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6Information for citation:
Vinnitskiy, D. V. (2020) Improving tax compliance in a globalized world: an approach of BRICS countries. European and Asian Law Review. 3 (2), 99-114.
UDC 336.227
LAW086000 LAW / Taxation DOI: 10.34076/27821668_2020_3_2_99
Research Note
IMPROVING TAX COMPLIANCE IN A GLOBALIZED WORLD: AN APPROACH OF BRICS COUNTRIES
DANIL V. VINNITSKIY Ural State Law University ORCID: 0000-0002-8150-4109
The Tax Gap in Russia
Traditionally, the tax gap is understood as the difference between the tax that taxpayers should pay and what they actually pay on a timely basis. The tax gap measures the extent to which taxpayers do not file their tax returns and remit the correct tax on time1 (Gemmella & Hasseldine, 2012). Thus, when determining the tax gap, the amount of taxes which has not been paid as a result of the application of preferential tax regimes provided for by tax law is not taken into account. In essence, the tax gap is the total arrears with regard to taxes in the case of a certain region, country, etc.
The tax gap leads to a loss of the planned revenue to the state budget. Therefore, Russia, like many other countries, is attempting to provide an adequate forecast of the possible tax gap and minimize the lost tax revenue.
In general, in Russia the tax revenue that is anticipated to be received, is included in the budget law (for the respective financial year) on the basis of information on the 'tax potential' (i.e. information about amounts of taxes which hypothetically should be paid to the respective budget in accordance with tax law)2. In other words, the tax potential is understood as the correlation between the estimated (or calculated on the basis of the budgetary planning procedure) tax revenue per one 'average taxpayer' which can be hypothetically received by the budget, taking into account the level of the development of the region, the structure of the economy and the 'estimated tax base'3.
At the same time, the Federal Tax Service (FTS or the tax administration) estimates annually the level of tax expenses - the revenues lost from the budgetary system, stipulated by the application of preferential tax regimes and other instruments (tax incentives) established under Russian tax law. In particular, according to the reports issued by the tax administration, from 2011 to 2013 the amount of tax expenses (lost tax revenue) of the Russian budgetary system became 1.3 times higher (increasing from RUB 1 491.5 billion to 1 930.5 billion)4.
1 Internal Revenue Service (2005). Understanding the Tax Gap. No. FS-2005-14. Available from: https://www.irs.gov/uac/ Understanding-the-Tax-Gap [Accessed 13 April 2016]; HMRC (2016) Measuring Tax Gaps 2016 Edition: Tax Gap Estimates for 2014-15. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/561312/HMRC-measuring-tax-gaps-2016.pdf [Accessed 31 December 2016].
2 Article 41 of Tax Code of the Russian Federation.
3 Articles 131 (6), 137 (3), 138 (3), 142.1 (4), 142.8(4) of the Budgetary Code of the Russian Federation.
4 The Main Priorities of Russian Tax Policy of the Russian Federation for 2016 and for the Planned Period of 2017 and 2018 (2015). Available from: http://minfin.ru/common/upload/library/2015/07/main/0NNP_^«92016-2018.pdf [Accessed 31 December 2016].
Copyright© 2020. The Authors. Published by Ural State Law University.
This is an open access article distributed under the CC BY-NC 4.0. license http://creativecommons.org//license/by-nc/4.0/
"imn EUROPEAN AND ASIAN
2020. Is. 2 LAW REVIEW
According to the general understanding, the tax gap (in contrast to tax expenses) has three components, namely non-filing, underreporting and underpayment (Toder, 2007)Non-filing occurs when taxpayers that are required to file a return do not do so on time; underreporting of tax occurs when taxpayers either understate their income or overstate their deductions, exemptions and credits on timely filed returns; and underpayment occurs when taxpayers file their returns but fail to remit the amount due by the payment due date (Brondolo et.al., 2008). However, the tax administration uses other classifications of cases connected with the tax gap ('tax indebtedness') as shown below.
Structure of indebtedness with regard to the Russian budgetary system (Tax Justice Network 2011)
Type of indebtedness On 1 Jan. 2014 (RUB bil.) On 1 Jan. 2015 (RUB bil.) On 1 Dec. 2015 (RUB bil.) Changes since the beginning of the fiscal year
% (RUB bil.)
Total indebtedness with regard to the Russian budgetary system (including default interest and tax penalties) 1,155.2 1,181.5 1,217.5 103.0 35.9
Unsettled indebtedness 583.3 640.6 692.6 108.1 52.0
Not subject to recovery by tax authorities 572.0 540.9 524.8 97.0 -16.0
Deferred or restructured indebtedness 18.8 18.5 19.6 106.0 1.1
To be received through law-enforcement procedure 164.8 166.3 162.2 97. -4.1
Suspended taxes according to the decision of a court or a superior tax authority 54.3 55.3 56.2 101.6 0.9
Suspended recovery due to bankruptcy 326.7 288.9 278.3 96.3 -10.7
Bad debt (to be written off by tax authorities) 11.0 14.7 11.1 75.5 -3.
In 2011, the Tax Justice Network prepared a rating of countries with regard to losses in tax revenue as a result of tax evasion or avoidance. Russia ranked fourth, after the United States, Brazil and Italy2.
The growth of the tax gap in Russia is connected with a number of factors. In this context, perhaps, the problem of so-called 'one-day companies' is especially significant for the country. In the authors' opinion, this is indeed one of the main reasons for the gap between anticipated tax revenue and tax revenue actually received (at least for the last 15 years). For instance, the damage to the budgetary system as a result of transactions involving one-day companies is estimated as approximately 30 % of the total of dubious
1 IRS (2012). IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study. No. IR-2012-4 [table]. Available from: IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study I Internal Revenue Service [Accessed 6 January 2012].
2 Tax Justice Network (2011) The Cost of Tax Abuse: A Briefing Paper on the Cost of Tax Evasion Worldwide, section 3. Available from: http://www.taxjustice.net/wp-content/uploads/2014/04/Cost-of-Tax-Abuse-TJN-2011.pdf [Accessed 31 December 2016].
transactions - more than RUB 450 billion per year1 (How many 'one-day' firms are there in Russia, or what to do about it? 2013). In an effort to solve this problem, the tax administration approved a list of typical characteristics of transactions with one-day companies2.
The attention of tax inspectors in Russia is also attracted to facts such as the registration of the contractor of a taxpayer at an 'address of mass of registration'3, as well as the forced liquidation of a legal entity (which was the contractor of a taxpayer)4,
Another reason for the tax gap is tax evasion of VAT and corporate profits tax (tax on profits of organizations). For instance in 2010, the additional amount of VAT and the respective default interest accounted for RUB 133.5 billion or 42.8 % of the total amount of additionally received payments within the framework of a law-enforcement procedure (Chirkov, 2012). (The share of revenue for the budget from the given taxes is quite significant and in 2015 accounted for more than one third of the total revenue -17 % (VAT) and 19 % (corporate profits tax))5. Taking into account that the tax bases with regard to VAT and corporate profits tax are computed based on the amount of proceeds or income of a company, the usual schemes of illegal evasion with regard to these taxes are relatively similar or comparable.
