Unsurprisingly given the current economic climate in Russia, the tax authorities have started to look more closely at the repatriation of profits to foreign jurisdictions. The tax authorities are looking into new ways of limiting this practice and in doing so, have found an ally in the Russian courts, who are also seen to be clamping down on this practice.
An analysis of recent court practice shows an emerging trend in this field. All intra-group payments made abroad – including interest, royalties, remuneration for services – are being increasingly scrutinised by both the tax authorities and, as a result of challenges by taxpayers, the courts. Recent case-law reveals three principal mechanisms actively used by the authorities and the courts as a means of limiting capital outflow: firstly, by way of (rather selective) interpretation and application of the concepts and provisions of tax law; secondly through increased cooperation with foreign tax authorities; and thirdly, with the aid of expert evidence in the courts.
The tax authorities appear to be interpreting and applying recognised concepts such as “unjustified tax benefit”, “beneficial owner”, “corporate citizenship”, “tax resident” and “permanent establishment”, in a rather arbitrary manner, seemingly with the principal intention of having profits taxed in Russia. What is more, this subjective and rather unconventional interpretation and application of tax law by the tax authorities appears to be finding favour with the courts, which was not the case previously.
Russian tax authorities have also been increasingly engaging in dialogue and information exchange with foreign tax authorities. Cooperation with foreign authorities enables them to obtain information on the tax practices of multinational corporations, including information on the rate at which payments are taxed in foreign jurisdictions and who the beneficial owner of a foreign entity is.
When it comes to resolving tax disputes in court, there is a tendency to now call for expert opinion and the courts appear to be placing greater reliance on this type of evidence. While this is not unusual or problematic in itself, the expert selection process and indeed the expert reports appear to exhibit a clear bias in favour of the tax authorities.
We would therefore recommend that Russian companies which are part of a multinational group put in place a contingency plan to hedge against the possible negative effects that this trend might have on the tax treatment of intra-group payments. For instance, companies may consider setting aside reserve funds from which an increased tax liability can be met in case a tax benefit is not recognised by the tax authorities. It would also be advisable to prepare in advance, a so called defence file containing an explanation of the tax treatment of key intra-group payments with reference to the underlying tax law provisions. The defence file can then be discussed with the tax authorities during any field audit with a view to settling the dispute at pre-trial stage.
Published in Le Courrier de Russie No. 279
04/2015
Unsurprisingly given the current economic climate in Russia, the tax authorities have started to look more closely at the repatriation of profits to foreign jurisdictions. The tax authorities are looking into new ways of limiting this practice and in doing so, have found an ally in the Russian courts, who are also seen to be clamping down on this practice.
An analysis of recent court practice shows an emerging trend in this field. All intra-group payments made abroad – including interest, royalties, remuneration for services – are being increasingly scrutinised by both the tax authorities and, as a result of challenges by taxpayers, the courts. Recent case-law reveals three principal mechanisms actively used by the authorities and the courts as a means of limiting capital outflow: firstly, by way of (rather selective) interpretation and application of the concepts and provisions of tax law; secondly through increased cooperation with foreign tax authorities; and thirdly, with the aid of expert evidence in the courts.
The tax authorities appear to be interpreting and applying recognised concepts such as “unjustified tax benefit”, “beneficial owner”, “corporate citizenship”, “tax resident” and “permanent establishment”, in a rather arbitrary manner, seemingly with the principal intention of having profits taxed in Russia. What is more, this subjective and rather unconventional interpretation and application of tax law by the tax authorities appears to be finding favour with the courts, which was not the case previously.
Russian tax authorities have also been increasingly engaging in dialogue and information exchange with foreign tax authorities. Cooperation with foreign authorities enables them to obtain information on the tax practices of multinational corporations, including information on the rate at which payments are taxed in foreign jurisdictions and who the beneficial owner of a foreign entity is.
When it comes to resolving tax disputes in court, there is a tendency to now call for expert opinion and the courts appear to be placing greater reliance on this type of evidence. While this is not unusual or problematic in itself, the expert selection process and indeed the expert reports appear to exhibit a clear bias in favour of the tax authorities.
We would therefore recommend that Russian companies which are part of a multinational group put in place a contingency plan to hedge against the possible negative effects that this trend might have on the tax treatment of intra-group payments. For instance, companies may consider setting aside reserve funds from which an increased tax liability can be met in case a tax benefit is not recognised by the tax authorities. It would also be advisable to prepare in advance, a so called defence file containing an explanation of the tax treatment of key intra-group payments with reference to the underlying tax law provisions. The defence file can then be discussed with the tax authorities during any field audit with a view to settling the dispute at pre-trial stage.
Published in Le Courrier de Russie No. 279