Along with the commonly accepted taxation system, small business subjects have a right to employ special tax treatments (section 8.1 RF Tax Code). Among the most frequently used is a simplified taxation system, single tax on imputed earnings for some types of activities.

In addition, from January 1^st 2006 independent entrepreneurs not employing in their business wage labourers can use the simplified system on basis of patent.

A patent is a document confirming the right of a citizen to carry on a trade or a line of business upon meeting fixed conditions and making a payment (patent tax).

According to the RF Tax Code,

Patent cost = in posse annual income * 6%.

 

Let us consider in greater detail the most frequently used special tax treatments:

1.  Single tax on imputed earnings for some types of activities

Taxpayers are organizations and independent entrepreneurs conducting business liable to single tax in the territory of a Russian Federation subject (from January 1^st 2006 - in the territory of municipal districts, town districts) in which the single tax is levied.

Taxpayer’s imputed earnings are acknowledged as taxation object for imposing the single tax.

Imputed earnings stands for in posse income of a single tax taxpayer, calculated with an allowance for a set of factors having direct influence on getting the income specified and used to calculate the single tax size according to the established rate.

The single tax rate is set as 15 % of the imputed earnings size.

To compute the single tax amount depending on the type of business activities, physical indices are used, characterizing certain types of business activities, as well as basic profitableness per month. Basic profitableness per month is set by the RF Tax Code.

Imputed earnings size = Basic profitableness * factors K₁, K₂, K₃. .  

К₁ - correction factor for basic profitableness, making allowance for a set of specific features in conducting business activities in various municipalities,   specific characteristics of an inhabited locality or a place, as well as of a place inside the inhabited locality. It is calculated as the ratio of the cadastral cost of land in the locality where business is conducted by a taxpayer to the maximum cadastral cost of land set by the State land cadastre for this particular type of activities. The procedure of informing taxpayers of the cadastral cost of land is established by the Russian Federation Government. 

 

К₂ - correction factor for basic profitableness, making allowance for a set of specific features in conducting business activities, including the range of goods (work, services), seasonality, time of work, income size, specific characteristics of the locality where business is conducted, information field area of illuminated and electronic indicator boards, information field area of printed and/or polygraphic outdoor advertisements, and other specific things.

 

К₃ - coefficient-deflator corresponding to a consumer price change index for goods (work, services) in the Russian Federation. The coefficient-deflator is published following the procedure established by the Russian Federation Government.

 

The single tax rate is set as 15 % of the imputed earnings size.

The taxation system in the form of single tax on imputed earnings for some types of activities (hereinafter ‘single tax’) is used for the following types of business activities:

1.      Providing personal services;

2.      Providing veterinary services;

3.      Providing  services in repair, maintenance and washing of motor vehicles;

4.      Retail trade carried on through shops and pavilions with a sales area for each commercial object of no more than 150 m², stalls and other commercial objects, including those with no permanent sales area;

4.1. Providing services in keeping motor vehicles in paid car parks;

5.      Providing catering services  when using a sales area of no more than 150 m²;

6.      Providing transportation services in conveyance of passengers and transportation of goods, performed by  organizations and independent entrepreneurs exploiting no more than 20 vehicles;

7.      Distribution and (or) location of outdoor advertisements.

 

In accordance with Federal Law No. 95-FL of 29 July 2004, statutory legal acts of representative bodies of municipal and town districts  specify beginning from January 1^st 2006:

1) single tax levy procedure;

2) types of business activities for which single tax is levied, within the list  established by the Tax Code.

For example, according to Republic of Karelia Law No. 384-RKL of 30.12.1999, “On republican taxes (tax rates) and dues in the territory of the Republic of Karelia”,  such a type of activities as “providing catering services” was not included in the list of activities subject to this tax levy;  

3) values of K-factor  (correction factor for basic profitableness, making allowance for a set of specific features in conducting business activities, including the range of goods (work, services), seasonality, time of work, income size, specific characteristics of the locality where business is conducted, information field area of illuminated and electronic indicator boards, information field area of printed and/or polygraphic outdoor advertisements, and other specific things). This means that a municipal or town district can introduce different values of this coefficient within their municipality.

It could be mentioned in this context that representative bodies of municipal and town districts should embark on elaboration of statutory legal acts having to do with the specified tax levy in their territories.

Paying single tax by organizations implies substitution of paying organizations’ income tax, property tax and single social tax.

Paying single tax by independent entrepreneurs implies substitution of paying natural persons’ income tax, property tax and single social tax.