Another critical reason of the tax gap in Russia is connected with the withdrawal of capital to offshore jurisdictions and, in particular, tax evasion or avoidance in cross-border situations. The Russian legislature is attempting to resolve these problems using the OECD and G20 recommendations, including some aspects connected with the BEPS Action Plan. For example in recent years, Russian tax law saw the introduction of (i) new transfer pricing rules6, (ii) new rules on the residence of organizations or companies7 and (iii) the first rules on controlled foreign companies8.
Improving Access to Information Needed by the Tax Administration
Access to information within the framework of tax audit and tax monitoring
From a procedural perspective, in most cases the need to have access to tax information arises in the course of an on-site tax audit, an off-site tax audit and tax monitoring (within the framework of enhanced tax relations with large companies).
The Tax Code provides for a wide scale of legal means of receiving tax information, including requests for documents, interrogation of witnesses, requests for clarifications and expert appraisals9.
An off-site tax audit is conducted on the basis of tax declarations and the documents submitted by taxpayer, as well as other documents concerning the taxpayer's activities which are at the disposal of the tax administration10. If there are any contradictions in the information or in the documents submitted by a taxpayer, the tax administration may request the necessary clarifications from the taxpayer11. Also, in a number of cases the tax administration has a right to request from the taxpayers those documents concerning entitlement to, for example, tax benefits and tax deductions12.
1 Bryzgalin, A. (2013) How many 'one-day' firms are there in Russia, or what to do about it? Personal blog of Arkady Bryzgalin. Available from: http://www.nalog-briz.ru/2013/04/blog-post_5.html [Accessed 17 September 2015].
2 Supplement 2 to Order of the Federal Tax Service of the Russian Federation No. MM-3-06/333@ of May, 30 2007. Here, one can see some of these characteristics: 'the absence of personal contacts of the heads of the supplying company and the buying company when discussing the terms of delivery and signing a contract; the absence of documentary confirmation by the authorities of the head of a contracting company, the absence of the copies of the document identifying his identity; the absence of documentary confirmation of the authorities of the representative of the contractor and copies of the document identifying his identity; the absence of information about the actual location of the contractor and about the location of the warehouse and/or manufacturing and/or trade premises, etc.'
3 An 'address of mass registration' arises where a significant number of companies have indicated the same address as the address of their permanent office.
4 Letters of the Ministry of Finance of the Russian Federation 03-02-07/1-118 of March 19, 2010 and 03-02-07/1-110 of March 16, 2010.
5 Supra note No. 7.
6 Section V.1 of the Tax Code of the Russian Federation.
7 Article 246.2 of the Tax Code of the Russian Federation.
8 Chapter 3.4 of the Tax Code of the Russian Federation.
9 Articles 90-95 of the Tax Code of the Russian Federation.
10 Article 88(1) of the Tax Code of the Russian Federation.
11 Article 88(4) of the Tax Code of the Russian Federation.
12 Article 88(6) & (8) of the Tax Code of the Russian Federation.
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In the course of an on-site tax audit, a wide range of tax control measures may be undertaken, including requests for any relevant documents, interrogation of witnesses, clarifications and expert appraisals1.
From the perspective of the information which is necessary for carry out a tax audit, the activities of so called one-day companies deserve special attention. Therefore - and for the purpose of identifying one-day companies, priority is given to the creation of a database of, for example (i) persons who serve as nominal directors of different organizations during the same period of time, (ii) addresses of 'mass registration' of organizations and (iii) dubious contractors. Information on the methods of carrying out high-risk financial and economic activities can be found on the official website of the tax administration2 in the section 'Criteria available for independent estimation of risks'.
In the context of perspective of receiving tax information, it is especially significant that the Tax Code obliges third parties (tax agents, contractors, banks, various state authorities) to submit tax information to the tax administration. In particular, article 85 of the Tax Code requires bodies maintaining migration and cadastre records, other bodies and organizations to transmit information concerning the records of organizations and individuals to the tax administration. Banks also must provide information concerning taxpayer records to the tax administration3.
Under article 93(1) of the Tax Code, a tax official conducting a tax inspection has a right to demand documents or information that a contractor or other persons may have at their disposal and which concern the activities of the taxpayer being inspected.
Generally, none of the above-mentioned subjects4 have a right to refuse to submit the requested information by referring to bank secrecy or another type of secrecy provided by law5. However, an exception applies for information falling under the attorney-client privilege and auditing secrecy6.
The tax administration has the right to request from attorneys and attorney associations that information which is necessary to evaluate the tax consequences of transactions concluded with their clients. At the same time, this information must be regarded as subject to tax secrecy and must be protected from further disclosure by virtue of law7. The tax administration may not demand the submission of information connected with the content of the legal assistance provided by an attorney, in light of the constitutionally significant principles of the protect attorney activities8.
Access to information and tax databases
It is evident that taxpayers need to have an access to information and tax databases, in particular, in order to be able to check the tax status of contractors. The tax administration offers significant assistance in collecting and using information that is significant for taxpayers, including in the form of publications such as 'Business Risks: Check Yourself and Your Contractor', 'The Real Taxpayer Identification Number (TIN) of Legal Persons', 'Invalid Certifications', 'Invalid TIN of Individuals', 'Invalid TIN of Legal Persons', 'Open and Accessible Information on Foreign Organizations'9.
The submitted information is especially effective with regard to tax control of VAT payments. Considering the developed case law of the Supreme Court, a taxpayer must check the information about the taxpayer's contractors (contracting parties) and be in any other way properly careful when choosing contractors. Thus, the verification of the supplier's legal capacity by obtaining information from the website of the tax administration can be considered as evidence of the taxpayer's being properly circumspect when concluding a transaction (provided that, for example, the taxpayer did not have any grounds to doubt the supplier's compliance with tax law)10.
1 Articles 90-95 of the Tax Code of the Russian Federation.
2 See the website of the Federal Tax Service of the Russian Federation. Available from: www.nalog.ru. [Accessed 26 December 2016].
3 Articles 85.1 & 86 of the Tax Code of the Russian Federation.
4 Articles 85-86, 93(1) of the Tax Code of the Russian Federation.
5 Article 93.1(6) of the Tax Code of the Russian Federation.
6 Article. 82(4) of the Tax Code of the Russian Federation.
7 Article 102 of the Tax Code of the Russian Federation.
8 Decision of the Constitutional Court of the Russian Federation of March 6, 2008 No. 449-O-P.
9 RU: FTS, Electronic Services ('Business Risks: Check Yourself and Your Contractor', 'The Real Taxpayer Identification Number (TIN) of Legal Persons', 'Invalid Certifications', 'Invalid TIN of Individuals', 'Invalid TIN of Legal Persons', 'Open and Accessible Information on Foreign Organizations'). Available from: https://www.nalog.ru/rn66/about_fts/el_usl/ [Accessed 31 December 2016].
