Tax Regulation of Expenses of Physical Bodies - Tax Residents of the Russian Federation | "Real Estate and Investments. Legal Regulation", the journal

Tax Regulation of Expenses of Physical Bodies - Tax Residents of the Russian Federation

Berezin M.Y., Finance Academy under the Government of the Russian Federation

Up to an entrance into force of a part of the first Tax code of Russian Federation (TC RF) an attempt was made to introduce on the territory of Russia a state control over the correspondence of large expenses on consumption and incomes actually received by the individuals. The federal act introducing state control over the expenses of individuals was several times rewritten, and at the end has entered into force since January 20, 1999. Owing to unsatisfactory state of material rate of the tax bodies and under-developed fiscal accounting in the country the given law did not survive and was recognized lost force since July 9, 1999. Since January 1, 2000 articles 86.1, 86.2 and 86.3 TC RF are entered into an operation, the content of which is completely dedicated to tax control over the expenses of individuals - tax residents of FR (further referred to as tax control).

The procedure of tax control is one of the ways of finding out the fact of understating of the income amount assessable by individual income tax. If, according to financial documents, an individual has declared small incomes, but effects expenses on acquiring of an expensive asset, non-comparable to them, it is an explicit sign of hiding (understating) of incomes, drift from the taxation, and consequently, committing either of a tax offence, if the sum of the hidden (underestimated) income is less than 200 of a minimum sum of wage MSW (200*83,49 rubles = 16 698 rubles, since 01.01.2001: 200*100 rubles = 20 000 rubles), or a tax crime in case of excess of 200 MSW, that can result in confinement for the term up to two years, and if the sum exceeds 500 MSW (41 745 rubles, since 01.01.2001: 500*100 rubles = 50 000 rubles), up to five years of confinement.

In case a particular act can be regarded as a tax offence, only the financial penalties (fines) can be enforced to lawbreaker through the civil adversary proceeding. Only tax inspections can deal with such problems.

Tax police has the right to become involved in a matter, if there is a corpus delicti, foreseen by Criminal code of Russian Federation. In such a case, the body of tax police conducts investigation actions, operational - search measures, interrogates the suspect, can listen to phone conversations with the sanction of a public prosecutor, insert its employees in organization etc. At presence of the sufficient evidences of the suspect's guilt a criminal case is transmitted in court, and in case of confession by the court of the suspect's guilt, both financial penalties (fines), and confinement are applied, but in any case, a law breaker will have a previous conviction for a crime in a sphere of economic activity.

The expenses of individuals - tax residents of Russian Federation are subject to tax control. A tax resident of Russian Federation according to the acting legislation of Russian Federation an individual who actually stays within the territory of Russia for more than 182 calendar days per a calendar year. In case you have gone abroad in a business trip on January 1, 2000 and have returned back to Russia on July 3, 2000 or later, there will be 182 or less days left till the end of a calendar year, therefore you will not be a tax resident of Russian Federation in 2000, and consequently, will not be a subject to tax control and will be able to acquire any goods, in any quantity, for any sum of money, in Russia before the end of 2000.

Further, tax control is spread on those tax residents of Russian Federation, who acquire the following asset:

The real estate (except for long-term plants) - the land lots, flats, houses, country houses, structures, buildings, airplanes, helicopters, maritime vessels, inland waterways crafts, space plants, isolated water plants (ponds), forests (forests will be excluded in the suggested modifications of TC RF).
Mechanical vehicles which don't refer to the real estate - automobiles, not dependant from an amount of sedentary places, permitted maximum bulk, potency and assigning of a vehicle; motorcycles; boats; hydrocycles and snowmobiles, if they are subject to state registration.
а) The shares of open joint-stock companies (the emission should be recorded in an appropriate way in Federal Commission on Securities of Russia);
b) The state and municipal securities - are the state and municipal bonds, state and municipal exchequer bonds, and also other state and municipal securities spread among individuals;
c) As well as the savings certificates - are the bearer securities , emitted by the Savings Bank of Russian Federation for the term of three years at a nominal 1, 10 and 50 thousand rubles and spread among individuals.
The cultural values - pictures, manual drawings, sculptures, art articles of glass, ceramics, wood, metal, icons, ancient books, rare manuscripts, unique musical instruments etc., considered as cultural values according to the current legislation.
Ingot gold. It does not refer to what - other precious metals, except for as to gold and ingot gold. In modifications in TC RF it is planned to extend an operation of the given article on all precious ingot metals (platinum, gold, silver). The acquiring of jewelry in any quantity (golden chains, ear rings, bracelets, rings) is not subject of tax control.

