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2010 Tax Lessons
Looking back on 2010 there have been some significant events that will have affected taxpayers, the business climate and the tax system in Russia. It is encouraging to see that there is more good news than bad. Taxand Russia examines the tax lessons learnt in 2010.
The main news is that not one particular bad thing happened. The State Duma did not pass the Ministry of Finance's proposed version of the transfer pricing bill. This gives us some hope that in 2011, lawmakers will manage to come up with a sensible law, rather than passing a vague one which could see businesses required, out of the blue, to pay additional taxes and fines.
The beginning of 2010 was marked by amendments to criminal legislation, which mitigated liability for tax offences and restricted the limits for taking suspects into custody. The most important thing here is that criminal prosecution for tax offences is subject to such offences being established by a tax authority's decision that has come into force.
The amendments saw a significant increase in the threshold amounts for large-scale and extremely large-scale tax evasion to qualify as a criminal offence. Also, the amendments restored a special provision whereby first-time offenders are exempted from criminal liability if they have fully paid their tax in arrears, fines and default interest. Both individuals and legal entities may now pay outstanding amounts of tax on behalf of a legal entity.
Amendments to the Russian Tax Code that deal with tax administration and control and the entry into force of a fast-track procedure for VAT recovery have made relations between businesses and the tax authorities more streamlined and less unpredictable.
For instance, the amendments introduced the active use of electronic workflow management, including the use of electronic VAT invoices, to streamline tax control procedures.
The tax authorities are now required by statute to ensure that tax audit reports are accompanied by third-party evidence of tax offences allegedly committed by the taxpayer. The taxpayer is now entitled to view all files from a tax audit before the tax authority takes a decision based on such audit. The amendments specify situations where outstanding amounts of tax must be written off. These include, inter alia, cases where the court finds that the limitation period for tax collection has expired. Interest is now payable on frozen funds where the tax authority was wrong in deciding to freeze the taxpayer's accounts. This will help reduce the number of unjustified decisions to freeze taxpayers' accounts.
The steps taken by the Russian Government and Ministry of Finance defy unambiguous assessment. Of considerable importance is the Protocol on the amendments to the Double Taxation Treaty with Cyprus, which sets clear guidelines for off-shore business. Once the Protocol is signed and ratified, Cyprus is expected to be removed from the Russian Ministry of Finance's blacklist, which will make dividends distributed by Cyprus-based companies exempt from Russian tax under the strategic participation income exemption provided for in the Russian Tax Code.
However, the preparation of a bill on combating tax irregularities has not advanced, despite a specific request from the Russian President to the Ministry of Finance to that effect. Courts are still strugglingwith this issue, and their practice is based on the Resolution of the Plenum of the Russian Supreme Arbitration Court No. 53, which is gradually becoming outdated.
The Russian Government Resolution that introduced a levy to finance compensation to authors drew criticism from the business community. Manufacturers or importers of compact discs, computers, cell phones and other equipment now have to pay 1% of their customs value or selling price for the benefit of authors, performers and producers of phonograms intended for private use. Since the money cannot be collected from the end users of musical and other similar products, the government is targeting those who are next to private users in the supply chain. Frankly, it has been a long time since we last saw such a legally uncertain and carelessly drafted regulation that would pave the way to arbitrary decision-making and uncontrolled spending by private persons of funds compulsorily collected from businesses. It is astonishing to see our leaders create feudal-style institutions and grant income-generating fiefs to their vassals, despite the established principles of a modern tax system that has already been in place for twenty years. This suggests that it will be a long time before those in power live up to their promises about respect for private property.
And it goes without saying that nobody is happy with the stubborn refusal on the part of the Russian Government to cancel its decision to raise social insurance contributions.
The Russian Constitutional Court issued just one resolution, albeit an important one. It agreed that resolutions of the Presidium of the Russian Supreme Arbitration Court can set legal precedents, and it also ruled that clarifications by the Presidium of the Russian Supreme Arbitration Court which are unfavourable for taxpayers may not be used retroactively.
The Russian Supreme Arbitration Court, by contrast, was the key newsmaker in tax, resolving a number of important practical issues from its rulings. More specifically, it allowed losses arising from writing off debt to be deducted from profit for tax purposes; it ruled that taxpayers must undertake a complete tax restructuring where they have been found to be using a tax evasion scheme; it limited taxpayers' liability for a failure to pay tax on the part of their suppliers; and it limited the list of expenses that only qualify for deduction for VAT purposes within allowable limits.
Another two resolutions should have a positive impact on the practices of the tax authorities. In its Resolution dated 29 September 2010, the Presidium of the Russian Supreme Arbitration Court ruled that it was unlawful for a tax officer who did not review the tax audit findings to sign a decision to hold the taxpayer liable for a tax offence. In its Resolution dated 12 October 2010, the Presidium of the Russian Supreme Arbitration Court ruled that the collection, under judicial decisions, of funds from budgets must be governed by the Budget Code rather than Article 78 of the Russian Tax Code.
At the same time, a number of Supreme Arbitration Court rulings have drawn justified criticism from practitioners: on the lawfulness of imposing fines on taxpayers for missing the deadline for submitting calculations for advance payments of profit tax, on calculating taxes based on estimates, on the inapplicability of court proceedings to the collection of additional tax where the tax authority has classified the taxpayer's transactions as being feigned or a sham.
The Presidium of the Russian Supreme Arbitration Court did not fail to address the settlement of tax disputes by way of administrative proceedings. It ruled that the tax authority does not have to invite taxpayers to the hearing of their appeals and that there are no grounds to allow the taxpayer to claim its expenditure on preparing an objection to a tax audit report as a loss. These rulings are unfavourable for taxpayers.
Conversely, Presidium of the Russian Supreme Arbitration Court allowed litigation costs to be claimed from the unsuccessful party during the enforcement of the judgement. This will not only help companies save on legal costs, but will also give debtors an incentive not to delay the enforcement of judgements.
By and large, the Supreme Court rulings have made the relations between the taxpayers and the tax authorities less unpredictable. There is some hope that 2011 will see an end to the retroactive application of court interpretations that are unfavourable for taxpayers. This would be the final step in dispelling the negative image of the Russian Supreme Arbitration Court, often viewed by companies as a source of surprises that may lead to their tax liabilities for earlier periods being recalculated.
What we saw in 2010 could be described as an adjustment and fine-tuning of the tax system as a follow-up to many years of tax reform, if it were not for a number of new trends. These trends can only give cause for concern: new tax legislation being enacted in the final days of the year, tax rates on the rise, new taxes being introduced, and some of the existing ones removed from the scope of the Tax Code. All this could signal abandonment of the goals of the Russian tax reform that started more than ten years ago. We wait to see what 2011 holds in store for taxpayers.
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