10 Ruling of the Presidium of the Supreme Commercial Court Ruling of the April 20, 2010 No. 18162/09, case A11-1066/2009; Ruling of the Presidium of the Supreme Commercial Court of the Russian Federation of February 1, 2011
Payments of tax and monitoring of financial flows
In principle, different means of payment, both cash and bank transfers, may be used in Russia to pay taxes. However, under article 6 of Bank of Russia Directive 3073-Y of 7 October 2013 on exercising cash settlements, cash settlements for one transaction between the same persons are limited to RUB 100,000, so as to allow the monitoring of financial flows by financial institutions.
Russian law provides (indirectly) for tax payments in electronic form. For example if the taxpayer fails to comply, tax debts may be enforced through collection from the taxpayer's funds of electronic money (or 'electronic monetary surrogates')1. The regime governing the use and transfer of electronic funds is set forth in Federal Law 161-FZ of 27 June 2011 on the national payment system.
Voluntary disclosure programmes
In recent years, attempts have been made in Russia to conduct a so-called capital amnesty. Individuals who disclose information about property owned, bank accounts opened and foreign companies controlled by them, may be relieved of criminal, administrative and tax penalties for the violations connected with such activities2. However, according to a statement by the tax administration, the process of the capital amnesty is going quite slowly and has not yielded the anticipated results3.
Russian tax law does not provide for any special voluntary disclosure programme, although certain features of voluntary disclosure programmes can be found in the special forms of tax control, namely tax monitoring and transfer pricing procedures.
Thus, in the case of tax monitoring, the information interaction is provided by the regulation that includes the procedure for (i) submitting to the tax administration those documents which are the basis for calculating taxes and/or (ii) granting access to the databases of organizations that possess the given documents4. On the basis of the information obtained within the framework of tax monitoring, the tax administration will prepare a justified opinion if a fact is established that proves a wrong calculation or untimely payment of taxes by a taxpayer5. If the taxpayer's complies with the justified opinion of the tax administration (as sent to the taxpayer in the course of tax monitoring), the taxpayer is excluded from guilt in committing a tax law violation6.
In addition, the tax administration and the taxpayer may conclude an advance pricing agreement -the means of determining prices and applying the pricing methods to intra-group transactions for tax purposes7. If the taxpayer complies with all the terms of the pricing agreement, the tax administration may not impose penalties for committing a tax infringement which involves an additional calculation of taxes with regard to those controlled transactions the prices on which were covered by the pricing agreement8.
Disclosure programmes and CFC Rules
The Tax Code also provides for the obligation of disclosure of the certain information under the controlled foreign company (CFC) rules. A Russian resident must notify the tax administration with jurisdiction in the place of its residence or incorporation, as to the following:9
their participation in foreign entities (if the share of such participation exceeds 10 %);
the establishment of foreign structures and the Russian resident's the control over them (including instances when an individual acts as a founder of such a structure or as a person who is the beneficial owner of the resulting income); and
No. 10230/10, case A57-22072/2009; Ruling of the Presidium of the Supreme Commercial Court of the Russian Federation of April 19, 2011 No. 17648/10, A26-11225/2009.
1 Articles 46 & 48 of the Tax Code of the Russian Federation.
2 Federal Law of the Russian Federation No. 140-FZ of June 8, 2015 'On voluntary declaration by individuals of the assets and accounts in banks and on the amendments of certain legislative acts of the Russian Federation'.
3 Petersburg Legal Portal. Available from: http://ppt.ru/news/134528 [Accessed 15 December 2016].
4 Article 105.26(6) of the Tax Code of the Russian Federation.
5 Articles. 105.29-105.30 of the Tax Code of the Russian Federation.
6 Article 111(1) and (3) of the Tax Code of the Russian Federation.
7 Article 105.19 of the Tax Code of the Russian Federation.
8 Article 105.23(2) Tax Code.
9 Article s. 23 (3.1), 25.12 (1), (2) & (4) of the Tax Code of the Russian Federation.
controlled foreign organizations with regard to which they are controlling persons.
This is aimed at identifying whether Russian residents and companies incorporated in Russia are beneficiaries of income received from sources outside Russia. Moreover, the tax administration may obtain information from other sources about the participation of an individual in a foreign organization or its control by this individual (e.g. income tax treaties, the Multilateral Convention). There are currently no plans to introduce a state register of beneficial owners in Russia (Alekseevskih, 2016).
Transfer pricing
Under Federal Law 227-FZ of 18 July 2011 (effective from 1 January 2012), new transfer pricing rules were introduced in the Tax Code1 Although, on the whole, Russian transfer pricing law corresponds to the general approach of the OECD, there are significant deviations. In particular, currently Russian law requires the submission of documents on the sections relevant to the local file2 (the terminology of BEPS Action 13). Under article 105.15(1) of the Tax Code, a taxpayer must submit the documents concerning a particular transaction (a group of homogeneous transactions) mentioned in a request for documents sent by the tax administration.
At the same time, in practice the tax administration widely applies the clarifications described in a 2012 Letter on the preparation and submission of documents for tax audit purposes3. In Supplement I of that Letter, there are partially the sections which correspond in their terminology to BEPS Action 13, specifically to the sections reflected in the master file4.
Thus, all the information required for taxpayer's transfer pricing documentation, by virtue of article 105.15 of the Tax Code, may be compared with the information mentioned in the provisions on the local file and master file in BEPS Action 13. However, not all the information subject to disclosure in accordance with BEPS Action 13, and also the relevant sections of the country-by-country report5, are contained in the Russian transfer pricing requirements (e.g. there is no information on all significant intra-group pricing agreements, nor a description of the business of multinational corporations).
In particular, all MNE groups must file a country-by-country report each year, subject to the following exceptions. An exemption from the general filing requirement is provided for MNE groups with annual consolidated group revenue in the immediately preceding fiscal year of less than EUR 750 million or a near equivalent amount in domestic currency as of January 20156. Meanwhile, according to the 'RBK' analytical service, at the time of conducting an analysis of multinational corporations, there were only approximately 143 corporations with a consolidated group revenue over EUR 750 million.
Exchange of Information between Tax Administrations of Different Countries
Bilateral tax treaties and multilateral conventions
The participation of Russia in the international exchange of tax information is based on bilateral tax treaties and the multilateral convention, namely the Convention on Mutual Administrative Assistance in Tax Matters7.
1 Section V.1. of the Tax Code of the Russian Federation.
2 The local file focuses on information relevant to the transfer pricing analysis related to transactions between a local country affiliate and associated enterprises in different countries and which are material in the context of the local country's tax system. OECD, Transfer Pricing Documentation and Country-by-Country Reporting - Action 13: 2015 Final Report, 0ECD/G20 Base Erosion and Profit Shifting Project, at 15 (OECD Publishing 5 Oct. 2015), International Organizations' Documentation IBFD.
3 Letter of the Federal Tax Service of the Russian Federation of August 30, 2012 OA-4-13/14433@ 'On preparation and submission of documents for tax audit purposes'.
4 The master file is to provide an overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. OECD, Action 13 Final Report, supra note No. 43, at 14.
