Draft law to amend the Russian Tax Code in view of the tax monitoring being improved

Pepeliaev Group advises that the draft law to amend the Russian Tax Code (the “Tax Code”) in view of the new developments in the tax monitoring[1] has been published on the federal portal for draft regulations.

Basically, the draft law develops the provisions of the Concept for the Tax Monitoring System to be Developed and Applied in Russia[2] that was adopted early this year. The draft law contains multiple amendments, but we will describe only those that we consider to be the most significant.

1. Entering into the tax monitoring

The draft law provides that the amount thresholds to be exceeded as a requirement for the entry into the tax monitoring, should be substantially reduced (article 105.26(3) of the Tax Code):

• the personal income tax and insurance contributions should be included into the list of payments that qualify for the purposes of a transfer to the monitoring (currently, such payments include only VAT, excise taxes, profit tax and MET);
• the required amounts of taxes (contributions) paid, revenues and asset value should be decreased to a third of their former size: for the purposes of entering into the monitoring for the year preceding the year when the application for the monitoring was filed, the threshold amount will be: RUB 100 million for the taxes (contributions) paid, and RUB 1 billion for the income volume and asset value (as at 31 December of the relevant year);
• the requirements for consolidated groups of taxpayers to comply with the threshold amounts should no longer be mandatory.

TThe Concept points out that owing to such measures, almost 8 thousand companies will be potential participants in the monitoring by 2024. It should be noted that, on the one hand, the Draft Law is even more radical than the Concept: unlike the Concept which provides for a step-by-step decrease of the threshold amounts, it provides for a one-off reduction of such thresholds. On the other hand, unlike the Concept, the Draft Law does not permit the monitoring to be applied if at least one of the amount criteria is met.

2. Being subject to the tax monitoring

Requesting documents according to the procedure described in article 93.1 of the Tax Code

The Draft Law enables the tax authorities carrying out the monitoring, in the event that they are instructed to request the documents (information), to independently download the requested data from the system of the company that is subject to the monitoring (without sending to the company a request to this effect). The tax authority should notify the company that such download has taken place.

This option may be applied to the entities that submit their documents to the tax authorities via their information systems.

Submitting documents

The draft Law provides for a new way to submit documents (information or explanations) to the tax authority via a company’s information systems to which the inspectorate is granted access.

Conducting desk and field tax audits of the companies that are subject to the monitoring

The Draft Law reduces the number of grounds for a desk tax audit to be performed with regard to the participants in the monitoring from the current four (article 88(1.1) of the Tax Code)[3] to one: the tax monitoring being terminated early, less than three months from when the tax return (calculation) for the period with regard to which the monitoring is being (has been) performed, was provided.

Unlike with desk tax audits, it is proposed not to change the number of grounds for a field tax audit (article 89(5.1) and article 89.1(4.1) of the Tax Code); however, significant clarifications are introduced:

• for a field tax audit to be carried out owing to a company’s non-compliance with a well-grounded opinion, the company should be in default on such opinion until 1 December of the year following the monitoring period[4]. In such case a field tax audit may be scheduled within two months from the last day of the specified date. At present, the Tax Code does not contain any restrictive deadlines in this respect;
• a submission of an adjusted tax return (calculation) with a reduced amount of tax payable (increased loss) for the monitoring period can be a reason for a field tax audit to be carried out only if such tax return (calculation) is submitted in the calendar year which was not covered by the monitoring. At present, the Tax Code treats the very fact of an adjusted tax return (calculation) with a reduced amount of tax payable (or with an increased loss - for the participants in a desk tax audit) being submitted, as a ground for a field tax audit to be held.

The taxpayers expect that the number of grounds for a field tax audit to be held will also be reduced. Thus, the need for a field tax audit in an event of a company’s default on the well-grounded opinion is unclear: it is obvious that when the tax authority was issuing a well-grounded opinion, it had already examined the relevant issue thoroughly and it is highly unlikely that the decision that is passed following the field tax audit will differ from the well-grounded opinion. With regard to this issue the Concept provides that in an event of a company’s default on the well-grounded opinion, the inspectorate may pass the final decision without carrying out a field tax audit. Similarly, retaining a ground for a filed tax audit to be held in the framework of a higher tax authority exercising supervision over a lower tax authority (article 89(5.1)(1) and article 89.1(4.1)(1) of the Tax Code) as a possibility to thus “revise” the monitoring results contradicts the principles that have been claimed for this form of tax control: certainty of taxation, closing the tax periods promptly, mutual trust and transparency of taxpayers and tax authorities.

VAT (excise tax) refund under a declarative procedure

It is proposed that the companies that are subject to the monitoring should be entitled to a VAT (excise tax) refund under a declarative (accelerated) procedure. In the framework of the monitoring it will be checked whether the tax refund is lawful without a desk tax audit being scheduled.

If a tax is refunded in excess, the interest on the relevant amount will be assessed at the rate equal to the Bank of Russia’s refinancing rate (rather than at the Bank of Russia’s double rate as for other taxpayers - article 176.1(17) and article 203.1(14) of the Tax Code).

Extending the tax monitoring period

The monitoring period is one calendar year (article 105.26(4) of the Tax Code).

The Draft Law provides that for the monitoring period to be extended, companies that are participants in a desk tax audit and the companies that are already being monitored are not obliged to meet the amount thresholds to be eligible for the monitoring.

