You may not have known about these changes, but you have already breached them.
New accounting standards took effect in 2022 and changed the rules for calculating the net book value of real estate. Many business owners did not take them seriously. That was a serious mistake.
How was property tax calculated before?
For several decades Russia applied a depreciation rule for fixed assets that reduced the net book value of real estate year by year, down to zero. A large number of expensive properties, including shopping centres and business centres built 20-30 years ago, had a net book value close to zero. The tax was therefore very low. That is why, in 2014, the legislature amended the Tax Code. Owners of real estate were required to pay tax on cadastral value, which is close to market value.
Russia still has a great deal of non-residential property whose tax cannot be tied to cadastral value, because that could set off a wave of bankruptcies. In Moscow, for example, there are cases in which industrial buildings were placed on the list of properties taxed on cadastral value. The buildings were valued as retail property. The enterprise could not pay a tax it was unable to bear, and it started bankruptcy proceedings. That is what Melkombinat v Sokolnikakh and the Ostankino Beverage Plant did. The episode showed that mass cadastral valuation does not suit manufacturing. A solution was found.
What is new in 2022?
On 1 January the new federal accounting standards took effect in Russia: FSBU 6/2020 "Fixed Assets" and FSBU 26/2020 "Capital Investments".
It may seem that nothing fundamental has changed in the tax rules. That is not so.
As at 31 December 2021, every owner of real estate had to recalculate the value of the fixed asset under the new rules. The recalculation must determine the asset's residual value: the amount the taxpayer would receive if the asset were disposed of. The standards contain no method for determining that residual value. That creates a risk that the taxpayer will determine it incorrectly.
In Moscow there are about 1,000 individual entrepreneurs and more than 1,500 organisations that own real estate. Most of them use the simplified tax system (STS). If in 2022 they ignore the new rules on recalculating net book value, the tax authority will make the recalculation for them. Organisations and individual entrepreneurs on the general tax system that own property taxed on average annual value face, for that inattention, an additional property-tax assessment, a fine and penalty interest. Organisations and individual entrepreneurs on the STS, whether they pay property tax on average annual value or on cadastral value, may be moved from the STS to the general tax system for 2022.
A taxpayer who does not recalculate the average annual value of the property risks receiving a calculation from the tax authority based on cadastral value. Taxpayers whose real estate has a combined cadastral value above 150 million rubles will most likely lose the STS for 2022 after a tax audit. They will then have to pay VAT for the whole of 2022, profits tax and property tax. Challenging those additional assessments after the event will be difficult.
What happens if you do not respond to the changes?
Suppose that the limited liability company "Property Owner" must now apply the general tax system instead of the STS.
Its tax liabilities will be recalculated, and VAT, profits tax, penalty interest and a fine will be assessed. The result is as follows.
Cadastral value of the property: 275 million rubles.
Revenue for 2021: 164.7 million rubles (VAT within that revenue: 27.5 million rubles).
Administrative expenses = 50.6 million rubles (VAT within those expenses = 8.4 million rubles).
Other expenses = 8.3 million rubles (VAT within those expenses = 1.4 million rubles).
The amount payable to the budget is calculated as follows:
VAT within the revenue, minus VAT within the administrative expenses, minus VAT within the other expenses, that is
27.5 - 8.4 - 1.4 = 17.7 million rubles.
These 17.7 million rubles have to be paid to the budget if every expense is subject to VAT. Some expenses are not subject to VAT (wages, for example). In reality the VAT payable to the budget will be a little higher.
Profit before tax is calculated as follows:
Revenue, minus the VAT treated as already transferred to the budget, minus administrative expenses, minus other expenses, or
164.7 - 17.7 - 50.6 - 8.3 = 88.1 million rubles.
Net profit on the general tax system equals profit minus profits tax at 20%, that is:
88.1 - 17.7 = 70.4 million rubles.
Net profit on the STS would have been 95.4 million rubles.
If revenue in 2022 is again 164.7 million rubles, and the taxpayer loses the right to use the STS because of the new rules, net profit falls to 70.4 million rubles. The move to the general tax system increases the tax liability by 25 million rubles, because VAT and profits tax have to be paid. In percentage terms, net profit falls by 27%.
If the taxpayer also fails to respond to the changes in time, then in 2023 a fine of 20% of the arrears is added to additional assessments of 24.8 million rubles. The fine is 5 million rubles, together with penalty interest.
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