5 The country-by-country report requires aggregate tax jurisdiction-wide information relating to the global allocation of income, taxes paid and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. OECD, Action 13 Final Report, supra n. 43, at 16.
6 OECD, Action 13 Final Report, supra n. 43, at 21.
7 OECD, Jurisdictions Participating in the Convention on Mutual Administrative Assistance in Tax Matters: Status. Available from: http://www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf [Accessed 31 December 2016].
However, no Russian bilateral tax treaty provides for the obligation of automatic or spontaneous exchange of tax information. At the same time, the ratification of the Convention on Mutual Administrative Assistance in Tax Matters creates the preconditions for such forms of information exchange. In particular, Russia is planning to commence the automatic exchange of tax information according to Common Reporting Standard starting from 2018 (Golova, 2015). In May 2016, Russia signed the Multilateral Agreement on Automatic Exchange of Information (Milyukova, 2016).
The exchange of tax information upon request is carried out quite intensively. According to the report by the Global Forum1 which completed both phases of Peer Review on Russia, in the 3-year period from July 2010 to June 2013, the Russian tax administration received and processed 7,945 requests for tax information and received approximately 100 messages containing information within the framework of spontaneous exchange. Moreover, judging by the emerging case law of commercial courts which contains references to evidence received within the framework of information exchange, it has been really increasing in recent years.
Income tax treaty negotiations is based (from the Russian side) on the National Model (the Russian Model) approved of by the government in February 20102. A comparison of article 26 of the Russian Model and article 26 of the OECD Model, indicates that they fully correspond to each other. Thus, in the current orientation of Russia when concluding treaties takes into account the existing OECD standard on the exchange of tax information. As for previously concluded Russian treaties, a significant portion does not correspond to the present version of article 26 of the OECD Model (in particular, from the perspective of article 26(3) and (4) of the OECD Model)3. However, the treaties that were concluded in the 1990s are being 'modernized', for example the new protocol to the Russia-China treaty4 and the Protocol to the Russia-Cyprus treaty5.
At the moment, Russia has not concluded any agreements based on the OECD Model TIEA. However, the Russian government has adopted a Model on exchange of tax information6 which de facto is a translation of the respective OECD Model. A number of exchange of information agreements have been concluded with some CIS countries which contain significant deviations from the OECD Model. However, the given agreements are, in essence, quite general.
FATCA and issues of reciprocity: Russian FATCA rules
Russia has been engaged in negotiations for an agreement with the United States on FATCA, and such agreement was supposed to be concluded according to the Model 1 intergovernmental agreement, but the parties did not reach the point of signing it. Currently, Russian financial institutions are being registered to submit information to the IRS within the framework of the FATCA initiative (more than 1,300 Russian banks, stock exchange companies and other financial institutions have already been registered). When submitting tax information to the US Internal Revenue Service (IRS), financial institutions are to notify the Russian tax administration of that information, and also must receive the client's consent for information transfer/submission. If a client does not give consent, the respective financial institution has the right to unilaterally terminate the relations with that client7.
Simultaneously, taking into account the reciprocity principle, Russia introduced the obligation for foreign financial organizations to provide the Russian tax administration with information about the bank accounts of Russian citizens and legal entities (e.g. companies) controlled by Russian citizens. This obligation is provided under article 6 of Federal Law 173-FZ and is generally referred to as 'Russian FATCA'. Although in December 2015 the Russian tax administration published forms for reporting under Russian FATCA, it is still not entirely clear how Russian FATCA will work in practice. First, to date, no electronic reporting is possible. Second, it is not clear how foreign financial institutions are to disclose client information if
1 OECD, Global Forum on Transparency and Exchange of Information for Tax Purposes, Peer Review Report - Phase 2: Implementation of the Standard in Practice: Russian Federation, at 68 (OECD Publishing 2014).
2 Government Decree No. 84 of February 24, 2010 on concluding interstate agreements on avoidance of double taxation and prevention of tax evasion with regard to taxes on income and property (revised and amended in 2012 and 2014).
3 For Russian Federation treaties, see http://www.eoi-tax.org/jurisdictions/RUfagreements [Accessed 31 December 2016].
4 Agreement between the Government of the Russian Federation and the Government of the People's Republic of China for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (13 October 2014), Treaties IBFD.
5 Protocol of October 7, 2010 on introducing changes in the treaty between the Government of the Russian Federation and the Government of the Republic of Cyprus on avoidance of double taxation with regard to taxes on income and capital of December 5, 1998.
6 Government Ruling of the Russian Federation No. 805 of August 14, 2014 'On concluding treaties on the exchange of information on tax matters'.
7 RU: Federal Laws of the Russian Federation No. 112-FZ of May 5, 2014; No. 173-FZ of June 28, 2014.
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suchdisclosure is prohibited under their national law (however, the same issue is relevant for the FATCA rules introduced by the United States). Finally, there are no penalties yet established for non-compliance with Russian FATCA.
Reports (within the framework of the Russian FATCA system) are to be filed with Russian tax authorities annually before 30 September of the year following the year of the opening of the relevant account. Reporting forms were approved by the a 2015 FTS Order1, although, to date, no clarifications regarding completion of the forms have been published.
As mentioned, from 2018 Russia may begin participating in the Common Reporting Standard. The Common Reporting Standard provides for a more developed and elaborate system for exchange of tax information. Thus, one can suppose that if Russia takes part in the Common Reporting Standard, Russian FATCA will lose practical value. Some representatives of the Russian tax administration even do not exclude that once Russia becomes involved in exchange of information under the Common Reporting Standard, article 6 of Federal Law 173-FZ of 28 June 2014 will be abolished2, or will be applicable only with regard to countries that are not members of the Common Reporting Standard system.
Organizational and technical issues
Most of the issues existing in the realm of exchange of tax information (also mentioned in the report by the Global Forum) have not so much legal causes, but rather organizational and technical ones (for example there were cases where Russian competent authorities, in response to a request, submitted copies of documents in Russian without any explanation as to what kind of documents they were and what information they contained)3. Perhaps the reason of this circumstance may be connected with the large volume of cases.
Although the possibility to conduct joint audits is provided for by the Convention on Mutual Administrative Assistance in Tax Matters4, ratified by Russia, to date there is no information about any practice of implementation of the Convention. One reasons is the absence of regulations on the legal status of the representatives of a foreign tax administration within Russian territory, in particular, in the course of a tax audit. Under the Tax Code, these persons just cannot be granted access to the materials of the tax audit, in part, because of the effective rules on tax secrecy (however, work is underway for federal laws that would eliminate the given gaps).
Cooperation between the Tax Administration and Other Law Enforcement Agencies
The exchange of information between the tax administration and other law enforcement agencies is carried out within the framework of the procedure established by law. In particular, Russian law provides for the effective interaction between tax administrations and anti-crime agencies. Thus, if some circumstances are identified requiring actions that are the competence of the tax administration, anti-crime and investigatory agencies must forward the materials to the respective tax administration to take a decision within a 10-day period from the date of revealing such circumstances5.
