As part of the further development of Russian tax law, previously existing but not yet codified concepts are being introduced to the Russian Tax Code (the “Tax Code”), and this will affect the relations between taxpayers and the tax authorities. The State Duma is now considering two bills which will introduce into the Tax Code:
- the presumption of a taxpayer’s good faith alongside a general concept of the abuse of rights by a taxpayer; and
- a horizontal monitoring system.
These provisions could become effective as early as 1 January 2015. However, the submission of both bills to the State Duma for consideration was only made on 23 May 2014, and they are thus subject to further amendment.
Concept of a taxpayer’s good faith
The first bill came about as a result of the latest initiatives aimed at the ‘de-offshorisation’ of the Russian economy. This bill has the intention of elaborating the concept of unjustified tax benefit previously developed by court practice (in Decree No. 53 of the Plenum of the Supreme Commercial Court dated 12 October 2006).
This bill introduces two new concepts to the Tax Code, namely the ‘good faith conduct of a taxpayer’ and the ‘abuse of rights’.
A taxpayer is presumed to have acted in good faith when they duly perform their tax obligations unless and until the tax authorities establish that an abuse of rights was committed. In this context, an abuse of rights means that commercial operations were mainly conducted with the intention of tax evasion or to become wrongfully eligible for a tax refund.
If, as a result of a tax audit, the tax authorities establish an abuse of rights by a taxpayer, this may lead to additional taxes being due, the non-deductibility of expenses and ineligibility for tax refunds.
The draftsmen claim that introducing these new concepts should help to create favourable business conditions for good faith taxpayers by eliminating unfair competition from those who abuse the system. As stated in the bill’s explanatory note, it aims to prevent the use of aggressive tax optimisation schemes. Taxpayers will still retain some leeway in relation to their tax structuring, but, nonetheless, they should make sure, even before the bill is enacted, they adjust their policy as appropriate.
Even though the bill codifies a concept that was developed by the Supreme Commercial Court in 2006, it leaves some discretion to the tax authorities in determining what will constitute an abuse of rights and good faith conduct. In the absence of detailed criteria for identifying a potential material abuse, the tax authorities may adopt a formal interpretation of the legal provisions and impose additional taxes on companies that use various tax optimisation schemes. To minimise this risk, companies should apply a greater degree of care when implementing their tax optimisation plans.
Horizontal monitoring system
The system of horizontal monitoring has already been tested with selected companies since December 2012 as part of a Federal Tax Service pilot project. The second bill rolls out this system to other companies that meet certain requirements.
The system in a nutshell
Companies will have the option to enter into special agreements with the tax authorities whereby:
- companies will give the tax authorities online access to their financial statements; and
- in return, they will be:
- exempt from field tax audits;
- informed by the tax authorities of potential breaches of tax law; and
- able to request a reasoned opinion of the tax authorities (similar to a tax ruling issued in some foreign countries) when they have difficulties or doubts regarding the interpretation or practical application of certain provisions of tax law.
However, only major businesses meeting all of the following criteria will be eligible:
Amount of federal taxes paid in the previous year
> 500m RUB (approx. 10.6m EUR)
Amount of income earned in the previous year
> 5b RUB (approx. 106m EUR)
Total value of assets
> 10b RUB (approx. 212m EUR)
Tax consolidated group membership
Not a member of such a group
Opting to be in the horizontal monitoring system should add trust and some predictability to the relations between businesses and the tax authorities. As experience has shown in other countries, where similar systems have been implemented for some time, opting in affords taxpayers with more reliable tax accounting and reporting. In turn, it can become a source of cost reduction for them as their position will be consistent with that of the tax authorities and they will not be subject to field tax audits.