SPECIAL ECONOMIC ZONE IN MAGADAN OBLAST

SPECIAL ECONOMIC ZONE IN MAGADANSKAYA OBLAST

AUTHOR: INNA NAZAROVA, BISNIS REPRESENTATIVE, VLADIVOSTOK
APPROVING OFFICER: RICHARD STEFFENS, FCS, US CONSULATE VLADIVOSTOK.

SUMMARY. The Magadan Regional Administration, in an effort to revitalize the region, has established a Special Economic Zone (SEZ). The law adopted by the Russian State Duma and approved by the President of the Russian Federation offers important economic incentives to companies operating in SEZ, including federal and local tax breaks and customs duties reduction. WHILE A NUMBER OF PROVISIONS CONFLICT WITH FEDERAL LAWS, THE MAGADAN GOVERNMENT IS VERY OPTIMISTIC ABOUT ITS ABILITY TO OVERCOME ANY EXISTING OBSTACLES. End of summary.

The Magadan Region Special Economic Zone is located within the administrative limits of the city of Magadan. It was inaugurated on July 7, 1999, in spite of the fact that sixteen provisions of the SEZ legislation were in conflict with some federal laws. The Magadan regional administration feels confident that necessary adjustments will be completed soon and SEZ will become an effective mechanism to stimulate local economy.

Legal entities and entrepreneurs registered for doing business in Magadan SEZ obtain a number of important economic benefits, including significant reduction of federal taxes and customs duties. To be eligible for such benefits, companies should have no less than 75 per cent of their assets located in the Magadan region.

TAX INCENTIVES

The Federal Law on the Special Economic Zone in Magadan Region provides for SEZ participants to enjoy a federal tax holiday until December 31, 2005 (payments to Russia's federal pension and social insurance funds are due in full). This provision, in effect, reduces the effective profit tax rate from 30 percent to 19. The Magadan State Tax Service May 25, 1999 comments specify that the taxpayers will not have to pay the federal component of the following taxes (the "local" part of each tax will remain unchanged):

- Profit tax for enterprises and organizations 11% (the existing "total" rate is at 30%);
- Tax on profit of stock exchanges, brokerage firms, loan and insurance companies obtained from intermediary operations and transactions 11% of taxed amount ( total rate is 38%);
- Automobile roads users' tax 0.5% of computed tax;
- Income tax for entrepreneurs 3% of taxable income (total rate ranges from 12% to 45%);
- Value added tax (VAT) 85% of computed tax;
- Excise tax on vodka, alcoholic drinks and spirits produced in Magadan Oblast 50% of computed tax.

The unified tax on total income of legal entities, royalty fees for extraction of natural resources, tax for land ownership, lease and use, as well as other taxes may be affected. Profit reinvested in production and social development in the Magadan region from January 1, 2006 to December 31, 2014 will be tax-exempt.

CUSTOMS INCENTIVES

Magadan SEZ will have status as a free customs zone as identified by the Russian Customs Code: import duties on goods imported by SEZ participants for internal production are waived. Goods imported for further processing are not subject to import duties provided they meet the State Customs Committee criteria of sufficient processing. The latter include the cases when (1) the classification code has been changed; (2) significant manufacturing or technological operations have been performed; and (3) no less than 30 percent of the good's price has been added in SEZ. (For hi-tech products the value-added component should be 15 percent or more.) Such goods are considered Russia-made. Goods storage, sorting, re-packaging, pre-sales support and transportation that do not alter product features do not qualify as sufficient processing.

The Government of the Russian Federation has the right to impose limitations to and exemptions from the customs regime of the SEZ. This law does not affect foreign trade transactions with precious metals.

The Federal Law on the Special Economic Zone in the Magadan Region will remain effective till December 31, 2014.

POST COMMENT: Although it is difficult to determine the strength and duration of Magadan SEZ tax and customs exemptions, the Magadan SEZ could give a boost to the Magadan regional economy. SEZ provisions, if enforced, make the city of Magadan a more competitive location for light manufacturing and sub-assembly operations.

CONTACT INFORMATION

OZIMOK, Igor Dmitrievich
Head of SEZ Administration/Deputy Governor
Magadan Region SEZ Administration
16A Gorkogo Street
Magadan, Russia 685000
Tel/fax: 7 (41300) 97-104, 26-621
E-mail: lic-pal@online.magadan.su

KAKORINA, Lyubov Alexandrovna,
Head of External Economic Relations Department,
Magadan Oblast Administration
16A Gorkogo Street
Magadan, Russia 685000
Tel: 7 (41322) 99-353
PECHYONY, Vladimir Petrovich,
1st Deputy Mayor of the City of Magadan
1 Gorkogo Street
Magadan, Russia 685000
Tel: 7 (41322) 250-48

KOLESNIKOVA, Olga Anatolyevna,
Head of Private Business Department
Magadan City Mayor's Office
1 Gorkogo Street
Magadan, Russia 685000
Tel: 7 (41322) 277-53

SMIRNOV, Yuri Nikolayevich,
Head of Local Tax Department
Magadan Oblast Tax Inspection
12 Proletarskaya Street
Magadan, Russia 685000
Tel: 7 (41322) 278-52, 234-37, 273-49
Fax: 7 (41322) 254-49

BONDARCHUK, Anna Gennadyevna,
Head of Legal Department
Magadan Customs Service
6 Shandora Shimicha St., Bldg. 1
Magadan, Russia 685007
Tel: 7 (41322) 280-50, 206-72
Fax: 7 (41322) 973-62

(Angela Batueva contributed to this report).