The procedure for information exchange and other issues of interaction between the anti-crime agencies and the tax administrations is governed by an Order of the Ministry of Internal Affairs6 and by Order of the tax administration7. Under these Orders, not later than 10 days from the date on which the materials are received, the tax administration must notify the anti-crime agency that sent the materials, as to the decision taken with regard to them:
to arrange an on-site tax audit or to carry out an off-site tax audit with regard to a respective taxpayer; or.
to refuse to commence any measures of tax control (justifying the given refusal).
If the materials forwarded by the anti-crime agency to the tax administration reveal violations of tax law entailing criminal sanctions, the tax administration, together with the notification of the decision to arrange
1 RU: FTS, Order of the Federal Tax Service of the Russian Federation No. MMB-7-14/501@ of December 18, 2015. Available from: http://www.pravo.gov.ru. [Accessed 07 December 2015].
2 Material of the meeting on 28 April 2016 of the Association of Russian Banks and the Federal Tax Service of Russia regarding Russian FATCA. Available from: https://www.pwc.ru/ru/legal-services/news/assets/flash-fatca-news-29-04-16.pdf [Accessed 31 December 2016].
3 OECD, supra noote No. 52, at 68.
4 Federal Law of the Russian Federation No. 325-FZ of November 4, 2014 'On the ratification of the Convention on Mutual Administrative Assistance in Tax Matters'.
5 Article 36 (2) of the Tax Code of the Russian Federation.
6 Order of the Ministry of Internal Affairs of the Russian Federation No. 495 of June 30, 2009.
7 Order of the Federal Tax Service of the Russian Federation No. MM-7-2-347 of June 30, 2009.
an on-site tax audit, will send to the respective anti-crime agency a request to participate in the respective tax audit (inspectorate)1.
There is a quite high level of coordination of the interaction of the tax administration with other controlling and law enforcement bodies. For instance there is are common characteristics of 'suspicious' taxpayers applied by the tax administration, on the one hand, and the Federal Financial Monitoring Service (known as Rosfinmonitoring) with regard to the clients of banks, on the other hand. These characteristics notably include:
the 'absence of economic sense' in a transaction; carrying out transactions only via intermediaries; the application of non-market prices; unreasonable and unusual transactions; very complicated forms of payments;
violations connected with the procedure of opening accounts and making payments; and the absence of information on contractors (clients) of the taxpayer, etc.2
In principle, the cooperation of Rosfinmonitoring and the tax administration is built on a system of operative interaction. This is especially seen in the work connected with the embezzlement of budgetary funds and corruption crimes. Information from the tax administration on accounts opened, as well as the objects of immovable property, allows the identification of assets subject to further confiscation in accordance with the Criminal Procedure Code.
In addition, for only 8 months during 2014 Rosfinmonitoring and the FTS interacted in a 'request -reply' format, and there were over 1,000 of these interactions3. In October 2015, the heads of the FTS and Rosfinmonitoring signed a bilateral agreement on cooperation and organization of information interaction4.
Currently, due to the efforts of the Financial Action Task Force (FATF), nearly all countries around the world have a standardized law to combat money laundering which provides for, among other things, the disclosure, upon request from abroad, of information about accounts and their beneficiaries (Budilin, 2015). Within the framework of international cooperation, Russia follows FATF recommendations and limits certain aspects of interactions with the black-listed states that do not execute FATF recommendations5.
As mentioned, in Russia, if individuals disclose information about the property they own abroad, the foreign bank accounts they have opened and the foreign companies they control, they may be relieved of criminal, administrative and tax penalties. In a number of cases the guarantees depend on the repatriation of the declared movable property to Russia. Such special rules are effective in those situations where such property is located in a black-listed state included in the FATF list or in a state that does not provide for the exchange of information for tax purposes with Russia6.
Cooperative Compliance and Risk Management
Cooperative compliance: Horizontal monitoring
Horizontal monitoring is actively used in international practice and now is an element of the Russian tax system7. The first agreements on horizontal monitoring were signed in Russia at the end of 2012.
1 Para. 5 of the Instruction that was adopted by Ministry of Internal Affairs Order 495, supra n. 64, and Order of the Federal Tax Service of the Russian Federation No. MM-7-2-347 of June 30, 2009 on the procedure for sending materials by anti-crime agencies to the tax administration.
2 RU: FTS Order of 30 May 2007 MM-3-06/333@ on adopting the conception of the system of planning on-site tax audits; RU: Federal Financial Monitoring Service Order 103 of 8 May 2009 on adopting the recommendations for developing criteria to reveal and identify the characteristics of unusual transactions. The Federal Financial Monitoring Service is known as Rosfinmonitoring and works to combat domestic and international money laundering, terrorist financing and other financial crimes.
3 Federal Tax Service of the Russian Federation (2014) Speech by the Director of Rosfinmonitoring, Mr U.A. Chikhanchin at the Collegium of the FTS devoted to the results of the work of tax administrations in January-August 2014. Available from: https://www.nalog.ru/rn77/news/activities_fts/4921909/ [Accessed 16 September 2015].
4 Federal Tax Service of the Russian Federation (15 October 2015) Head of the Federal Tax Service of Russia M.V. Mishustin and director of Rosfinmonitoring Yu.A. Chikhanchin signed an agreement on interdepartmental cooperation. Available from: https://www.nalog.ru/rn77/news/activities_fts/5761489/ [Accessed 10 November 2015].
5 Ruling of Government of the Russian Federation No. 173 of March 26, 2003 'On the procedure of identifying and making public the list of the states which do not follow FATF recommendations'. Order of Rosfinmonitoring No. 361 of November 10, 2011 'On the approval of the Recommendations on the development of criteria for the identification and identification of signs of unusual transactions'.
6 RU: Article 6 of the Federal Law of the Russian Federation No. 140-FZ of June 8, 2015.
7 Section V.2 of the Tax Code of the Russian Federation.
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In particular, on 25 December 2012 agreements on expanded information interaction (horizontal monitoring) were signed between the tax administration and a number of companies, including OAO Rusgidro, OAO Inter RAO EEC, OAO Mobile TeleSystems and Ernst and Young (CIS) B.V. (Pepelyaev & Zaripov, 2013).
The advantages of using horizontal monitoring for taxpayers include that tax inspectors have a chance to monitor and verify income and expense records for tax purposes in 'real time' (e.g. in the accounting database of the company), and cannot conduct on-site or off-site tax audits during the period of horizontal monitoring1. Consequently, the mistakes identified by tax inspectors can be corrected nearly immediately.
In addition, such interaction allows the tax administration to warn the respective taxpayer about tax risks and grant the tax administration's justified opinion on specific matters upon the request of the company2. Thus, horizontal monitoring guarantees the taxpayer that no extra taxes or default interest will be imposed, even if the company subsequently has indebtedness as a result of following the opinion of the tax administration3.
