Federal Law No. 47-FZ of 9 March 2022 amended the Tax Code of the Russian Federation, under which, from 1 January 2023, organisations and individual entrepreneurs producing jewellery and other precious metal items or engaged in wholesale (retail) trade in jewellery and other precious metal items will not be entitled to apply the simplified taxation system (hereinafter, the "STS").
In this respect, from 1 January 2023 such entities will be subject to the general taxation system ("GTS"). Accordingly, sales of jewellery and other precious metal products made by such entities from 1 January 2023 are subject to VAT and profits tax in the general taxation system.
Main changes
Since January 1, 2023 subparagraph 3 of Article 346.12 of the Tax Code of the Russian Federation has been added with subparagraph 22 under which organizations and individual entrepreneurs producing jewellery and other articles made of precious metals or engaged in wholesale (retail) trade of jewellery and other articles made of precious metals are not entitled to use the simplified taxation system.
Thus, the expansion of the list of organisations that are not eligible for the simplified taxation system has had a significant impact on organisations in the jewellery industry:
- The obligations to calculate, declare and pay VAT in accordance with Chapter 21 of the Tax Code of the Russian Federation have arisen;
- instead of a "simplified" tax, taxpayers now calculate the tax base for income tax.
Article 346.25. of the Tax Code of the Russian Federation provides for provisions concerning the specifics of calculating the tax base when transferring from the STS to the GTS. It does not establish any specifics depending on what was the object of taxation when applying the simplified taxation system: income or income reduced by the amount of expenses. In this respect, the biggest question is how to account for VAT charged by suppliers during the period of application of the simplified taxation system.
Key "transition" issues
In order to reduce the tax risks when transferring from the simplified tax system to the GTS, it is necessary to analyse the list of debtors and creditors of the organisation:
- If an advance payment was received from a purchaser during the period of application of the
simplified taxation system, VAT must be charged to the purchaser as part of the price of the
goods (work and services) sold in 2023. The following situations are possible:
- a supplementary agreement to the contract to revise the price may be drawn up in agreement with the buyer;
- The contract may be terminated by agreement with the buyer, the advance payment may be refunded without VAT, and the advance payment may be received under a new contract already with tax.
- VAT may be paid from the seller's own funds.
- If sales are made under the simplified tax system and payment is made under the GTS, do not calculate VAT.
- Include in income taken into account for profit tax purposes all revenue for goods shipped but not paid for during the period of application of the simplified taxation system, services rendered and work performed.
VAT charged by suppliers while applying the simplified taxation system on goods, works and services that were not included as expenses under the simplified taxation system (for taxpayers who applied the "income reduced by the amount of expenses" taxation object) should be deductible. It should be borne in mind that, despite the fact that there are no specific features depending on what the object of taxation was when applying the simplified taxation system, in the case of VAT deductions by former simplified taxpayers who applied the "income" object of taxation, there is a high probability of disputes with the tax authorities.
The main feature of the recalculation of income tax liabilities when changing the taxation regime is the change from cash basis to accrual basis. There are special rules for this purpose:
- Expenses for the acquisition of goods (work, services and property rights) that were not paid during the period of being on the simplified tax system must be included in the first month of application of the GTS.
- The residual value of PPE and IA, the acquisition costs of which were incurred while using the GTS before transferring to the simplified taxation system and are not fully deductible, should be determined as the difference between the residual value at the date of transfer to the STS and the amount of expenses taken into account when calculating the simplified tax.
Special attention should be paid to the cost of goods. At the date of transfer from the simplified taxation system to the GTS, there may be goods whose value was not recognised as an expense in the period when the simplified taxation system was applied:
- If there are goods not paid to the supplier and not sold to the customer, the value of these goods is not a 'transition period' expense but is included as an expense in the period the goods are shipped to the customer;
- If the goods are paid to the supplier but not sold to the buyer, the value of these goods is not a 'transition period' expense, but is included as an expense only in the period when the goods are sold to the buyer;
- If there are goods not paid to the supplier and sold to the buyer, the value of these goods is classified as a 'transition period' expense and is included as an expense in the month of transition to the GTS.
Thus, for the purposes of preparing tax and accounting statements by an organisation in the jewellery industry in 2023, we recommend
- develop/revise existing accounting policies for accounting purposes;
- develop accounting policies for income tax purposes;
- identify and analyse transactions to be included in the "transitional" base for income tax and VAT purposes;
- for organisations that do not apply simplified accounting methods, perform preparatory accounting procedures and start applying RAS 18/02 "Accounting for corporate income tax".
We are happy to answer all your questions and share our experiences.