Only the expenses effected on acquiring of the asset mentioned above are subject to tax control. Therefore acquiring, for example, in property of the closed joint-stock companies shares is not subject to tax control. Therefore, all transactions with the above-stated asset should be registered, and a registrar will be obliged to file a duplicate of the asset purchase contracts to the tax bodies at his location within 15 days from the date of registration of the contract of sale and purchase of an asset, named in item 2 of article 86.1 TC RF. In order that there were foundation for tax control, you should acquire an asset in property. To acquire is to pay, to effect expenses, that is a sale and purchase contract is present. If there is no payings (for example, the receiving of asset is gratuitous), there is no tax control as well. Thus, inheriting and donation is not subject to tax control. It is better to pay the donation tax, than to try to prove to a tax body legality of the incomes and, in case of defeat, to pay huge (compared with a donation tax) shortage (underpaid income tax), fines and penalty.

Now we shall discuss the procedure of tax control. Being a tax resident of Russian Federation in 1999 (for example), you have filed in 2000 the tax declaration for 1999 to the tax body, where you have pointed the aggregate revenue for tax phase, that is for 1999. Let's assume, that the aggregate revenue was of 120 000 rubles. In 2000 you acquire under the agreement of sale and purchase of the real estate a flat for 300 000 rubles. The data on this agreement and its price will be directed through by registration chamber a line-up to your tax body (at the location of your habitation (registration). So, according to article 86.3 TC RF, in case the effected expenses exceed the incomes stated by an individual in his tax declaration for the previous tax phase, or the tax bodies do not have the information on the incomes of an individual for a previous tax phase (for example, your income for 1999 has constituted less than 50 000 rubles, and consequently you have not filed a tax declaration), the tax bodies are obliged to drive an act on the detected non-conformity and in a month's time to direct to an individual a written demand about giving the explanations about sources and amounts of money resources spent on acquiring of asset.

Let' s outline two important problems - time limits: during what period, since the moment (day) of detection of non-conformity of the incomes to the effected expenses, the tax bodies are obliged to drive an appropriate act? Since what moment (day) a monthly period granted to the tax bodies for a direction of a demand to an individual begins? The answers to these questions are absent from article 86.3 TC RF.

And this fact makes an article unfavorable for a taxpayer and generates unwarranted operations from the part of the tax bodies. Taking into account, that in the majority periods in TC RF are preclusive, after expiration of one month a tax body has no right to refer a demand to an individual, and a tax body does not have any instrument of tax control over the expenses of an individual. But for a correct calculation of the indicated monthly period it is necessary to know, when it starts.

On our view, article 86.3 TC RF can be formulated as follows: (…), the tax bodies not later than 10 days from the date of detecting the fact of non-conformity of the incomes of an individual to the expenses, effected by him, are obliged to drive an appropriate act and within 3 days from the date of driving an act to direct to an individual by a certified mail a demand about grant to the tax body of the special declaration about sources and amounts of the spent money resources. It is necessary to outline, that according to TC RF, the tax bodies will take into consideration the income for the last year only and to compare it with the price of purchase, even if it is obvious, that according the sum of incomes for the last years taken from the last tax declarations, you could have saved money to purchase a flat, all the same a tax body doesn't have the right to not ask you for explanations by direction to you of a demand about filing of a special declaration about sources and amounts of the means spent for acquiring of an asset, the layout of which (demand and special declaration) was ratified by the command on MT RF on December 2, 1999 only. The demand of the law is like this. It is necessary to enclose to the special declaration the duplicates of the documents, confirming your incomes.