If the taxpayer disagrees with the opinion of the tax administration, a procedure for mutual agreement should be initiated with the tax administration4. Thus, horizontal monitoring (under Russian tax law) supposes the following advantages for taxpayers: (i) decrease of tax risks for the taxpayer; (ii) possibility to be relieved from some measures of tax control and audit and (iii) the possibility to be informed, in advance, as to the position of the tax administration on planned transactions, thereby decreasing uncertainty in the application of tax law. Risk management
Risk management is also used in the planning of tax audits. In particular, an important point in planning on-site tax audits is the criteria of the taxpayer's independent risk appraisal under section 4 of the Conception of the Planning System of On-Site Tax Inspections5. For example the following facts are regarded as indicative of risk for taxpayers:
the entry of losses on the accounting and tax records during several tax periods; the recording of significant tax deductions on the tax return over a certain period; building financial and economic activities on the basis of contracts only with intermediaries ('chains of contractors') without any reasonable economic or business purpose;
the taxpayer's repeated striking from the register and re-registration with the tax administrations in connection with a change of location (so-called migration between tax administrations); and
significant deviation of the profitability level as reflected in accounting records, from the profitability level for the given sphere activity according to statistical information.
In addition, as mentioned, information about the methods of conducting financial and economic activities with a high tax risk is placed on the official website of the tax administration (www.nalog.ru) in the section 'Criteria available for independent risk appraisal'. Constitutional issuers
Horizontal tax monitoring, as provided for in the Tax Code, could hypothetically lead to conflicts with the principles of tax law and constitutional law, which are connected with the possibility to apply tax monitoring only for those taxpayers with a high level of income and significant valuable assets6. As a result, the rights of other taxpayers, including small and medium-sized businesses, will face discrimination7.
The Tax Code is vague with regard to the remedies available to defend taxpayer rights in the course of horizontal monitoring. In particular, it not formally stipulated that a taxpayer may go to court to appeal a 'justified opinion' of the tax administration8 and the notification of reserving a 'justified opinion' without changes (adopted in the result of the mutual agreement procedure)9.
1 Articles. 88(1.1) & 89(5.1) of the Tax Code of the Russian Federation.
2 Article105.30 of the Tax Code of the Russian Federation.
3 Arts. 75(8), 111 (3.1) Tax Code
4 Article 105.31 of the Tax Code of the Russian Federation.
5 Adopted by Ruling of the Federal Tax Service of May 30, 2007 No. MM-3-06-/333@.
6 Article 105.26 (3) of the Tax Code of the Russian Federation.
7 Article. 3 (3) of the Tax Code of the Russian Federation.
8 Article 105.30 of the Tax Code of the Russian Federation.
9 Article 105.31 of the Tax Code of the Russian Federation.
Improving the Collection of Taxes
Collection of taxes in purely domestic situations
Currently, the collection regime for a number of taxes uses the mechanism of withholding1. Withholding taxation facilitates the procedure of tax administration. Also, after the tax agent remits the tax, the taxpayer still has a chance to correct the taxation for the reporting period2.
In particular, the Tax Code provides that the tax on passive income received by a foreign organization from Russian sources is calculated and withheld by the respective Russian organization or by the respective foreign organization conducting activities in Russia via a permanent establishment3.
Under article 24(4) of the Tax Code, tax agents remit the tax withheld from the taxpayer. In light of the peculiarities of the legal status of the tax agent, the Supreme Court clarified some Tax Code provisions regulating enforced execution of the taxpayer's obligation4. Thus, the enforced execution of the obligations of a tax agent by collecting from the respective tax agent any unremitted amounts of tax (plus the respective default interest) is possible when the tax agent has withheld the tax from the income of a taxpayer but has not remitted it to the budgetary system (treasury).
At the same time (taking into account the compensatory character of default interest as a payment aimed at compensating the losses of the treasury as a result of the failure to timely pay tax), a tax agent who has not withheld the tax from the taxpayer's income, is subject to default interest for the period from the moment when the tax agent should have withheld and remitted tax to the treasury, up to the moment when the obligation to remit the tax is executed by the taxpayer independently after the end of the respective tax period.
However, as the Supreme Court pointed out further, the given recommendations on the impossibility of collecting the non-withheld tax from the tax agent and on the limitation of the period for collecting default interest, which is based on the fact that the taxpayer remains obliged with regard to the tax5 and from this taxpayer the tax administration should demand the payment of tax, are not applicable when paying income to a foreign person, as the respective foreign person is not registered with the Russian tax administration and cannot be subject to Russian jurisdiction with regard to taxes. Consequently, if the amount of tax was not withheld when income was paid to a foreign person, the tax may be recovered from the tax agent, along with default interest calculated up to the moment when the tax obligation is executed.
Prepayments facilitate tax administration and offer a chance to estimate a person's tax obligations before the tax return is filed. As the Constitutional Court noted:
'the established obligations of the taxpayer to make tax payments in advance, i.e. before the tax period expires, are stipulated by the necessity, throughout the budgetary year, of a steady inflow to the treasury of funds necessary to cover the expenses of the budget, and cannot be considered as a violation of constitutional rights and freedoms6'.
In particular, in the Russian legal system pre-payments are made within the framework of the regime of excises7, corporate profits tax8, transport tax9, tax on the property of organizations10 and when applying some special tax regimes11.
The issue of the legal regime for pre-payments under tax law (whether the legal nature of pre-payments is similar to the legal nature of a tax), as well as the issue of the possibility to apply penalties and security measures with regard to taxes, in the case of non-payment and/or untimely remission of pre-payments, led in the past to serious discussions in theory and practice. Now, the general approach is that a pre-payment is,
1 VAT, article 161 of the Tax Code of the Russian Federation; individual income tax, article 226 of the Tax Code of the Russian Federation; corporate profits tax, article 310 of the Tax Code of the Russian Federation.
2 Articles. 23, 161, 226 & 310 of the Tax Code of the Russian Federation.
3 Article 310 of the Tax Code of the Russian Federation.
4 Ruling of the Plenum of the Supreme Court of the Russian Federation of July 30, 2013 57 on some issues arising when applying the First Part of the Tax Code by Commercial Courts, sec. 2.
5 Article 45(3.5) of the Tax Code of the Russian Federation.
6 Decision of the Constitutional Court of July 4, 2002, case 200-0.
7 Chapter 22 of the Tax Code of the Russian Federation.
8 Chapter 25 of the Tax Code of the Russian Federation.
9 Chapter 28 of the Tax Code of the Russian Federation.
10 Chapter 30 of the Tax Code of the Russian Federation.
11 Chapters 26.1 & 26.2 of the Tax Code of the Russian Federation.
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in its essence, a part of the amount of tax, and consequently, an untimely pre-payment should be regarded as a violation of the deadline for paying a part of the tax itself which entails the application of the security measures established in the Tax Code and ultimately - tax penalties.
Currently, article 58(3) of the Tax Code defines pre-payments as preliminary payments with regard to tax. The obligation to transfer pre-payments is recognized as executed in the same way as it is for the payment of tax. In a 2013 ruling, the Plenum of the Supreme Commercial Court noted that, following from the given norm, it is possible to identify significant differences between tax and pre-payment of tax which -in contradistinction to tax - is paid not on the basis of the financial results, but during the tax period1.
