Grace Period on credit cards: how tax legislation influences product launch?

1. Grace Period on credit cards: how tax legislation influences product launch? Marina Bykova, CFO Russia&CIS, Citigroup Tatyana Romanchuk, CIS Tax Manager, Citigroup AmCham Tax Seminar, 23rd September 2005

2. What is a Grace Period? Grace Period is a period of 20 to 25 days that is given to a Customer interest-free to repay his/her purchases made with a Credit Card until the close of the billing cycle. NB: There is no grace period on cash advances taken via credit card!

3. What is a Grace Period? The grace period is: • the number of days that a Customer has to pay his/her outstanding balance before a credit organization starts charging interest • a standard term of the Credit Card product • instrumental to development of credit card industry as it provides an additional incentive for consumer to purchase a Credit Card product. Revolvers (customers who carry their credit card balance forward) constitute 70% of credit card customers in Poland, 50% in Turkey, 80% in Saudi Arabia and 80% in Russia.

4. Grace Period: tax implications NO! First Credit Card in Russia: may we implement a Grace Period? Article 212 of the RF Tax Code: • Material benefit received from economy on interest accrued on • borrowings is considered as taxable income for an individual. • Taxable base in calculated as amount of interest accrued in excess • of the following limitations: •  ¾ of the refinancing rate of the Central Bank of Russia (currently 13%* ¾ =9.75%) •  9% for financing in FCY

5. Grace Period: tax complications Grace Period First Credit Card in Russia: may we implement a Grace Period? Material benefit received from economy on interest accrued on borrowings Taxable income for an individual • No cash payment – no tax is withheld at source • Reporting to the tax authorities on incomes received by an individual (Form 2-NDFL) should be done by a tax agent • Annual Tax Declaration should be submitted by an individual to the local tax inspectorate where he/she is registered • Tax is paid by an individual Tax Declaration

6. Grace Period: legislation developments Article 212 of the Tax Code: NEW Till January 1st, 2005 Since January 1st, 2005 • Income of a taxpayer received in the form • of material benefit shall be: • material benefit received on economy • from interest on borrowings received from • organizations or individual entrepreneurs. • Income of a taxpayer received in the form • of material benefit shall be: • material benefit received on economy • from interest on borrowings received from • organizations or individual entrepreneurs, • except for material benefit received in • respect to operations with Credit Cards • during Grace Period established by • the terms of Credit Card Agreement. Federal Law dated 30 December 2004 N212-FZ “On amendments to the Article 212… of the Tax Code of Russian Federation”

7. Grace Period: results of the changes in tax legislation Building infrastructure has supported the rapid growth of Credit Cards issuance Statistics: Credit cards in Russia Kirill? MasterCard?- Information provided by MasterCard Europe sprl: * all programs except for Maestro

8. Personal Income Tax: what do we have now? Related parties or all organizations? Article 211 Article 212 Taxable income of an individual Income in-kind: 1) partial or full payment made by an organization for goods, works, services provided to an Individual for the benefit of this individual; 2) goods, services, works received by an individual from organizations on free-of-charge basis; 3) employmentremuneration in non-monetary form. Material benefit from: 1) interest-free (low-interest) financing received from organizations, except for grace period on credit cards; 2) sale of goods/services at prices lower than market is treated as a taxable income if provided to an individual by a related party.

9. · 7 Personal income tax: international experience UK: Section 160 of Income and Corporate Taxes Act 1988 - Where in the case of a person employed in …there is outstanding…loan (whether to the employee himself or a relative of his) of which the benefit is obtained by reason of hisEmployment and -  (a) no interest is paid on the loan for that year; or  (b) the amount of interest paid on it for the year is less than interest at the official rate, there is to be treated as emoluments of the employment, and accordingly chargeable to income tax. What the analysis has shown? Article 212 of the Russian Tax Code: Material benefit received from economy on interest accrued on borrowings from ORGANIZATIONS is considered as taxable income for an individual Czech Republic: Section 6 of the Czech Income Taxes Act, “Employment Income”, subsection(3) - Income from employment shall also mean the amount by which an employee’s payment to his/her Employer for goods, services, rights provided by the Employer is lower than their usual market price…”. RUSSIA Poland:Article 12 of Personal Income Tax Law- all benefits received from an Employerare treated as the income from emloyment. Kazakhstan: Article 151 of the Tax Code - “Incomes of an employee in the form of material benefit received from his/her Employer” + USA and the Netherlands

10. Personal Income Tax implications: comparative analysis of Russian and Kazakh legislation Related parties or all organizations? Article 211 of the Russian Tax Code. Calculation of taxable base for incomes in-kind 1. For incomes received by an individual from organizations and individual entrepreneurs in kind in the form of goods ( works, services), other property, the taxable base shall be calculated as cost of such goods (works, services), other assets, calculated based on market prices as defined in the Article 40 of the Tax Code. The cost of such goods (works, services) shall include the respective amount of VAT and excise taxes 2. Income in-kind of an individual in particular shall include: 1) payment (full or partial) made by organizations or individual entrepreneurs for goods (works, services) or property rights, including housing utilities, meal, entertainment, education in an individual’s interest; 2) goods received by an individual , works performed in an individual’s interest, or services provided to an individual free of charge; 3) labor remuneration in non-monetary form. Article 150 of the Tax Code of the Republic of Kazakhstan. Incomes of employees received in non-monetary form (incomes in-kind) 1. Income received by an employee in non-monetary form shall include: 1) labor remuneration in non-monetary form; 2) goods received by an employee , works performed in an employee’s interest, or services provided to an employee free of charge; 3) payment made by an Employer for goods, works, services received by an employee from third parties. 2. Income of an employee in non-monetary form shall be the cost of goods (works, services) including the respective amount of VAT and excise taxes.

11. Personal Income Tax implications: consumer awards Economic growth rising living standards of the population consumption increase Seller’s Market in Russia Buyer’s Market CONSUMER AWARDS TAX IMPLICATIONS

12. Personal Income Tax implications: how could we get closer to international practice? Driving force of sales Consumer awards(prizes, gifts, compensations, etc.) BUT are TAXABLE INCOME of customers: Income in-kind Article 211 Material benefit Article 212 Gifts if received in the result of advertising campaigns and promotions of enterprises (amounts in excess of 2,000 RUR, eqv. $70) Article 217, par.28 Removing barriers in order to be in line with international practice: Related parties All organizations