In our example the joint income for the last year (1999) was 120 000 rubles, price of a flat acquired in 2000 - 300 000 rubles. This implies that the tax body is legally obliged to direct a written demand about giving the explanations about sources of incomes.

The tax declaration and a special declaration are not the same and it is necessary to distinguish such documents. It is also necessary to distinguish them because a special measure of responsibility for their non-presentation in a statutory period is stipulated, and the given responsibility is governed by different articles of TC RF. In the tax declaration a taxpayer points out an amount of tax base (in this case, on individual income tax), its calculation, right on the fiscal incentives, calculates himself a sum of the tax, and on the basis of these data pays the tax in the period defined by the law.

A special declaration is an instrument of tax control over the expenses of individuals - tax residents of Russian Federation. In the given declaration the individual is obliged to point out information about the acquired asset: the name and location (location for the real property only) of the acquired asset, date and cost of its acquiring, and also information about sources of the means spent for acquiring of asset: the name and location of a source, period of receiving of the means, type of the means (wages, patrimony, sale of asset, fee, scoring in a lottery, hidden treasure etc.) and a sum of the received money resources.

According article 86.1 TC RF, the tax control is effected over expenses of the citizen, who realizes these expenses himself and using his earned (received) money. If your relative has paid for you, for example, at purchase of a flat, and the tax body has demanded for your arguments, you should point out in the special declaration, that the money sum is received in a gift from a relative. The special declaration should be directed to the tax body at location of the habitation of an individual committing expenses, not later than 60 calendar days from the date of receiving a demand about the special declaration filing. Demand is considered received by the individual on expiration of six days from the date of its direction by a tax body by the certified mail. In a case if you miss the period assigned for filing in the tax body of the special declaration, not having reasonable excuses listed in article 111 and article 112 TC RF, according to item 1 of article 126 TC RF you must pay a penalty of 50 rubles. The sum of penalty, compared with those sums, which hiding can be detected as a result of tax control, is, frankly speaking, symbolical, and that is marked not only by the law maker.

Legally, the tax body does not have a foundation to apply to you any punitive measures, since you give an argument by filling the special declaration about a source of money, i.e. money is received not as a result of robbery etc. but from a relative. But do not forget to include the received sum of money to the tax declaration for the current year (2000). Concerning money resources directed on acquiring of flats, apartment houses, the tax privilege at a rate of 5 000 MSW (417 450 rubles) acts. A taxpayer has the right to extract this sum of privilege from the aggregate revenue, which is accounted for three years. If on expiration of three years the sum of a privilege is not used to the end, the further transfer of the residual for the next years is not authorized. Besides the indicated sum of 5 000 MSW a taxpayer has the right to subtract from the aggregate revenue the sum of mortgage credit (net debt), directed annually on its cancellation, and also a sum of percents periodically paid such credit.

At a subtraction by a taxpayer of all above-stated sums from the annual revenue the residual should always be a positive figure (0 rubles and more).

Since January 1, 2001 the size of this tax privilege has augmented up to 600 000 rubles, and if the sum of the given property tax residue can not be completely used in a current year, the rest of a property residue is transferred on the following tax phases (next years) before its complete cancellation. It is necessary to mark, that the sum directed on cancellation of the mortgage credit (of the net debt) is already included in the sum of a residue at a rate of 600 000 rubles i.e. the residue in 600 000 rubles constitutes an amount of the actually effected expenses on a new acquiring of an apartment house or a flat.

The following is not included in the indicated sum of property tax residue: sums directed on cancellation of percents on the mortgage credits, spent by a taxpayer on construction or acquiring of an apartment house or a flat - these sums are subtracted from the taxable revenue besides maximum residue of 600 000 rubles. In case his employer or other persons effect expenses for an individual - purchaser of a flat or apartment house, or the agreement is committed between interdependent persons (for example, relatives), such property residue is not applied.

