Tax anti-abuse rule: an attempt at doing the impossible

The Federal law* (the “Law”) that introduces a general anti-abuse rule to the Russian Tax Code (GAAR) took effect on 19 August 2017.

This is not the legislators’ first attempt to codify the concept of an unjustified tax benefit (which has been developed in Russian tax dispute cases). The Russian Parliament (the Federal Assembly) made the first attempt in 2015, when legislators proposed a similar initiative. The bill, which was introduced at the time, was dropped after passing the first reading. However, two months ago, a fundamentally rewritten version of the bill appeared on the official website of the State Duma*, where it was submitted for discussion in the second reading.

The Law that was finally adopted avoids using abstract concepts such as “good faith” or “abuse of the law.” Instead, it has introduced the concept of “limits to the taxpayer’s exercise of rights.” According to this concept, taxpayers have the right to reduce their tax bases (the amounts of payable taxes), provided they simultaneously comply with the following conditions:

• operations must reflect their actual economic substance;
• the main purpose of the transaction should not be tax evasion;
• the business transaction must be real.

At the same time, the conditions set for certain types of taxes and fees should be fulfilled in order to reduce the tax base.

Further, the Law lists a number of circumstances, which, in their own right, cannot be used as grounds for refusing to reduce the amount of payable tax, namely:

• the signing of primary accounting documents by an unidentified or unauthorised person;
• violation of the legislation on taxes and fees by the taxpayer’s counterparty;
• the taxpayer’s ability to achieve the same result in terms of economic activity by performing other transactions that are not prohibited by law.

The Law enshrines the case law developed by courts, namely, the principle of substance over form, as well as main purpose test and due diligence when selecting a counterparty. However, unlike the judicial practice, the Law is too brief, combining all the principles in a single article without giving detailed criteria. One hopes that the judicial practice will elaborate on the criteria, taking into account the interests of both the tax authorities and taxpayers.

* in Russian