Academic journal article Journal of Accountancy

U.S.-Russia Treaty

Academic journal article Journal of Accountancy

U.S.-Russia Treaty

Article excerpt

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. …

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