The right to take advantage of a property residue arises only from the moment of state registration of the property right on residential plant in registration chamber of the subject of Russian Federation on the location of acquired asset. For example, an individual receives on 01.01.2001 in a bank the mortgage credit of 70 000 dollars USA (1 960 000 rubles, if USD 1 = RUR 28), the credit is actually spent for acquiring of a flat in 2001,

Under 10 % (annual paying for 2001 is 7 000 dollars USA, or 196 000 rubles),

An individual has directed supplement to the sum of the mortgage credit 10 000 dollars USA (280 000 rubles) from his own savings on purchase of a flat,

His annual revenue for 2000 makes 30 000 dollars USA (840 000 rubles).

The given individual has the right to a total property tax residue at an amount of the sum of the actually spent means (limitation 600 000 rubles) + sum of percents on cancellation of the credit, that is (1 960 000 + 280 000) + 196 000 = (600 000) + 196 000 = 796 000 rubles. The taxable revenue at a rate of 840 000 rubles is moderated on 796 000 rubles, total is 840 000 _ 796 000 = 44 000 rubles. The property residue is completely used in 2001. In the next years the residue of paid percents is effected only, that is 840 000 _ 196 000 = 644 000 rubles before the complete cancellation of the credit, in our example, within 10 consequent years.

Let's change now only figures (all other conditions are former) and assume, that

Credit is 1 000 dollars USA (28 000roubles)

At 10 % annually (2 800 rubles)

Personal savings are 20 000 dollars USA (560 000 rubles)

Revenue is 30 000 dollars USA (840 000 rubles)

The total tax residue for 2001 makes (28 000 + 560 000) + 2 800 = 588 000 + 2 800 = 590 800 rubles. We moderate the revenue for 2001: 840 000 _ 590 800 = 249 200 rubles.

Per consequent years the sum of percents on cancellation of the credit, in our example at a rate of 2 800 rubles is subtracted only.

In case the annual revenue makes 20 000 dollars USA (560 000 rubles), and the property residue is 28 000 + 560 000 + 2 800 = 590 800 rubles, a residual of 590 800 _ 560 000 = 30 800 rubles is transferred for 2002, and the property residue in 2002 will be: 30 800 + 2 800 = 33 600 rubles.

The operation, when a relative gives you a loan in a money form for acquiring a flat with the purpose to soften somehow the consequences of tax control, applied to you is qualified by TC RF as the agreement between interdependent individuals, and can entail some problems with the tax bodies. And then, this agreement can be defined according to item 1 of article 170 CC RF as invalid. Certainly, process of the proving of the fact of simulated contract presence, and also, that any agreement is conducted between interdependent individuals and to apply legal acts (consequence) to the agreement between interdependent persons, will demand a large effort of the tax body in the professional plan.

As to your relative or any other person who rendered you a financial contribution in acquiring of asset, though he has effected expenses, but has not received the flat in property (flat you have received), and it eliminates application to the relative of tax control over his expenses, i.e. direction to him of a written demand to fill the special declaration on sources of incomes. Only in case these two conditions are simultaneous, when a person itself spends money and acquires the asset in property, a tax body has the right to apply to this person the procedure of tax control over his expenses. A relative can be subject to control, but only as a cameral check of his tax declaration, which is conducted, according to the paragraph 2 article 88 TC RF, within three months from the date of filing of the tax declaration in the tax body. The tax declaration on individual income tax is presented in the tax body at the habitation not later April 30 of the following year. If your relative has filed the declaration on April 30, a cameral check can be conducted till July 29 of the given year inclusively. At non-detecting of tax offences during conducting the check a tax body doesn't have the right to conduct consequent cameral check of same tax declaration, and after July 2 your relative can safely give you money to purchase a flat etc., not being afraid of consequences.

In case you have bought a flat, and your aggregate revenue for the last year is less than the price of a flat (see the previous example), you might be asked to come in the tax body for giving explanations. If you are sure in a legality of your incomes, ask your wife to take in accounts department certificates on wages for the previous years, to make in the sum the price of a flat in view of expenses on consumption. If the tax body calls you, be very serious in this problem. In the special declaration point all sources of the income and enclose all covering vouchers. If you fail to prove, that your legal (or declared) income for the last years are enough to purchase a flat etc., the tax body has the right, in case a court proves a fact of hiding (understating) of the taxable income sum, to charge in addition an income tax fine for delay of its payment. Further, the tax body will collect the penalty for hiding (understating) of tax base (20 % from underestimated (hidden) sum) itself or will transmit your data in tax police for starting a criminal case. In all cases burden of the evidence of your guilt (it refers to definition of a composition of a tax offence or crime) lays on the tax body or body of tax police.

