On 6 July, with the adoption of the Customs Code of the Customs Union, a unified customs territory was formed bringing together the customs territories of Russia, Belarus and Kazakhstan. Goods originating in the territories of the Customs Union’s member states, as well as foreign goods released for free circulation in the territory of at least one of the member states of the Customs Union, may circulate freely within the unified customs territory with no customs formalities. The powers to set, change and cancel rates of import duty have been transferred to the Commission of the Customs Union, whose functions have been carried out since 1 January 2012 by the Eurasian Economic Commission.
When Russia joined the WTO applicable import duties on new cars were combined and made up 30% of the customs value of the car, but not less than between EUR 1.20 and EUR 2.80 per cubic centimeter of the engine capacity. In accordance with the obligations Russia has assumed to the WTO, the rates were at the time of accession to be reduced to the level in force up to 2008 and from there to 15% of the customs value within 7 years, taking account of the fact that apart from the initial reduction, the rates will not be reduced in the first three years.
Based on Federal Law No. 89-FZ ‘On manufacturing and consumption waste’ dated 24 June 1998 and with a view to safeguarding the interests of Russian car manufacturers in conditions where import duty rates for cars were being reduced, the Russian Government published its Resolution No. 870 dated 30 August 2012 ‘On a recycling fee for wheeled vehicles’. This resolution set recycling fees that importers were to pay on top of import duty when importing cars into Russia. In addition, an exemption from paying the recycling fee was granted to, among others, Russian manufacturers who undertook an obligation to ensure that cars were recycled in Russia once their useful life was over. However, when this approach was applied, importers of foreign cars were put at a disadvantage as compared with domestic producers, the latter being in a significantly better position. As a result, the question arose of whether, in applying the recycling fee, Russia was meeting its obligations to the WTO. Subsequently, because the European Union made a complaint about the practice of applying recycling fees, Russia was compelled to reject a preferential regime for domestic road vehicle manufacturers with regard to such recycling fees.
Despite this, the current legislation makes it possible for domestic road vehicle manufacturers to obtain reimbursement of the expenses they incur on paying recycling fees. In particular, amounts of the recycling fees paid by domestic producers may be compensated by way of subsidies being provided from Russia’s federal budget. The legal grounds for these subsidies to be granted are:
- the Russian Government’s Resolution No. 29 dated 15 January 2014 ‘On approving the Rules for subsidies to be granted from the federal budget to Russian manufacturers of wheeled vehicles to compensate a part of their expenses on carrying out research and development work and on testing wheeled vehicles in the context of the "Automotive Industry" sub-program of the Russian Federation’s state program "Developing industry and increasing its competitiveness”’;
- the Russian Government’s Resolution No. 30 dated 15 January 2014 ‘On approving the Rules for subsidies to be granted from the federal budget to Russian manufacturers of wheeled vehicles to compensate a part of their expenses on energy-intensive enterprises in the automotive industry using energy resources in the context of the "Automotive Industry" sub-program of the Russian Federation’s state program "Developing industry and increasing its competitiveness”’;
- the Russian Government’s Resolution No. 31 dated 15 January 2014 (as amended on 2 April 2014) ‘On approving the Rules for subsidies to be granted from the federal budget to Russian manufacturers of wheeled vehicles to compensate a part of their expenses associated with releasing and supporting guarantee obligations in relation to wheeled vehicles corresponding to the Euro-4 and Euro-5 standards in the context of the "Automotive Industry" sub-program of the Russian Federation’s state program "Developing industry and increasing its competitiveness”’;
- the Russian Government’s Resolution No. 32 dated 15 January 2014 (as amended on 2 April 2014) ‘On approving the Rules for subsidies to be granted from the federal budget to Russian manufacturers of wheeled vehicles to compensate a part of their expenses on the upkeep of workplaces in the context of the "Automotive Industry" sub-program of the Russian Federation’s state program "Developing industry and increasing its competitiveness”’.
Subsidies are granted in the form of compensation for the following expenses of domestic car manufacturers:
- expenses on carrying out research and development work and testing wheeled vehicles, including expenses on paying for the labor of the manufacturer’s employees and material expenses directly relating to performing the work in question, and the cost of the relevant services of third party organizations;
- expenses on paying for electric power used for production purposes;
- payroll costs (based on the average number of staff members for the reporting period);
- expenses on insurance contribution payments for compulsory social insurance, compulsory medical insurance, and contributions to the Russian Federation Pension Fund; and
- expenses on manufacturing vehicles and supporting guarantee obligations in relation to vehicles manufactured after 1 January 2014.
The majority of the subsidies may be granted to a manufacturer not only in relation to its own costs but in relation to the costs of parties affiliated with the manufacturer or by other parties, provided that they provide the manufacturer with services that involve specific technological operations being carried out when vehicles are manufactured.
Conditions on which subsidies are granted
A manufacturer must comply with the following main conditions if the subsidies available under current Russian legislation are to be granted:
- an agreement for a subsidy to be granted has been entered into with the Russian Ministry of Industry and Trade;
- the manufacturer is a legal entity registered within the Russian Federation;
- the manufacturer has no arrears in relation to tax, levies and other mandatory payments due to Russian federal, regional or municipal fiscal authorities;
- it manufactures vehicles in the context of applying the industrial assembly regime or a free customs zone customs procedure;
- the manufacturer has been allocated a world manufacturer identifier (WMI), and the manufacturer is authorized to place the vehicle identification number (VIN) for one-piece components of the body (cabin), chassis or specially made number plates of vehicles;
- the maximum amount of the subsidy should not exceed 90% of the maximum amount of expenses set for each type of subsidy;
- a quarterly report is submitted to confirm that the manufacturer incurs the costs listed above;
- the amount of the subsidy is transferred to the manufacturer’s current account with a Russian credit institution; and
- the relevant expenses have been incurred after 1 January 2014.
