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U.S.-Russia treaty.

The United States and Russia recently signed a treaty intended to make the Russian income tax on enterprises creditable for U.S. foreign tax credit purposes. The treaty is still subject to ratification by the Senate, and the effective date is uncertain. In the interim, Russia agreed to honor the old U.S.-U. S.S.R. treaty.

For a foreign tax to be creditable against U.S. taxes, its predominant character must be that of an income tax in the U.S. sense. For instance, it must be designed to tax net income and permit the recovery of significant costs and expenses attributable to the gross receipts subject to tax.

The current Russian corporate tax is imposed at a 32% rate and generally allows deductions for wages and other employee costs. However, it is scheduled to be replaced on January 1, 1993, with the enterprise income tax, which is applied at an 18% rate but does not allow the deduction of wages and employee expenses. It also does not allow a deduction for interest expense.

To ensure the Russian enterprise income tax will be creditable in certain instances, provisions were added to the proposed U.S.-Russia treaty. These provisions entitle certain Russian entities to take deductions for all interest, wages and other employee costs for purposes of computing any Russian tax.

However, it is unclear whether the Russian entity will be required to apply the old profits-tax rates to obtain these deductions. If so, there may be instances when the tax computed with the new treaty deductions will be greater than the tax that would be due without application of the treaty, which would be levied at a lower tax rate. If this is the case, serious issues about the creditability of all or part of the Russian tax could arise.

The protocol provisions apply when a Russian entity is at least 30% U.S.-owned and has capital of at least $100,000. The deductions generally are not available to branches of U.S. entities except for certain financial service businesses-an incentive to conduct business through a corporation.

Observation: Because the treaty has not yet been ratified, Russian taxes may not be creditable if the enterprise income tax replaces the profits tax before ratification. Furthermore, technical issues concerning the appropriate rate of Russian tax and related issues of creditability still need to be resolved.

Edited by Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and Jack Serota, Esq., international tax consultant, at Price Waterhouse, New York City (international).
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Title Annotation:U.S. foreign tax credits for Russian income tax
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1992
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