A law to improve Tax Monitoring

The Law in many respects develops the provisions of the Concept for the Tax Monitoring System to be Developed and Applied in Russia[2], which was adopted in early 2020.

The Law contains a considerable number of amendments. In this alert we will brief you on the amendments we consider the most important[3]. 

1. Lowering the thresholds to enter monitoring

The sum thresholds that need to be overcome to enter monitoring have been reduced significantly:

• personal income tax and insurance contributions have been included in the list of payments that qualify for the purposes of a switch to monitoring (currently, only VAT, excise taxes, profit tax and mineral extraction tax are accepted as such);
• three times, the requirements were reduced that are applied to the amount of taxes paid, the volume of income and the value of assets. To enter monitoring for a year preceding that in which an application for monitoring is filed, it will suffice to pay taxes in the amount of at least RUB 100 million, and to have income of and assets worth no less than RUB 1 billion.
• the requirements for consolidated groups of taxpayers to comply with the threshold amounts are no longer mandatory.

It is emphasised in the Concept that owing to the measures aimed at reducing requirements for the sums, almost 8,000 companies will be potential participants in monitoring by 2024. However, the Law, as opposed to the Concept, does not provide for an opportunity to transfer to the form of tax control at hand if, as a minimum, one of the sum requirements has been complied with.

2. Extending the deadlines for filing an application for monitoring

The Law extends by two months the deadline for filing an application for entering monitoring. It can now be sent by 1 September (rather than by 1 July, as was the case before the Law was passed) of the year preceding that in which monitoring will start.

When the decision was adopted to extend the deadline for application, the experience of 2020 was taken into consideration when tax authorities had only one month to check the documents taxpayers filed to enter monitoring[4]. Therefore, the temporary measure adopted in 2020 to extend by three months the period for applying for monitoring in 2021 is becoming permanent, albeit slightly curtailed. The period for tax authorities to adopt their decisions on taxpayers’ documents remains the same: by 1 November of the year in which the relevant application was filed. Cutting the time for reviewing taxpayers’ documents, on the one hand, and the projected significant increase in the number of participants in monitoring, on the other, allow for an assumption to be made that the Russian Federal Tax Service is relying on an automated check of the documents filed to enter into the monitoring[5].  Moreover, it is intended to formalise, at the level of an order of the Federal Tax Service, the procedure for approving the roadmap to prepare to switch to monitoring[6]. The roadmap contemplates that a tax authority should review a taxpayer’s documents for entering monitoring long before the date when the relevant application is filed.

3. New requirements for information exchange regulations (IER) and the accounting policy for taxation purposes

The Law establishes a number of additional requirements for the content of a company's IER and accounting policy.

Specifically, if a monitored company grants the tax authority access to its information systems, the IER must reflect the time of access to the documents (information) related to the payment of taxes (duties and contributions) for the period covered by monitoring[7], during the period when monitoring is carried out for that period[8], and for three years after that.

The accounting policy of a company that switches to tax monitoring should additionally disclose how the company records taxable items and the tax base in its accounting and tax ledgers, as well as the information regarding its accounting ledgers and analytical tax ledgers.

4. No information exchange via telecom channels

The Law determines that such method of information exchange between a monitored taxpayer and a tax authority as via telecommunications channels can be applied only until 2023 (inclusive).

The plans have long been known to discontinue the exchange of documents and information via telecommunications channels. Thus, in accordance with the Law there will be two types of information exchange starting from 2024: via a datamart or a grant of remote access to a company’s information systems. Meanwhile, no such methods of interaction are singled out at the level of the Tax Code. These are defined as granting access to a company’s information systems.

5. Filing and receipt of documents

A new method of document (information) exchange between a company and a tax authority is enshrined at the level of the Tax Code: via information systems of the monitored company to which an inspectorate is given access.

These amendments imply that a monitored company will not have to resend via, for example, telecommunications channels replies to the tax authority’s requests for documents (information, explanations) sent via the company’s information systems. The Law further grants an opportunity to send requests for grounded opinions via the company’s information systems.

6. Suspending transactions in bank accounts

The Law establishes that a tax authority which conducts monitoring will adopt a decision to suspend transactions in bank accounts and the wire transfer of electronic monetary funds of a participant in monitoring. Thus, a ‘single window’ principle is being introduced with respect to the above, which will undoubtedly be convenient for taxpayers.

7. A cross-audit

The Law supplements article 93.1 of the Tax Code with a provision stating that a tax authority conducting monitoring is entitled to request documents (information) about a monitored company from its counterparties. Article 93.1 of the Tax Code virtually places monitored companies on the same footing as companies with respect to which a tax audit is conducted.

