Tax Accounting on Controlled Foreign Companies
Tax Accounting on Controlled Foreign Companies
In September 2014 an updated version of the draft law “On Introducing Amendments to Part One and Part Two of the Tax Code of the Russian Federation regarding Taxation of the Profits of Controlled Foreign Companies and an Improvement in the Effectiveness of the Tax Administration of Foreign Companies” was posted on the official website of the Ministry of Finance of the Russian Federation. The business community anticipates that this draft Law will be approved soon and adopted by the State Duma of the Russian Federation. The forthcoming law will introduce material changes to the rules governing the taxation of foreign companies, whose participants include Russian taxpayers. The main innovations stipulated by the draft law include the introduction of a new taxable item in the Russian Federation (the profits of the Controlled Foreign Companies - CFC), a special mechanism for calculating the amount of tax, the requirement on the filing of notices with the tax authorities of the Russian Federation on participation in foreign companies and on the existence of CFC, and a number of other innovations.
New obligations of Russian taxpayers regarding reporting relating to the activities of foreign companies
The draft law establishes the new obligations of Russian taxpayers related to the activities of foreign companies and CFC. In particular, it stipulates that special notices should be filed in respect of foreign companies and CFC and that a corporate profits tax return containing the profits of the CFC should be submitted.
In practice, the introduction of the new innovation will mean that companies, whose structure includes foreign companies and CFC, will have to draft and implement a completely new procedure relating to the transformation of the foreign reporting data of the CFC in accordance with Russian tax accounting rules.
What actions will taxpayers need to take in order to be ready for the new rules?
In order to prepare for the new legislation, taxpayers need to start acting now, as the scope of the actions necessary to comply with the established requirements is fairly extensive.
As a first step it is advisable to analyze all the companies in the perimeter of a group for the purpose of determining the list of companies that meet the criteria for the filing of notices and CFC criteria. Information on the foreign company needs to be disclosed in the notice if the equity interest of the Russian company therein amounts to no less than 25% until 1 January 2017 (after 1 January 2017 – no less than 10%). In respect of CFC, this ownership interest amounts to more than 50% until 1 January 2017 (after 1 January 2017 – more than 25%).
The second step should involve the drafting of the transformation methodology of CFC incomes and expenses in accordance with Russian tax rules.
It is clear that the general methodology in the Draft Law for determining CFC profits does not mean that a company will manage to apply the methodology in the stipulated manner without adapting to the operating specifics of its companies.
Based on the drafted methodology, taxpayers will have to verify the status of the CFC, calculate the preliminary profits tax for each company in order to match the effective rate with the requirements of the Law and transform the foreign tax accounting data of the CFC in accordance with the requirements of Russian legislation.
The obtained data on the tax base of each CFC should be reported in the Russian corporate profits tax return for 2015.
It is understood that the companies will also have to think about the resources required to comply with the new requirements of the legislation. In particular, they will need to decide whether to allocate additional resources to perform the new work or engage third party consultants to help them rapidly organize the required processes and prepare the required reporting.
How can we help?
KPMG can fully organize the process of compliance with the new requirements of the legislation on a “turnkey basis” and also join in the preparation process at any of its stages.
Our services may include:
1. Maintenance of the tax accounting of foreign companies and CFC according to the personal law of the jurisdictions of incorporation, calculation of the profits tax
The services could include the following blocks:
- Calculation of the preliminary figures of the profits tax according to accounting data (or according to the data of the source documentation);
- Calculation of advance payments of the profits tax according to the accounting data (or according to the data of the source documentation);
- Regular maintenance of accounting according to the national standards of the jurisdiction of their incorporation or IFRS standards in countries where the financial statements serve as the basis for the preparation of tax reporting;
- Submission of the tax reporting to the tax authorities;
- Regular interaction with the tax authorities on any issues, including negotiations on extending the deadlines for the submission of tax reporting (extensions), submission of classifications according to the filed tax reporting, or interaction on issues regarding the return of taxes, etc.;
- Maintenance of tax accounting and accounting on foreign companies and CFC may be performed in different ERP systems.
2. Drafting of the transformation methodology of CFC incomes and expenses in accordance with Russian tax rules
De facto the drafting of the methodology requires the compilation of special tax ledgers that serve as the basis for the preparation of the tax reporting for the calculation of profits tax. The ledgers are formed from the accounting systems of the company and present data in accordance with the provisions of Chapter 25 of the RF Tax Code.
The following may be the results of the work on forming the methodology:
- Methodology for determining and confirming CFC, including the procedure for the filing of notices (including the Regulations and Business Processes for interaction within the company and with CFC (foreign companies) relating to the preparation and filing of notices)
- Methodology for calculating profits tax on CFC (as a separate document or as part of the general tax accounting policy)
- Data Collection Forms and CFC Tax Calculation Forms (including the specification for the integration and automation of document management and calculation in the IT systems)
- Instructions on completing the Data Collection Forms from subsidiaries and associates and the CFC Tax Calculation Forms and the tax return
- The internal controls system on the Regulations for Interaction regarding the Determination and Confirmation of CFC, notices, the Data Collection Forms and the CFC Tax Calculation Forms (KPIs are optional)
- Methodology for reporting the accrual and payment of tax on CFC in the accounting (optional – as a section of the Accounting Policy or Tax Accounting Policy or in a separate section)
3. Transformation of the tax accounting data of foreign companies, preparation of corresponding pages of the tax return, execution of the requirements of the Law on the filing of notices
The work involves the performance of the following procedures:
- Selection of companies for the filing of notices (notices on participation in foreign companies and notices on CFC). Preparation and filing of notices on foreign companies and CFC with the tax authorities
- Review of CFC status, including:
- Preliminary calculation of the effective tax profits rate (paid) payable on CFC in accordance with the personal law of the country of registration;
- Performance of other procedures relating to the final review of the status
- Adjustments to the tax data of the CFC in accordance with the requirements of Russian taxation, completion of tax ledgers, calculation of the amount of tax;
Completion of corresponding sections of the profits tax return.
KPMG would be pleased to assist you in respect of any of the aforementioned issues, and will continue to keep you informed about the most important amendments to Russian and international tax legislation.
Should you have any questions, please do not hesitate to contact us.
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