Chambers Europe. TAX
Contributed by Pepeliaev Group
In Russia, as in other countries, the crisis is pushing the government to devote greater attention to its tax policy.
In doing so, the government has rather rapid methods at its disposal to respond to illegal tax evasion schemes. In general, laws that amend tax legislation are being adopted very quickly and in large numbers. Where this is insufficient, court and administrative decisions are plugging the gaps.
The Russian government is actively fighting against tax evasion.
New transfer pricing rules have started to operate, based on international practice. Companies have already filed their first notifications of controlled transactions and the initial tax audits based on these are imminent.
The process is under way of re-examining tax benefits to see whether they may be scrapped. However, as before, major investment projects may lay claim to certain preferential taxation conditions.
Notwithstanding the long-term fight against business being done through so-called ‘fly-by-night’ companies, this practice continues to be encountered. To reduce it, the Russian Central Bank has imposed an obligation on banks to check the business reputation of potential clients before entering into contracts with them to provide banking services. A letter of recommendation from other clients of the bank must be supplied.
Other measures are now also planned with a view to stimulating increased discipline in terms of making tax payments to the state’s coffers.
A draft national plan has been prepared to combat tax evasion, and this will dictate how tax policy moves forward in the near future.
Within the framework of this plan, a draft law concerning controlled foreign companies has already been prepared and published for discussion. All Russian companies and individuals who hold even 1% of a foreign company must inform the tax authorities of this or else face a fine. If the equity holding is above 10% and the company in question has undistributed profit, tax on this will have to be paid in Russia.
There is a plan to create a register of beneficial owners of companies that receive state support. Moreover, there is an intention that organisations which have offshore companies as shareholders will not be able to put themselves forward to enter into government contracts.
Over recent years, an accusation that a tax offence has been committed has not led to a criminal prosecution. Currently, however, the return of this practice is under active discussion. It is highly likely that, in the near future, an investigative committee will be given the right to institute criminal proceedings based on accusations of tax evasion.
It should be noted that, even before the above drafts have been passed, tax services are actively trying to implement policies in their work to combat unlawful tax optimisation schemes.
Tax inspectorates have focused their attention on large companies, which face regular tax audits every other year. In addition, the quality of such audits has increased markedly. More thorough checks are carried out of transactions with affiliated parties, offshore companies or organisations with shareholders that are offshore companies, as well as ‘thin capitalisation’ issues, and the application of benefits under international double taxation treaties.
The number of formal claims has been reduced. Tax inspectors in their work are trying to follow the judicial doctrines of ‘substance over form’, ‘business purpose’ and ‘step-transactions’. Further, during tax audits, many interrogations of companies’ employees are conducted and use is made of informal alternative sources of information (websites and the like).
In 2013, the number of land tax disputes climbed. Taxpayers are frequently in disagreement with the new value for reassessing land plots.
Russia’s Federal Tax Service (FTS) has substantially changed the methodology in the way it works. In many disputes that have the potential to set a precedent, it is not only the representatives of regional inspectorates who become involved; employees of the FTS’s senior staff at federal level also play a role. A system has been introduced to offer additional financial incentives to employees who conduct tax audits if cases are won in court. On the other hand, the Federal Tax Service is attempting to reduce the number of disputes based on purely formal claims from local inspectorates. Many decisions of tax authorities are being set aside when they go through the out-of-court administrative appeal procedure.
The number of tax disputes in the state commercial courts has reduced slightly. In addition, the nature of them has also changed: there are more disputes which involve a taxpayer being accused of creating an unlawful tax optimisation model. In examining such cases, judges are attempting to minimise a formal approach to applying the law; instead, they study the tax inspectorate’s arguments with care, and identify the business motives that were guiding the taxpayer when it entered into the transaction. Frequently, it is extremely difficult to predict the outcome of such disputes. The judge’s own subjective outlook, in other words his or her attitude to the actual facts of the transactions in dispute, is highly influential.
As before, court decisions on tax disputes remain highly significant. It is often the courts rather than legislators who fill in gaps in the law, sometimes pointing out that it needs to be read in a way that differs radically from the ‘traditional’. To this end, when they undertake tax planning, taxpayers devote much more attention to judicial decisions than to the law itself.
However, the judicial system itself is currently undergoing reform. Russia’s Supreme State Commercial Court, which previously heard tax disputes involving entrepreneurs and business entities, will close its doors in August 2014. The Russian Supreme Court, previously responsible for hearing disputes involving private citizens, will also head up the state commercial court system. As a result of this, many experts are stating that there is a danger of greater uncertainty in terms of how rules of tax legislation will be interpreted (the continuity of precedents in tax disputes heard by the Supreme State Commercial Court and the reduction of the number of tax disputes to be considered the new highest court authority).
Overall, the Russian Federation’s tax policy is focused at present on improving methods of state regulation, identifying tax evasion and implementing information technologies.