The original version of the draft Law enabled tax authorities that conducted monitoring to independently download the requested documents from the company’s information system (without sending a relevant request to the company) when an order is received within the scope of a cross-audit to collect documents (information). The adopted version of the Law contains no such provisions.

8. Conducting desk and field tax audits of monitored companies

The number of grounds for a desk tax audit to be performed with regard to participants in monitoring are reduced from the previous four to one: only early termination of tax monitoring remains, less than three months from when the tax return (calculation) was submitted for the period with regard to which monitoring is being (has been) carried out.

The number of grounds for a field tax audit remains the same. There are, however, important clarifications:

• to conduct a field tax audit when the company fails to implement a grounded opinion provided that it was not implemented before 1 December of the year following the period covered by monitoring[9]. In this case, a field tax audit will be scheduled within two months from the last day of the above period. No such restrictive measures were included in the Tax Code before the amendments were introduced;
• a submission of an adjusted tax return (calculation) with a reduced amount of tax payable, increased tax for refund or an increased loss[10] for the period covered by monitoring can be a reason for a field tax audit to be carried out only if such tax return is submitted in a calendar year which was not covered by monitoring. Before the Law was passed, the very fact of an adjusted tax return (calculation) being submitted with a reduced amount of tax payable (or, for members of a consolidated group of taxpayers, an increased loss) served as a ground for a field tax audit to be conducted.

The Law ‘compensates’ fewer grounds for tax audits by entitling a tax authority to inspect the territory (premises, documents, items) of a company that is subject to tax monitoring (article 92 of the Tax Code).  In the long run, it would be better to see fewer grounds not only for a desk tax audit, but also for a field tax audit. For instance, retaining a ground for a field tax audit to be conducted 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 ground for a field tax audit and, hence, a possibility to “revise” the results of monitoring contradicts the principles that have been claimed for this form of tax control: certainty of taxation, closing tax periods promptly, mutual trust and transparency of taxpayers and tax authorities.

9. Extending a period covered by tax monitoring

The Law provides that for a period covered by tax monitoring to be extended companies that are members of a consolidated group of taxpayers and companies that are already being monitored are not obliged to meet the amount thresholds to be eligible for monitoring.

In addition, periods covered by tax monitoring are now extended automatically without the need for filing an application for monitoring for the year following the three-year period when tax monitoring is carried out (as was the case before the Law was approved).

10. Extending a period when tax monitoring is carried out

Before the Law was passed, the period when tax monitoring is carried out could not be extended. The Law has supplemented the Tax Code with two grounds for extending the above period, each of which relates to submitting an adjusted tax return (calculation) for the monitoring period in a year which is not covered by the monitoring:

• if such tax return (calculation) is submitted less than three months before the end date of 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 monitoring.

The period when monitoring is carried out may in such cases be extended by three and six months respectively.
If a company that is still subject to monitoring submits an adjusted tax return (calculation) for the period for which monitoring has expired, such tax return (calculation) will be checked during the current period of monitoring.

In a situation when there is a reduction in the number of grounds for audits to be conducted of companies that are subject to monitoring, it is logical and reasonable that a tax authority is granted an opportunity to extend the monitoring period.

11. Well-grounded opinion of a tax authority

The Law lays down that before a 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 tax inspectorate will state the facts in the notice evidencing that taxes have been paid incorrectly, as well as its conclusions and proposals to rectify the violations. A participant in monitoring may provide explanations in response to such notice or may make necessary adjustments. The inspectorate draws up a well-grounded opinion if, taking into account the explanations provided, the established facts attest to an incorrect payment of taxes.

The Law also entitles tax authorities to draw up well-grounded opinions at their own initiative throughout the entire monitoring period (rather than before 1 July of the year following the monitoring period, as was the case before the amendments were made).

Unfortunately, the Law does not contain any provisions that would aim to ensure that well-grounded opinions are by their nature stable (may not be changed) and available to the public. In one of her interviews[11], the head of the Tax Monitoring Department at the Russian Federal Tax Service M.A. Krasheninnikova stressed that the Federal Tax Service does not so far have any plans to create a base of grounded opinions that would be accessible for taxpayers, similar to the “Resolutions of Appeals” service on the website of the Service.

12. A declarative procedure for a refund of VAT (excise tax)

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

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

13. Early termination of tax monitoring

The amendments concerning the grounds for an early termination of monitoring are targeted differently.

On the one hand, the regulation in this respect is becoming more stringent: a new ground has been added for the early termination of 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, a two-stage procedure similar to that for grounded opinions has been established instead of instantaneous termination of tax monitoring. First, the tax authority should notify a company that there are grounds for the early termination of the monitoring. In reply to the notification, the taxpayer may either eliminate the circumstances which constituted the grounds for the early termination of tax monitoring (of which it forwards a notice) or submit its explanations justifying its position that no such grounds exist. The inspectorate terminates monitoring early only following the examination of the notice or explanations received from the company (or upon the expiry of the deadline for submitting the documents).