Organizations and independent entrepreneurs paying single tax are not acknowledged as VAT payers, except for the VAT subject to payment upon importation of goods to the customs territory of the Russian Federation.

Computation and payment of other taxes and dues are made by taxpayers in accordance with the general tax treatment.

Organizations and independent entrepreneurs paying single tax pay insurance fees on compulsory retirement insurance according to the Russian Federation legislation.

 

2.  Simplified taxation system

The simplified taxation system is used by organizations and independent entrepreneurs together with the general taxation system.

The use of the simplified taxation system by organizations implies paying the single tax based on the results of organizations’ economic activities in the accounting period.

Payers of this single tax are those whose income does not exceed 15 million roubles or the depreciated cost of permanent and fictitious assets, determined according to the Russian Federation legislation on business accounting, does not exceed 100 million roubles;  organizations in which the proportion of other organizations’ direct participation is no more than 25 %; organizations and independent entrepreneurs employing in the accounting period the staff of no more that 100 people on average.

The use of the simplified taxation system by organizations implies substitution of paying organizations’ income tax, property tax and single social tax by paying the single tax based on the results of organizations’ economic activities in the accounting period.

Organizations using the simplified taxation system are not acknowledged as VAT payers, except for the VAT subject to payment upon importation of goods to the customs territory of the Russian Federation.

Organizations using the simplified taxation system pay insurance fees on compulsory retirement insurance according to the Russian Federation legislation.

Other taxes are paid by organizations using the simplified taxation system in accordance with the general tax treatment.

The use of the simplified taxation system by independent entrepreneurs implies substitution of paying natural persons’ income tax, property tax and single social tax from the income received from business activities, as well as from payments and other recompenses charged for benefit of physical persons, by paying the single tax based on the results of economic activities in the accounting period.   

Independent entrepreneurs using the simplified taxation system are not acknowledged as VAT payers, except for the VAT subject to payment according to the present Code, upon importation of goods to the customs territory of the Russian Federation.

Independent entrepreneurs using the simplified taxation system pay insurance fees on compulsory retirement insurance according to the Russian Federation legislation.

Other taxes are paid by independent entrepreneurs using the simplified taxation system in accordance with the general tax treatment.

The following entities do not have a right to use the simplified taxation system:

1.      Organizations having subsidiaries and (or) representations;

2.      Banks;

3.      Insurers;

4.      Non-governmental retirement funds;

5.      Investment foundations;

6.      Professional participants of the securities market;

7.      Pawn-shops;

8.      Organizations and independent entrepreneurs engaged in manufacturing excisable goods as well as in mineral extraction and realization, except for widely found minerals;

9.      Organizations and independent entrepreneurs conducting business in the gambling industry;

10.  Private practice notaries;

11.  Organizations and independent entrepreneurs - participants of product division agreements;

12.   Organizations and independent entrepreneurs transferred to the taxation system for agricultural commodity producers (single agricultural tax) according to Chapter 26_1 of the present Code;

13.  Organizations in which the proportion of other organizations’ direct participation is more than 25 %. This restriction does not apply to organizations whose authorized capital stock consists entirely of contributions of public organizations of the disabled, if the average number of workers-invalids on payroll is no less that 50 % and their part in salaries - no less than 25 %;

14.  Organizations and independent entrepreneurs whose average number of employees in the accounting period, defined in a manner prescribed by a federal executive body authorized in the field of statistics, exceeds 100;

15.  Organizations the depreciated cost of permanent and fictitious assets of which, determined according to the Russian Federation legislation on business accounting, exceeds 100 million roubles.

 

The following are acknowledged as taxation objects:

Income;

Income reduced by the size of costs.

 

The choice of the taxation object is made by the taxpayer himself.  The taxation object cannot be changed by the taxpayer throughout the period of applying the simplified taxation system.

When income is the taxation object, the tax rate is set as 6 %.

If the taxation object is represented by income reduced by the size of costs, the tax rate is set as 15 %.

In addition to this, the amount of minimum tax may be computed as 1 % of the tax base constituted by the income.

The minimum tax is paid in case the amount of tax computed by general procedure is less than the amount of computed minimum tax.

 

2.1. Specific features of employing by independent entrepreneurs the simplified taxation system on basis of patent

 

Independent entrepreneurs have a right to turn to the simplified taxation system on basis of patent.

