ICNL Comments on Proposed Russian Tax Code Amendments
13 August 2004
Proposed Russian Tax Code Amendments: Benefit or Burden?
By Natalia Bourjaily, David Moore
In July 2004, the Government of the Russian Federation submitted to the State Duma proposed amendments to the Tax Code. Amendments to subsections 5 and 6 of Article 251, if enacted into law, would directly impact on Russian non-commercial organizations (NCOs). As translated into English, the draft amendments provides as follows, in relevant part:
“Grants1 are given on a gratuitous and irrevocable basis by Russian physical persons as well as by non-commercial organizations in accordance with the list approved by the Russian Government, by international and foreign organizations and associations according to the procedure, similar to the procedure, provided in sub-section of 6 section 1of this article in regards to funds (assets) received as a gratuitous assistance (aid).
Grants are granted for the performance of specific programs in the area of education, art, culture, health protection of the population (related to AIDS, drug addiction, children’s oncology, including oncohemotology, children’s endocrinology, hepatitis and tuberculosis), protection of the environment, defense of human rights and citizens’ rights, as defined by legislation of Russian Federation, social services to the poor and socially unprotected, as well as for conducting specific scientific research.”
On the one hand, the proposed amendments could help solve one of the greatest problems with the tax treatment of grants – the overly narrow definition of activities for which grants may be awarded. Following amendments adopted in May 2002, grants can only be provided to support education, arts, culture, environmental protection, as well as for carrying out specific scientific research. The critically important areas of health care, social care services, and the protection of human rights were not included in the amendments, and are not included in the law. The July 2004 amendments, if enacted, would expand the list of activities that grants can support, including certain categories of health protection, social service and the defense of human rights. Thus, the proposed amendments could help ameliorate the negative impact of the 2002 tax code changes and broaden the activity areas for which grants may be awarded.
On the other hand, the proposed amendments, if enacted, would place additional burdens on both foreign and domestic grant making. Most significantly, the proposed tax changes would:
Prevent foreign citizens from making tax-exempt grants. Currently, the Tax Code allows all individuals, whether foreign or local, to give tax-exempt grants to Russian NCOs. The language of the proposed amendments suggests that only Russian physical persons2 (emphasis added) would be entitled to give contributions in the form of tax-exempt grants to NCOs. Thus, if enacted, foreign individuals and foreign organizations would both be hindered from giving grants to Russian NCOs. Foreign organizations already are required to be included on a government-approved list of grant makers; the amendments would prevent foreign individuals from giving grants altogether.
Require Russian NCOs to be included on the government-approved list of grant makers, in order for their contributions to other NCOs to qualify as tax-exempt grants. According to the proposed amendments, for example, where a Russian foundation contributes monetary support to a charity, that contribution would not be tax-exempt for the recipient, unless the contributing foundation is included on the government’s approved list of authorized grant makers.
Currently under the law, only foreign and international organizations must be included on the list of approved grant makers. The procedure for inclusion on the government-approved list has not yet been established (since the requirement was imposed in 2002) and the list of foreign grant makers has not been updated since December 2002. Inclusion on the list entitles organizations to provide tax-exempt grants only; there are no additional incentives. The proposed amendment does not require foreign organizations to be included on such a list. Therefore we may conclude that this list is not going to apply to foreign organizations, leaving the status of the current list of foreign organizations unclear.
By extending this burdensome “list” requirement to domestic NCOs, the Russian Government can only be seeking to discourage domestic grant making, even as it has sought to discourage foreign grant making. The additional requirement on would-be domestic grant-making NCOs is simply an additional burden.
Require foreign donors to satisfy more stringent procedural requirements, in order for their contributions to qualify as tax-exempt grants. Currently under the law, for a contribution to qualify as gratuitous assistance (and therefore tax-exempt for the recipient), a domestic donor is subjected to an overly bureaucratic procedure, requiring at least two months for the government to “register” the grant; this registration process applies to every grant. If enacted, the draft amendments would require foreign grant makers to undergo the same registration procedure, to ensure their contribution qualifies as a grant (and is therefore tax exempt for the recipient).
ICNL has serious concerns about the proposed tax changes. The amendments threaten to overwhelm the awarding of tax-exempt grants with burdensome procedural requirements. Moreover, to impose such burdens (especially in the absence of corresponding tax incentives) runs counter to international best practices. No European country prevents foreign citizens from providing grant support for public benefit or charitable causes. No European country requires foreign organizations and domestic NCOs to seek inclusion on a government-approved list of grant makers in order to give tax-exempt grants. And no European country requires foreign and domestic donors to “register” each and every grant with the government. Surveying the NIS region reveals that only Kazakhstan requires foreign grant makers to be included on a government-approved list of grant makers. Even Kazakhstan, however, does not require local donors to seek inclusion on this list. Kazakhstan also does not require foreign and domestic donors to submit to a grant registration process for every single grant extended. The proposed Russian framework for grant giving is truly unique in the region.
Finally, it is impossible to know what legitimate government interest is being served by the proposed amendments. While the expansion of activity areas which grants can support certainly will help promote a broader area of public benefit activity, the other amendments (restriction on grants by foreign individuals, requirement of inclusion of domestic NCOs on a government-approved list, and requirement of registration of grants by foreign donors) can only undermine grant giving. Moreover, the draft amendments clearly are not aimed to ensure that tax exemptions are linked to the public good, as is generally the rule in most tax schemes. To determine whether or not grants are tax-exempt to recipients, regulators should look to the purposes of the grant or the status of the recipient, rather than to the identity of the grantors. In this way, the government can ensure that project-specific financial support, regardless of the source of the money, is dedicated to some public benefit purpose (as defined by law). Instead, the amendments currently pending before the Duma are seemingly only “justified” by the desire to stifle civil society.
For questions, please, contact Natalia Bourjaily at email@example.com