Moreover, current legislation also establishes a range of additional conditions and whether these are met may influence whether specific types of subsidies are applied (for example, there being no debt in relation to electric power payments; a manufacturer having a minimum of 100 employees engaged in research and development work; there being a base at a science and technology center located in Russia where research and development is undertaken and to which the company has ownership title or which it occupies on another lawful basis; and so on).
The Ministry of Industry and Trade grants subsidies on a quarterly basis. To receive a subsidy, a car manufacturer must file an application for a subsidy to be granted (there is no set form for this), which should be accompanied by supporting documents. The application must be filed with the Ministry no later than the 12th of the month following the quarter for which the manufacturer is asking for the subsidy to be granted.
Refusal to grant a subsidy
Current legislation provides for only two grounds for refusing to grant a subsidy, which are:
- the documents submitted to the Ministry of Industry and Trade do not meet the conditions for the subsidy to be granted;
- the Federal Budget of the Russian Federation lacks the funds envisaged for the purposes of the subsidies that are being granted.
If a decision is taken to refuse to grant a subsidy, the Ministry of Industry and Trade must notify the manufacturer of this, giving reasons for the refusal, within five calendar days.
It is worth noting that, because the procedures for granting subsidies have not been sufficiently worked through, in some cases the amounts of the subsidies in question can exceed the amounts of the recycling fees manufacturers have paid.
In addition, it is a drawback of the procedure that there is such a complicated reporting mechanism for granting subsidies. This is due to the large number of subsidies, all of them having different criteria, different procedures for confirming the calculation of the subsidies and different sets of supporting documents. As a result, the document flow is considerable. Consequently, if they are to receive subsidies, manufacturers may need to structure themselves so that they have standalone divisions whose main activity is to prepare supporting documents with a view to obtaining subsidies. The above complicated procedure makes it difficult for the Ministry of Industry and Trade to administer and control the granting of subsidies.
Bearing this in mind, it is advisable for manufacturers to analyze with great care the potential implications, paying attention to the pros and cons of receiving subsidies, before they enter into the relevant agreement with the Ministry of Industry and Trade.
Subsidies to reimburse the cost of interest on loans
No less attention should be given to subsidies granted to car manufacturers based on the Russian Government’s Resolution No. 640 dated 1 August 2011 ‘On approving the Rules for granting subsidies from the federal budget to Russian companies constructing cars, including their subsidiaries, to reimburse part of their costs on paying interest under loans obtained to implement investment and innovation projects and/or to pay coupon income in relation to bonds issued so that expenses of an investment nature may be implemented, as well as to reimburse a part of the expenses on paying interest under loans taken out in 2009-2010 and secured by state guarantees of the Russian Federation’.
This Resolution provides for subsidies to be granted to partially reimburse expenses incurred by Russian car manufacturers:
- on implementing investment and innovation projects carried out between 2010 and 2014 and which relate to paying interest under loans received between 2009 and 2013 from credit institutions and the "Bank for Development and Foreign Economic Affairs (Vneshekonombank)" state corporation, as well as from international financial institutions created under international treaties to which Russia is a party;
- relating to coupon income being paid in relation to bonds issued between 2010 and 2013 so that expenses of an investment nature may be implemented;
- by companies between 2010 and 2014 on paying interest under loans that they received from financial institutions in 2009 and 2010 using the Russian Federation’s mechanism of state guarantees.
However, the fact that this type of subsidy is granted for a fixed period of time significantly restricts its application. For example, this subsidy may not be applied to reduce interest under loans obtained in 2014. Moreover, such a subsidy cannot be granted to car manufacturers after 2015. These facts mean that there are limited opportunities to apply the subsidy in question in 2014.
In addition, a literal reading of the conditions for granting this subsidy shows that it may be, among other things, received as compensation for costs associated with paying interest on loans obtained from credit institutions in 2009 – 2013. What is more, current legislation does not regulate whether it is to loans from Russian or foreign credit institutions that these subsidies apply. However, under the definition contained in article 1 of Federal Law No. 395-1 dated 2 December 1990 ‘On banks and banking activity’, a credit organization means a legal entity which, to generate a profit and as the main objective of its activity, based on a special permit (license) from the Central Bank of the Russian Federation, has the right to carry out the banking operations provided for by the Federal Law in question. Further, foreign credit institutions as well as their representative offices are not entitled to conduct commercial activity within Russia. The activity of representative offices of these institutions is restricted to: studying the economic situation and the situation of the banking sector in Russia; providing consulting services to their clients; supporting and expanding contacts with Russian credit institutions; and fostering international cooperation. To this end, foreign commercial organizations often create Russian credit institutions with foreign investment. This fact points towards a conclusion that, in formal terms, the subsidies may be granted in relation to interest made on loans issued only by Russian credit institutions as long as they are registered in Russia and have the appropriate permit (license) from the Russian Central Bank.