Remote examination of tax audit materials: PG’s comments on Order No. 32ED-7-2/181@ of the Russian Federal Tax Service dated 20 March 2020

On 20 March 2020 the Russian Federal Tax Service (the “Federal Tax Service”) issued its Order No. 32ED-7-2/181@ whereby as a measure to prevent the spread of the coronavirus infection, tax control activities involving direct contact with taxpayers are prohibited, and telecommunications channels (TCC) and video conferencing services should be used for decisions to be made following the examination of tax audit materials. 

According the Order, taking part in a video conference requires submitting to the tax authority via TCC copies of the representatives’ IDs and authorisations before the date when the materials are to be examined. If no application has been submitted to ensure participation in the remote examination together with copies of the above documents and in the event that no petition has been filed to postpone the examination, it will be held in the absence of the taxpayer’s representatives.

It is worth mentioning that the tax authority did not comply with the procedure for adopting a regulation when issuing this Order, i.e. the Order was not registered with the Russian Ministry of Justice, nor was it duly published[1]. Therefore, in formal terms it does not entail any legal consequences, since it never came into force and it may not serve as a ground for regulating the relevant legal relationships[2]. 

Moreover, the Russian Tax Code (the “Tax Code”) does not provide for using TCC or video conferencing services in the examination of tax audit materials; nor does it even contain the specified terms. The only item of tax regulation that contains such terms[3] is Order No. BG-3-28/96 of the Ministry for Taxes and Levies dated 3 March 2003 whereby the standards and formats of and the procedures for information exchange with the taxpayers via TCC are to be determined by the Ministry itself. However, such standards were never adopted. 

After the Federal Tax Service’s Order was published many entities received notices that audit materials are to be examined via various video conferencing services. The software and the services that the inspectors select should be treated as a matter of serious concern, since the information that may be announced during the examination of the audit materials is a tax secret including any data concerning the taxpayer the tax authority receives[4]. For example, the Zoom service which the inspectorates suggest as an option often does not conform to the statutory requirements for safeguarding a tax and commercial secret or know-how[5]. 

The software used in a remote examination must comply with the personal data (“PD”) protection legislation. As expressly specified in the Law, the tax authority is recognised as a PD operator, so both the tax authority and the service used in a video conference which is also recognised as an operator, must ensure the localisation of PD, i.e. data concerning Russian citizens must be processed on servers located in Russia[6]. 
Besides, the operator must make sure that the cross-border transfer of data is carried out only to the states that ensure a sufficient level of protection of citizens’ PD[7]. Such states include European member states of the Convention for the Protection of Personal Data and countries which are not members of the Convention but are specified in a special list of the Russian Federal Service for the Supervision of Communications, Information Technology and Mass Media (Roskomnadzor) (including Australia, Canada, Israel, South Korea, Singapore, etc.)[8]. For instance, the above list does not include the USA. Thus, software using US databases may not be used in the examination of audit materials. 

We recommend that, in addition to the above issues, a taxpayer who receives a notice of the examination of the audit materials via a video conferencing service, should analyse the following issues:

1) whether it is possible (lawful) to examine the audit materials in the period when such examination is suspended. What the consequences will be if the audit materials are examined on the date within the period during which such examination has been suspended by the Government on a mandatory basis:

2) whether filing a petition to postpone the examination of the audit materials is reasonable and what time should be selected for filing such petition. Thus, a company may:
a) file such petition before the examination starts, or
b) take part in the examination of the audit materials and file a petition to postpone the examination before the examination ends.

3) whether it is possible to provide (demonstrate) evidence, case law and extracts from a regulation to the person examining the audit materials, and what procedure should be complied with for this purpose;

4) the procedure for recording procedural violations that may be committed in the examination of the audit materials via video conferencing services, especially violations that will definitely result in the inspectorate’s decision being cancelled (the selected method of recording must be recognised as acceptable in the event that the decision is subsequently contested), etc.

When answering these questions, one should take into account the current situation when the restoration of rights through court proceedings is hampered by the activity of the courts being suspended, as well as the nature of the violation imputed, the volume of the audit materials and of the evidence collected by the taxpayer, the prospects of success in the event that additional assessments are contested and many other factors.
However, we believe that regardless of the method of examining the audit materials, the major priority is to ensure that the position of the taxpayer is efficiently presented to the tax authority and there are ways to safeguard such position. The taxpayer needs to take part in this procedure to ensure that a lawful decision on the audit is taken and that the tax administration performs its tasks. 
[1] Clause 10 of Resolution No. 1009 of the Russian Government dated 13 August 1997; clause 12 of Order No. 88 of the Russian Ministry of Justice dated 4 May 2007.
[2] Clause 10 of Order No. 763 of the Russian President dated 23 May 1996.
[3] Instead, the Code provides that the audit materials should be reviewed directly at the tax authority’s office (article 101(2)(3) of the Tax Code).
[4] Article 102 of the Tax Code.
[5] Article 3 of Federal Law “On a commercial secret”; article 1465 of the Russian Civil Code. The Zoom conference communication service has been discredited. Thousands of recorded video calls made by people using Zoom have leaked out into the Internet. URL.: https://www.vedomosti.ru/technology/articles/2020/04/04/827177-zoom?utm_source=facebook.com&utm_medium=social&utm_campaign=neskolko-tysyach-lichnyh-videozvonkov--sde .
[6] Articles 2 and 18 of the Federal Law “On personal data”.
[7] Article 12 of the Federal Law “On personal data”.
[8] Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data (Concluded on 28 January 1981 in Strasbourg); Order No. 274 of Roskomnadzor dated 15 March 2013.

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