According to planned modifications to TC RF, a relative or another person rendering to you a financial contributing at acquiring of asset will not be able to avoid tax control over their expenses. Financial contributing is understood as any grant of money resources to a person acquiring in property an asset, indicated in article 6.1TC RF. The loan for consumption, simple donation of money etc. can not serve as an excuse any more, and an individual committing expenses as well as an individual rendering financial contributing to him will be subject to tax control. The forthcoming modifications in TC RF will force the tax bodies to work more with the tax declarations, as with the purposes of tax control the incomes of the individuals for three years, previous to the current one will be taken into account, and the Example (in view of planned modifications). In connection with accomplishment of the procedure of tax control over expenses of the individuals, a cameral check of his tax declarations is conducted in 2000. The check covers three previous tax phases, i.e. 1999, 1998 and 1997. In 1999 the total income of an individual has constituted 100 000 rubles, in 1998 - 110 000 rubles and in 1997 - 120 000 rubles. In the total for three tax phases the total income of an individual has constituted 330 000 rubles.

In 2000 an individual has purchased a flat at the price of 360 000 rubles. The sum of expenses exceeds the sum of the income on 9,1 % (((360 000 _330 000) /330 000) *100 %), that eliminates a direction of demand about filling the special declaration about the sources of the incomes, as already the data from the tax declarations explain derivation of the spent money resources. In case the price of a flat would constitute 370 000 rubles, that exceeds the income of three previous years on 12,1 %, an individual would be subject to obligatory tax control over the expenses.

According to planned modifications in TC RF, a relative or any other individual rendering to you financial contributing in purchase of asset, can not evade any more from a similar procedure of tax control, indicated in the above-stated example. The list of asset, the expenses on which is subject to tax control on correspondence to the individual's incomes, is closed. It means, that tax control is spread only on these aspects of asset, and if there is a necessity to extend a list of asset indicated in article 86.1 TC RF, such suggestions should be made out as a modification and supplement to the law, pass through all legislative process and be signed by the President of Russian Federation. The velocity of passing of these modifications hardly will be high.

If Russian Federation has the purpose of transition to the civilized rules of economic and financial relations, an efficiently operating tax control over the expenses can become an acting instrument of order in a financial sphere of the country.

Further, tax control is spread on those tax residents of Russian Federation, who acquire the following asset:

The real estate (except for long-term plants) - the land lots, flats, houses, country houses, structures, buildings, airplanes, helicopters, maritime vessels, inland waterways crafts, space plants, isolated water plants (ponds), forests (forests will be excluded in the suggested modifications of TC RF).

Mechanical vehicles which don't refer to the real estate - automobiles, not dependant from an amount of sedentary places, permitted maximum bulk, potency and assigning of a vehicle; motorcycles; boats; hydrocycles and snowmobiles, if they are subject to state registration.

а) The shares of open joint-stock companies (the emission should be recorded in an appropriate way in Federal Commission on Securities of Russia);

b) The state and municipal securities - are the state and municipal bonds, state and municipal exchequer bonds, and also other state and municipal securities spread among individuals;

c) As well as the savings certificates - are the bearer securities , emitted by the Savings Bank of Russian Federation for the term of three years at a nominal 1, 10 and 50 thousand rubles and spread among individuals.

The cultural values - pictures, manual drawings, sculptures, art articles of glass, ceramics, wood, metal, icons, ancient books, rare manuscripts, unique musical instruments etc., considered as cultural values according to the current legislation.

Ingot gold. It does not refer to what - other precious metals, except for as to gold and ingot gold. In modifications in TC RF it is planned to extend an operation of the given article on all precious ingot metals (platinum, gold, silver). The acquiring of jewelry in any quantity (golden chains, ear rings, bracelets, rings) is not subject of tax control.