At the same time, due to the directive of the law, a violation of the procedure of calculation and/or payment of pre-payments cannot be considered as a ground for tax penaltie2.
Cross-border aspects
Collection of taxes in cross-border situations under article 27 of the OECD Model Convention is complicated by the difficulties of implementing the given rules into Russian law. Among all Russian tax treaties, only 11 contain a provisions on assistance in the collection of taxes3. Five more treaties include declarative provisions that 'the contracting states will cooperate' on this issue and/or conclude the respective additional agreements on this matter in future4.
It is evident that any collection of taxes supposes enforced withdrawal from private property and transfer to the fisc of a part of the taxpayer's property (monetary means). Under constitutional principles, this action may be carried out only on the basis of, and in the procedure established by, federal law5.
However, no concrete rules have been established in federal law for enforced execution of tax obligations in the territory of another country. It seems that in order to remove this obstacle to the effective assistance in the collection of taxes, it is necessary to introduce an amendment into the Tax Code under which the Russian tax administration may carry out collection to execute a tax obligation in the territory of another country according to the procedure established by the Tax Code for collecting Russian taxes. In 2014, Russia ratified the Convention on Mutual Administrative Assistance in Tax Matters, under article 11 of which 'at the request of the applicant State, the requested State shall [...], take the necessary steps to recover tax claims of the first-mentioned State, as if they were its own tax claims'6.
Advantages for Taxpayers
Advantages for small and medium-sized business
The ranking of favourable conditions for doing business views the Russian tax system quite positively and does not consider it to be an obstacle to conducting business; Russia occupies the 47th place in respect of favourable tax conditions for business (out of 189)7. The position of Russia in this ranking is connected
the improvement of the tax administration;
the introduction of tax benefits for small and medium-sized business, in particular the introduction of the 'patent (presumed) system of taxation' and the 'tax holiday'; and
the introduction of the President Decree on imposing a moratorium on the increase of tax rates and insurance contributions until 2018.
A more critical appraisal of the Russian tax system is given by some categories of taxpayers, including representatives of small and medium-sized business. In particular, the State Council report on measures for developing small and medium-sized business in Russia (2015)8 sums up the tax-related problems of small and medium-sized business, including:
complicated forms of legalizing labour activity for self-employed individuals;
1 RU: Ruling of the Plenum of the Supreme Commercial Court of the Russian Federation of July 30, 2013 No. 57.
2 Article 58(3 (3)) of the Tax Code of the Russian Federation.
3 Russian tax treaties with Algeria, Armenia, Belgium, Botswana, Cyprus, Iran, Iceland, Latvia, Mali, the Netherlands and Norway.
4 Russian tax treaties with Lithuania, Mexico, New Zeeland, Tajikistan and Uzbekistan.
5 Articles 35(1), 55(3) of the Constitution of the Russian Federation.
6 Convention on Mutual Administrative Assistance in Tax Matters, concluded in Strasbourg on 25 January 1988.
7 Rating of Countries on Favorable Conditions for Doing Business. Available from: http://russian.doingbusiness.org/rank-ings [Accessed 31 December 2016].
8 The State Council, Report on Measures for Developing Small and Medium-Sized Business in Russia (2015). Available from: http://www.smeforum.ru/upload/iblock/f81/f810c5d73204a810a2889cfc43d6aae9.pdf [Accessed 31 December 2016].
long time period for unblocking accounts in the case of an entrepreneur's tax debt which blocks the entrepreneur's current payments; and
the difficulties in mutual payments between entrepreneurs applying special tax regimes and enterprises applying the common tax system. In particular, taxpayers which apply the common tax system and which are VAT payers, when buying products from taxpayers that apply special tax regimes, lose the right to VAT deduction.
Under Russian law, in general, the amount of tax obligations should be estimated by taxpayers themselves1. In cases provided for by the Tax Code, the obligation to calculate the amount of tax may fall to the tax administration or tax agent. In particular, such is the cases with regard to calculating the transport tax2 and land tax3 by individuals and with regard to calculating the tax on the property of individuals4.
When a return is obligatory, the taxpayer must fill out the tax return and submit it to the tax administration5. An exception is provided when the tax agent withholds the amount of tax and then sends the respective records to the tax administration. There is no official practice under the Russian tax system in which the tax administration fills out tax returns for taxpayers (although in 2001 the State Duma discussed the establishment of an obligation of the tax administrations to provide assistance to individuals, upon request, in filling out tax returns)6.
Tax burden in general and parafiscal payments
In 2015, the Business Ombudsman submitted his annual report to the President in which he noted that the level of the tax burden in Russia is higher than in neighbouring countries7. Since 2006, the tax administration has annually published the tax burden with regard to the main types of economic activities8. Consider the following statistics:
Tax burden with regard to type of economic activity (% )9
Types of economic activities 2006 2007 2008 2009 2010 2011 2012 2013 2014
1 2 3 4 5 6 7 8 9 10
Total 11.6 14.4 13.5 12.4 9.4 9.7 9.8 9.9 9.8
Agriculture, hunting, forestry 5.5 8.7 8.0 7.4 4.2 3.6 2.9 2.9 3.4
Extraction of natural resources 45.1 54.8 46.0 30.8 30.3 33.2 35.2 35.7 38.5
Construction 11.9 15.9 14.5 16.2 11.3 12.2 13.0 12.0 12.3
Wholesale and retailing, repair of ve-0 hicles, motorbikes, household devices, products for personal usage 3.8 2.7 3.0 3.0 2.4 2.4 2.8 2.6 2.6
1 Article 52(1) of the Tax Code of the Russian Federation.
2 Article 362 of the Tax Code of the Russian Federation.
3 Article 369 of the Tax Code of the Russian Federation.
4 Articles 408-409 of the Tax Code of the Russian Federation.
5 Article 80 of the Tax Code of the Russian Federation.
6 Draft Federal Law of the Russian Federation No. 32972-3 on introducing amendments to article 206 of the Tax Code.
7 Commissioner under the President of the Russian Federation for the Protection of the Rights of Entrepreneurs (26 May 2015) Boris Titov presented his annual report to the President of Russia Vladimir Putin. Available from: http://ombudsmanbiz. ru/2015/05/boris-titov-predstavil-svoj-ezhegodnyj-doklad-prezidentu-rossii-vladimiru-putinu/ [Accessed 17 September 2016].
8 The tax burden is calculated as a correlation of the amount of taxes paid based on the data of tax administrations and the revenue of organizations based on data of the Federal State Statistics Service (known as Rosstat). See RU: Supplement 2(1) to FTS Order of the Federal Tax Service of the Russian Federation No. MM-3-06/333@ of May 30, 2007 on adopting the conception of the system of planning on-site tax audits.
9 RU: Supplement 3 to the Order of the Federal Tax Service of the Russian Federation No. MM-3-06/333@ of May 30, 2007 on adopting the conception of the system of planning on-site tax audits (the calculation is made taking into account tax revenue in respect of individuals.
The end of the tab.