Moreover, it is proposed that the monitoring periods should be extended automatically without any application being submitted for the monitoring to be held for the year which follows the three years during which the monitoring was held (article 105.27(7)(1.1) of the Tax Code).

Extending the timeframes of the tax monitoring

The timeframe of the monitoring starts on 1 January of the year which is the monitoring period and ends on 1 October of the subsequent year (article 105.26(5) of the Tax Code). The current legislation does not provide for any grounds for such timeframe to be extended.

The Draft Law proposes that the Tax Code should be amended by adding two such grounds. Both relate to submitting an adjusted tax return (calculation) for the monitoring period in the year which is not covered by the monitoring:

• if such tax return (calculation) is submitted less than three months before the end date of the monitoring;
• if such tax return with a VAT (excise tax) amount to be refunded is submitted less than six months before the end date of the monitoring.

The timeframe of the monitoring may in such cases be extended by three and six months, respectively.

If a company that is still subject to the monitoring submits an adjusted tax return (calculation) for the period for which the timeframe of the monitoring has expired, it is proposed that such tax return (calculation) should be checked during the period of the monitoring for which the timeframe has not expired yet.

Since the number of the grounds for the audits of companies that are subject to the monitoring has been reduced and since there is a possibility to extend the monitoring timeframes, the Draft Law also proposes that it should be established that a company must make accessible the documents (information) relating to the monitoring period for the duration of the relevant monitoring period’s timeframe and for the three years after the last day of such timeframe.

In a situation when it is planned to reduce the number of audits to be held of the companies which are subject to the monitoring, it is logical and reasonable that the inspectorates should be granted an opportunity to extend the monitoring timeframe. At the same time, it is unclear why the Draft Law does not enable the inspectorates to extend the timeframe for providing notices that there are (there are no) outstanding well-grounded opinions (article 105.30(9) of the Tax Code) in the event that the monitoring timeframe is extended.

Well-grounded opinion of the tax authority

The Draft Law proposes that before the tax authority draws up a well-grounded opinion at its own initiative, it should send to the company a notice that there are grounds for such an opinion to be drawn up. The company may provide its own explanations in response to such notice or make the necessary adjustments. The inspectorate draws up a well-grounded opinion if, taking into account the explanations provided, the existing facts attest to an incorrect payment of taxes (levies or contributions).

There are also plans to establish the tax authority’s right to draw up a well-grounded opinion at its own initiative during the entire timeframe of the monitoring (rather than until 1 July of the year following the monitoring period, as currently is the case).

Unfortunately, the Draft Law does not contain any amendments that would aim to ensure that well-grounded opinions remain stable (may not be changed) and are open to the public. At the same time, the Concept provides for the procedure to be developed and approved for publishing the information regarding the results of well-grounded opinions being drawn up. Possibly, the Russian Federal Tax Service plans to establish such procedure by its order.

3. Early termination of the tax monitoring

In our opinion, the amendments concerning the grounds for an early termination of the monitoring are controversial.

On the one hand, the regulation in this respect is becoming more stringent: a new ground has been added for an early termination of the monitoring, which is a delayed submission of documents (information or explanations) to the tax authority that occurs systematically (on two or more occasions).

On the other hand, the Draft Law proposes that, similarly to the case with well-grounded opinions, the current one-off termination of the monitoring (article 105.28(2) of the Tax Code) should be substituted with a two-stage procedure. At first, the tax authority should notify a company that there are grounds for an early termination of the monitoring. In response to such notice the company may provide explanations with a well-grounded position that actually there are no such grounds. Also, the company may remedy the violations described in article 105.28(1)(1)[5] and article 105.28(1)(2)[6] of the Tax Code. The inspectorate may terminate the monitoring early only following the examination of the explanations received from the company (or, if there are no clarifications, when the relevant timeframe expires).

It appears to be excessive that a company’s failure to provide documents (information or explanations) on only two occasions (article 105.28(1)(3) of the Tax Code) is retained as a ground for an early termination of the monitoring and moreover, that a similar ground for the monitoring to be terminated is added to the Tax Code. It would be more justified if at least in the event that such violation is identified for the first time, the company, would, for instance, be subject to liability in the form of a fine and could retain the right to remain subject to the monitoring, rather than being deprived of such right instantly. It would also be more fair with regard to the two other grounds for an early termination of the monitoring where the Draft Law proposes grant the taxpayer to be an opportunity to eliminate the relevant violations (unlike for the ground in question).

What to think about and what to do

The Draft Law is at the stage of public discussion (which will be completed on 9 September 2020) and before it becomes a law, it may change significantly.

At the same time, even at the current stage it would be good for the companies that are subject to the monitoring to read the proposed amendments in order to arrange their further activities in the framework of this form of tax control.

Many companies that would like to apply for the monitoring but are not eligible currently because they do not meet the established amount criteria, are fairly likely to be receive an opportunity to transfer to the monitoring in the near future.

Help from your adviser

The Pepeliaev Group team will continue to monitor how the events will develop. Pepeliaev Group offers advice on a wide range of issues relating to the entry into and participating in the tax monitoring, including: preparing grounds for the owners (shareholders) to enter into the tax monitoring, assessing the current internal control system and preparing recommendations on how to refine it taking into account the Federal Tax Service’s requirements, preparing documents for entering into the monitoring and preparing requests for well-grounded opinions and objections to the well-grounded opinions.