Fundamentals of the tax system and types of payments in the agro-industrial complex

Types of Taxes and Principles of Taxation in the Agro-Industrial Complex

Taxes act as the primary tool for the redistribution of income and financial resources in the economy. For agricultural enterprises, taxation is based on the general principles of the Tax Code of the Russian Federation (TC RF) and includes mandatory payments to state or local budgets. The economic sustainability of a farm and the legality of its financial activities depend on a correct understanding of the tax structure.

The country's tax system is divided into two main groups of payments: direct and indirect. Direct taxes are calculated on the taxpayer's income and property, and the relationship regarding their payment arises directly between the farm and the state. Direct taxes are characterized by complex administration and often low collection rates.

• Levels of the tax system — 3 (federal, regional, local)
• Main indirect tax — VAT (Chapter 21 of the TC RF)

The group of direct taxes includes property tax, personal income tax, corporate income tax, as well as land tax, which is paid by both individuals and legal entities. Indirect taxes are included directly in the price of goods or services. The main indirect tax remains the Value Added Tax (VAT), regulated by Chapter 21 of the TC RF.

Value added is created at all stages of production and is defined as the difference between the value of realized products (works, services) and material costs attributed to production and circulation expenses. VAT is convenient for the state to perform its fiscal function, but as it is levied as part of the price, it intensifies inflationary processes. In Russia, this tax was introduced during a period of severe inflation.

The tax system of the Russian Federation has a three-level structure corresponding to the federal organization of the state. The legislation divides payments by territory of operation and the authorities establishing them:

• Federal taxes and fees — established by the TC RF and mandatory for payment throughout the territory of the Russian Federation;
• Regional taxes and fees — established by the TC RF and the laws of the constituent entities of the Russian Federation, mandatory for payment in the territories of the respective regions;
• Local taxes and fees — introduced in accordance with the TC RF and regulatory legal acts of representative bodies of municipalities.

All agricultural enterprises operate within the framework of uniform legislative principles that guarantee the economic justification of taxation and the protection of the taxpayer's rights.

Special Tax Regimes and Farm Property Accounting

A tax is considered officially established only when taxpayers and the key elements of taxation are legally defined. Mandatory elements include the object of taxation, tax base, rate, period, as well as the procedure for calculation and payment deadlines. For correct tax calculation, it is necessary to identify the object in a timely manner, conduct its valuation or revaluation, and take into account applicable exemptions.

To support the agricultural sector and optimize accounting processes, the legislation provides for special tax regimes. They introduce a special procedure for determining taxation elements and exempt entities from paying certain taxes and fees. Special regimes include:

• Taxation system for agricultural producers (Unified Agricultural Tax — UAT);
• Simplified taxation system (STS);
• Taxation system in the form of a single tax on imputed income for certain types of activities;
• Taxation system for production sharing agreements.

Efficient accounting in livestock farms is closely linked to the proper classification and valuation of the livestock herd. Animals of the basic herd are classified as fixed assets of the enterprise. At the same time, young stock and livestock being fattened are accounted for as current assets.

The valuation of livestock for balance sheet and taxation purposes directly depends on the method of their acquisition by the farm. Purchased livestock is valued strictly at acquisition prices. Animals raised on the farm itself are recognized in accounting at the actual costs of rearing. Livestock transferred to the main herd or culled is valued at actual costs calculated per 1 centner of live weight.

Depreciation of fixed assets and methods of reducing the tax base

During the process of operation, machinery, buildings, and equipment wear out, gradually transferring their value to finished products, works, or services. This process is called depreciation. For a farm, depreciation charges are an annual cost element included in the cost of production and calculated as a percentage of the original (book) value of equipment or structures.

The movement of the value of fixed assets on a farm goes through four sequential stages:

1. Wear and tear of the means of production and the loss of their initial consumer qualities.
2. Transfer of the value of fixed assets to manufactured products or performed works in proportion to wear.
3. Formation of a depreciation fund after the sale of grown produce or provision of services.
4. Renewal and purchase of new means of production at the expense of accumulated depreciation fund assets.

In practical economics, a distinction is made between physical and moral depreciation. Physical depreciation occurs directly during the process of operating machinery in the field or on the farm. Moral depreciation is caused by scientific and technical progress: physically sound machines become economically disadvantageous due to the emergence of more productive and cheaper analogs.

Legislation defines a list of items for which depreciation is not accrued:

• general-purpose public highways;
• productive cattle, buffaloes, oxen, deer;
• perennial plantations;
• fixed assets transferred to preservation (mothballing);
• library collections.

For the correct calculation of costs in agriculture, a distinction is made between applied and consumed funds. Applied funds are the total sum of fixed and working capital actually available on the farm at the beginning or end of the year. Consumed funds are the part of the value of fixed assets in the form of annual depreciation plus the sum of working capital included in the cost of production for the current period.

Conceptual framework of taxation and criteria for a taxpayer

Effective management of tax burden requires a precise understanding of the terminology of the Tax Code of the Russian Federation. Applying basic legal concepts helps the heads and economists of the agro-industrial complex to correctly define accounting objects, the taxable base, and the amounts of payments.

An agricultural enterprise obtains the status of a taxpayer if it is a Russian organization or satisfies at least one of the following conditions:

• carries out economic activity in Russia or receives income from sources in the RF;
• owns property on the territory of the RF that is subject to taxation;
• performs operations or actions on the territory of the RF that are subject to taxation.

Any agricultural enterprise acts not only as a payer but also as a tax agent — for example, it withholds income tax from payments to hired employees. Taxation on the farm applies to income (profit, dividends, interest, income from equity participation), property, the value of sold products and services, as well as operations for their sale, the use of natural resources, and certain types of activities.

To calculate payments, it is important to accurately determine the tax base and rate. The tax base is a quantitative expression of the object of taxation. Usually, the market value of property or the monetary expression of income is used, but in the agro-industrial complex, natural units of measurement are often applied.

• Base for land tax — Cadastral value
• Base for machinery — Engine power
• Base for wells — Volume of water extracted
• Types of rates — Fixed and variable

The tax rate indicates the amount of charges per unit of the tax base. In most cases (VAT, income tax, or property tax), a value-based indicator is used, but for machinery, engine power is calculated; for wells, the volume of water extracted; and for fields, the area of the plot. Fixed rates are set by central government authorities as a percentage of value; therefore, due to the variable tax base, the exact amount of budget revenue cannot be determined in advance.

Correctly configured taxation solves the financial problems of municipalities, socially distributes the burden, and performs an important economic function: it stimulates the efficient use of land and reduces the burden on the company's real estate property.

Specifics of calculating land tax in agriculture

In accordance with the Land Code of the Russian Federation, the use of land is always subject to payment. The forms of payment are rent and land tax, the calculation procedure for which is regulated by Chapter 31 of the Tax Code of the Russian Federation. Land tax is paid by owners, landowners, and land users. Tenants who pay rent are excluded from this rule.

The tax base is the cadastral value of the land plot, and the rate is set as a fixed amount per unit of area per year. For agricultural land, an average regional rate is established. Regional authorities may adjust it taking into account the location of the plot, but the final amount cannot exceed the average regional rate by more than two times.

Urban lands and non-agricultural territories are taxed depending on their urban planning value and location. For certain categories of land, the legislation provides for special conditions.

A lower tax burden on industrial land outside settlements encourages enterprises to relocate production and auxiliary facilities outside the city limits.