RUSSIA: An Introduction to Tax

Contributed by Pepeliaev Group

Russia is entering 2015 on the wave of an incipient economic crisis. The outward manifestation of that crisis is taking the form of:

• economic growth coming to a standstill, or a slide into recession;

• a record-breaking outflow of capital abroad (USD120 billion in 2014);

• a drop of currency earnings from the export of oil and gas, which is linked to the drop in global prices for energy resources (they almost halved over Q4 2014) and a reduced demand for Russian gas in Europe (which almost halved over 2014);

• a dramatic reduction in the exchange rate of the national currency (70% over Q4 2014);

• the Russian Central Bank increasing its base lending rate (by 70%).

With a state budget deficit threatened for 2015, Russian authorities are paying special attention to tax policy.

To revitalise Russian business, at the end of 2014, the Russian President made a commitment that Russia will:

• not increase the tax burden for an extended period of time (i.e. new taxes will not be introduced and the rates of existing taxes will be stabilised);

• reduce the administrative burden on business;

• introduce a tax amnesty and an amnesty for capital that has been channelled to offshore jurisdictions.

Tax legislation has been amended to reflect how the tax policy of the state will be adjusted in 2015.

1. Individuals will both face an increased tax burden and encounter stricter tax control (a regional sales tax will be introduced; property tax for individuals will depend on the cadastral value of such property; banks will have to report to the tax authorities when accounts are opened by individuals and will have to disclose information about the movement of funds on these accounts).
2. Desk VAT audits will be more informative (starting from 2015, in addition to VAT returns, taxpayers will have to submit to the tax inspectorate extracts from sales and purchase ledgers, which will allow the inspectorate to determine effectively whether tax obligations have been complied with along the whole chain of transactions).
3. Relationships between taxpayers and the tax authority will be more transparent: taxpayers' personal accounts (provided for in Federal Law No. 347-FZ dated 4 November 2014) and tax monitoring (provided for in Federal Law No. 348-FZ dated 4 November 2014) have been introduced.
4. There are increased risks of unjustified criminal prosecutions for tax offences. Previously, it was impossible for a criminal case to be initiated in relation to a tax offence if there had been no tax audit. As expected, an investigative committee has now been granted the right to take this step irrespective of the results of any tax audit.

The key event of 2014 characterising the state's future tax policy for the whole upcoming period was the abolition of the Russian Supreme State Commercial ('Arbitration') Court on 6 August 2014.

The Russian Supreme Court's panel of judges for economic issues has not yet accumulated enough experience in resolving tax disputes. There is a threat that legal positions of the Supreme State Commercial Court will be adjusted. 

A new trend is gaining popularity in tax disputes: evidence and documents from criminal cases involving individuals are being used to confirm that companies have obtained unjustified tax benefits. This trend is supported by the recent clarifications of the Supreme State Commercial Court. According to these, evidence obtained under the law on operational and investigative activities is regarded as admissible within the context of tax law relationships.

Overall, Russian tax policy is currently continuing to focus on making tax audits more effective and efficient. To this end, a pre-audit analysis is conducted and large-scale, solvent taxpayers are selected on a regular basis for tax audits.

Tax authorities continue to identify schemes used for tax evasion using fly-by-night firms (management services or royalties) by structuring the work of a group of companies to involve offshore companies involved or by making use of the thin capitalisation rules. The tax authorities will continue to determine who the actual recipients of income abroad are, in order to apply double tax treaties.

The tax authorities are winning an ever increasing proportion of their disputes in state commercial courts. This is because they are putting forward an improved evidence base and legal positions when they litigate.