The use of the simplified taxation system on basis of patent is permitted for independent entrepreneurs not employing in their business activities wage labourers, including under agreements of civil character, and carrying on one of the following type of business activities:

1) tailoring and repair of  clothes and other ready-made garments;

2) manufacturing and repair of stockinet;

3) manufacturing and repair of knitwork;

4) tailoring and repair of  fur clothes (including head-dress);

5) tailoring and repair of  head-dress made of felt, fabric, and other materials;

6) manufacturing and repair of footwear (including felted footwear);

7) manufacturing of small wares and bijouterie;

8) manufacturing of artificial flowers and wreaths;

9) manufacturing, mounting and repair of furniture and other joiner’s goods;

10) manufacturing and repair of carpets;

11) manufacturing and repair of metal ware, sharpening of cutting instruments, refueling and repair of lighters;

12) manufacturing and repair of fishing gear (fishing-tackle);

13) repair of clocks, watches and engraving;

14) manufacturing and repair of toys and souvenirs;

15) manufacturing and repair of jewelry;

16) manufacturing of folk art craft ware;

17) supply of skin and hair of domestic animals;

18) currying and selling of skins;

19) cleaning of footwear;

20) photo-, cine- and video services;

21) repair of domestic appliances, radio and television equipment, computers;

22) manufacturing, mounting and repair of grave monuments and fences;

23) repair and maintenance of motor cars;

24) hairdresser’s and cosmetic services;

25) conveyance of passengers and transportation of goods by motor vehicles and water transport, including ferrying;

26) washing of cars;

27) musical servicing of celebrations and ceremonies, toast-master services;

28) repair and attuning of musical instruments;

29) making of pictorial works (portraits, landscapes, still lifes and the like);

30) translator’s services;

31) typewriting;

32) copying;

33) repair and maintenance of copiers;

34) sound recording;

35) hiring-out and selling of video and audio cassettes, video and audio disks;

36) baby-sitter’s and housemaid’s services; cleaning of flats and offices;

37) washing, ironing and dry cleaning services;

38) flat repair services;

39) wiring, constructing-and-mounting, sanitary engineering, and welding-sanitary engineering work;

40) art- designing work and design;

41) draft-and-graphic work;

42) bookbinding;

43) receiving glass ware and secondary raw materials, except for scrap metal;

44) glass and mirror cutting;

45) balcony and loggia glass cover work;

46) bath-house, sauna and solarium services;

47) training and tutoring services;

48) sporting and health-improving activities (shaping, aerobics, sports clubs, health groups);

49) coaching services;

50) organization and conducting the work of clubs and studios;

51) planting of greenery;

52) manufacturing of bakery and confectionery;

53) leasing of flats and garages;

54) porter’s services;

55) veterinary service;

56) concierge and watchman services;

57) paid lavatory services;

58) ritual services.

 

The decision on a possibility of applying by independent entrepreneurs the simplified taxation system on basis of patent in the territories of Russian Federation subjects is determined by laws of the corresponding Russian Federation subjects. Laws of Russian Federation subjects identify specific lists of types of business activities (within the limits of the RF Tax Code) permitting independent entrepreneurs to apply the simplified taxation system on basis of patent.

The patent is issued to an independent entrepreneur by a rating authority for one of the types of business activities.

The patent form is approved by a federal executive body authorized to exercise control and supervision in the field of taxes and dues.

The patent is issued, at a taxpayer’s option, for one of the following time periods, beginning from the 1^st day of the quarter: a quarter, half year, nine months, a year.

The application for the patent is submitted by an independent entrepreneur to a rating authority, in the locality where the independent entrepreneur was registered in a rating authority, not later than 1 month before the independent entrepreneur starts using the simplified taxation system on basis of patent.

The form of the application mentioned above is approved by a federal executive body authorized to exercise control and supervision in the field of taxes and dues

The rating authority must in ten days’ period issue the patent to the independent entrepreneur or notify him of a refusal to issue the patent.

The form of failure notice concerning patent non-granting is approved by a federal executive body authorized to exercise control and supervision in the field of taxes and dues.

Upon issuing the patent, its duplicate is filled in, which is kept at a rating authority.

The patent yearly cost is determined as corresponding to the tax rate specified by Item 1 Clause 346_20 of the RF Tax Code (6 %), percent of the in posse annual income to be received by an independent entrepreneur, specified for each type of business activities.

Should the independent entrepreneur receive the patent for a shorter period (a quarter, half year, nine months), the patent cost is subject to re-calculation depending on the period of patent validity.

The size of the in posse annual income to be received by an independent entrepreneur is set by Russian Federation subjects’ laws for each type of business activities for which the use by independent entrepreneurs of the simplified taxation system on basis of patent is permitted. At the same time, differentiation of such an annual income is allowed, considering specific features and the place of conducting business activities by independent entrepreneurs in the territory of a corresponding Russian Federation subject.