclear issues regarding the mechanism for tax payments and refunds and the possibility to use a positive balance of the unified tax account (UTA) for tax credit purposes.

How B1 can help

B1 will be glad to assist you in addressing issues relating to the calculation and payment of windfall tax. In particular, we are ready to:

  • Determine whether a company is subject to windfall tax
  • Prepare profits tax base calculations taking into account all deductions and specifics of the tax mechanism
  • Obtain custom clarifications from the tax authorities on the practical application of the new legislation
  • Assess the possibility of providing the security deposit considering potential risks and benefits
  • Assist in preparing a windfall tax return
  • Analyze areas of potential tax efficiency and options to clarify the historical period for profits tax purposes

Authors:
  • Natalia Khobrakova
    Partner
  • Margarita Tolstaya
    Senior Manager
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