14. The Law coming into force

The Law provides for different dates on which its provisions will come into force. Most of the Law’s provisions dedicated to tax monitoring will apply starting from 1 July 2021.

The rules concerning the reduction of grounds for a desk tax audit, an extension of the monitoring period, the declarative procedure for VAT (excise tax) refund and a number of others amending Part II of the Tax Code will apply with respect to tax returns (calculations) submitted for periods after 1 July 2021.

What to think about and what to do

Today we are witnessing one of the most significant changes in the legal regulation of the tax monitoring regime since it emerged.

In addition to the Law adopted last year and the Concept and Letter No. BV4-23/13939@ dated 31 August 2020 of the Federal Tax Service referred to above, there are draft orders of the Federal Tax Service posted on the federal portal of regulations approving electronic forms and formats of documents used in tax monitoring and requirements for them (designed to replace Order No. MMV-7-15/323@ of the Federal Tax Service “On approving the forms of documents used in tax monitoring and requirements for such forms” dated 21 April 2017), and on approving the forms and formats of documents used when a tax authority’s grounded opinion is drawn up and requirements for them. These are expected to be adopted in April 2021.

It is expected that a draft order will be published in the near future concerning the requirements for a company’s internal control system (designed to replace Order No. MMV-7-15/509@ of the Federal Tax Service “On approving the Requirements for an internal control system” dated 16 June 2017), together, potentially, with draft orders regulating other issues surrounding tax monitoring.

Companies that are already subject to tax monitoring and those who only plan to shift to it are recommended to watch such transformations closely: those who are already being monitored - in order to be able to promptly amend documents they have adopted and their ongoing processes, and those shifting to the monitoring - to proceed based on updated requirements when they prepare themselves to enter monitoring.

Help from your adviser

Having monitored the voluminous changes in the legal regulation of tax monitoring, Pepeliaev Group's team is happy to offer assistance in advising on the various issues related to entering monitoring and being subject to such form of tax control. Specifically, we will: analyse whether the company has met the conditions to enter monitoring and prepare a justification for entering monitoring for owners (shareholders); inspect the existing internal control system and risk management and issue recommendations on how the above can be improved based on the changing requirements of the Federal Tax Service; analyse the need for improving the documents that a participant in tax monitoring has already adopted based on the changes in legal regulation; assess the documents received from the tax authority within the scope of tax monitoring; and draft and/or assist with drafting replies to them.

[1] Federal Law No. 470-FZ 'On amending Parts I and II of the Russian Tax Code and certain items of Russian legislation concerning taxes and levies’ dated 29 December 2020 (the “Law”).
[2] Approved by Russian Government’s Directive No. 381-r dated 21 February 2020.
[3] It is remarkable that when the draft Law was considered in Russia's lower chamber of Parliament, i.e. the State Duma, a number of additional provisions were introduced that were absolutely irrelevant for tax monitoring, such as articles 3 to 5 of the Law. Hence, even the title of the draft law was amended. Originally, the draft Law was called “On amending Part I and II of the Tax Code in connection with improvements in tax monitoring”.
[4] Russian Government’s Directive No. 409 “On measures to ensure sustainable development of the economy” dated 2 April 2020.
[5] Please be reminded that, in its Letter No. BV-4-23/13939@ dated 31 August 2020, the Federal Tax Service forwarded new recommended electronic forms and formats for submitting the documents used when a company enters into and is subject to tax monitoring.
The draft Order of the Federal Tax Service has been posted on the federal portal of draft regulations approving electronic forms and formats of documents used for tax monitoring, as well as requirements for them. (https://regulation.gov.ru/projects#npa=108489).
[6] The above draft Order of the Federal Tax Service approving electronic forms and formats of documents used for tax monitoring, as well as requirements for them. To date, the form of a roadmap has been proposed in the Federal Tax Service’s Letter No. ED-4-15/8599@ dated 7 May 2019.
[7] A calendar year (article 105.26(4) of the Tax Code).
[8] Starts from 1 January of the year corresponding to the period covered by monitoring and ends on 1 October of the next year (article 105.26(5) of the Tax Code).
[9] Until a notice that there are (there are no) outstanding well-grounded opinions that were received during the tax monitoring, is provided to the company (article 105.30(9) of the Tax Code).
[10] For members of a consolidated group of taxpayers, the submission of an adjusted profit tax return indicating the amount of tax to be reduced (an increased loss).
[11] Tax Policy and Practice Journal, Issue 11, November 2020.