1 2 3 4 5 6 7 8 9 10
Real estate operations, renting and provision of services 18.2 29.5 30.0 23.7 19.7 22.2 18.6 17.9 17.5
Other utilities, social and personal services 16.8 18.2 37.9 37.3 22.3 23.9 26.6 26.6 25.8
The total tax burden and the burden with regard to the main types of activities is not increasing on the whole. However, the opinion of the Business Ombudsman is that the share of parafiscal payments is very high in Russia.
At the eleventh All-Russia tax forum 'Tax Policy: Annual Results and Prospects' in December 2015, the president of the Russian Chamber of Commerce and Industry, S.N. Katyrin, also drew attention to the fact that:
'the total level of the tax burden on business does not include the burden which business bears in connection with the payment of so-called 'parafiscal payments'. In the last years, the transparency of the domestic tax system has increased significantly; however outside the framework of the Tax Code, there has appeared, actually, 'a parallel tax system'. It consists of several dozens of payments, similar to taxes and charges, each with its own rules of calculation, payment collection and reimbursement'1.
The head of the department of law-making activity of the Chamber of Commerce and Industry, P.E. Fadeev, gave examples of identified parafiscal payments in Russia, including: social contributions, contributions for using natural resources, contributions for the right to be connected to the electricity network, city building contributions, motor-road contributions, contributions for nature preservation and dispatcher contributions (in general, approximately 50)2.
A minimal appraisal on the basis of open sources shows that the burden of parafiscal payments which are not included by the Ministry of Finance when calculating the tax burden is not less than RUB 700 billion or 0.99 % of the GDP in 2014. In particular, under the Federal Law on the execution of the federal budget for 2014, the budget revenue from the payment of charges for utilization in 2014 was RUB 102,505 billion3. By the end of 2015, this figure (the share of parafiscal charges) could exceed 1 % of GDP, as the number of parafiscal charges has increased (e.g. charges for 12-tonne trucks, contributions for capital repairs)4.
Finally, the President approved the creation of the single cadastre of parafiscal charges, and the respective orders to the Ministry of Finance are expected in 20165.
Further steps
To decrease the tax gap, it is necessary to adopt a series of measures aimed at solving the problem at the level of domestic and foreign markets.
The 2014 Plan on 'Improving Tax Administration'6 is aimed optimizing the system of tax administration and creating an atmosphere of comfortable communication with businesses. The Plan7 provides the following directions for improving tax administration:
reduction of time and expense of entrepreneurs on tax compliance and payment of taxes;
1 Russian Chamber of Commerce & Industry (2015) Analytical Note on the Condition and Problems of Law-Making. No. 132. Available from: https://tpprf-leasing.ru/workdir/files/File/TPPRF_analit_nov-dec_2015.pdf [Accessed from 1 February 2016].
2 Fadeev, D. E. Taxes and the Business Climate in Russia. Material and presentation at the eleventh Russian Tax Forum. Available from http://nalogforum.tpprf.ru/nalog/folder1/ [Accessed 31 December 2016].
3 Ibid.
4 Ibid.
5 Putin Approved the Creation of a Register of Non-Tax Charges (29 December 2015). Vesti-Finance. Available from: http://www.vestifinance.ru/articles/65987 [Accessed from 25 May 2016].
6 Plan on Improving Tax Administration, adopted by the Decree of Government of the Russian Federation No. 162-r of February 10, 2014.
7 Ibid, sec. I (General Description).
improvement of dealings between taxpayers and tax administrations, taking into account best international practices;
harmonization of tax documentation rules and accounting rules; increased effectiveness of VAT administration;
encouraging the application of electronic documentation by taxpayers and the tax administration; improvement of administration of special tax regimes applied by certain categories of taxpayers. The effective elimination of the tax gap requires coordinated and consistent application of the above-mentioned measures, taking into account the economic situation and the actual capacity of certain categories of taxpayers with regard to paying taxes. Challenges Ahead
National roadmap: 'Improving Tax Administration'
In 2014 the Plan on 'Improving Tax Administration'1 was developed and focused, in particular, on the following tasks:
providing for expanded electronic documentation circulation between the tax administration and taxpayers;
reduction of time and material costs of the preparation and submission of tax returns to the tax administration; and
improving tax compliance in cross-border situations2.
In the course of implementing the Plan, a series of other significant measures has already been completed3.
Eurasian Economic Union
Special tax rules are provided in the Treaty on the Eurasian Economic Union4 (EAEU). Section 17 of the Treaty regulates the principles of collection of indirect taxes in cross-border situations arising in the EAEU.
It is critical that the exchange of information between the tax administrations of the EAEU Member States necessary for securing the full payment of indirect taxes, be carried out in accordance with a special international treaty that also establishes a procedure for the exchange of information, the application form on imports of goods and payment of indirect taxes, for example5.
Article 73 of the EAEU Treaty establishes the specifics of the collection of taxes on income of individuals in cross-border situations. In particular, if:
In accordance with its legislation and provisions of international treaties, a Member State is entitled to levy the income tax from a tax resident (permanent resident) of another Member State in connection with his/her employment in the first Member State, such income tax shall be levied in the first Member State starting from the first day of employment at the tax rates stipulated for such income of natural persons -tax residents (permanent residents) of the first Member State6.
One can expect further development of the specifics of tax compliance rules in the EAEU in the field of indirect taxation (the new Customs Code of the EAEU should be introduced in 2017).
1 Supra n. 107.
2 Supra n. 107, secs. 2-3 of the Report. (Report is a part of the Plan).
3 The following laws and regulations are particularly relevant: Federal Law of the Russian Federation No. 382-FZ of November 29, 2014 established the right to allow a deduction of VAT with regard to invoices received before the deadline for submitting the VAT return. Taking into account the given amendment, the invoices, also in e-form, received before the moment of submitting the tax return may be recorded in that tax period in which economic operations have been conducted.
Letter of the Ministry of Finance of the Russian Federation of July 27, 2015 No. 03-03-05/4297 permits the taking into account for tax purposes the original documents with regard to on-going services with a date later than the end of the report period (the clarification was sent in Letter of the Federal Tax Service No. GD-4-3/14815 of August 21, 2015 through the system of tax administration). It will allow the use of a uniform procedure to take into account late invoices and original documents, in particular, acts on providing services.
The Ministry of Finance clarified in Letter No. 03-03-10/43034 of August 28, 2014 that minor mistakes in original documents do not lead to a refusal to recognize the expenses. This also reduces unnecessary risks in the work of entrepreneurs.
The Ministry of Culture has defined the main rules for storing electronic documents. See RU:, Order of the Ministry of Culture of the Russian Federation No. 526 of March 31, 2015). The given procedure includes accounting and tax documents. See RU: Clarification of the Ministry of Finance of the Russian Federation No. PZ-12/2015 of September 11, 2015.
4 Signed in Astana on 29 May 2014.
5 Article 72(3) of the Treaty on the Eurasian Economic Union.
6 Article 73 of the Treaty on the Eurasian Economic Union
Territorial approach in tax administration vs. branch principle
The improvement of the procedures of tax administration is also achieved through organizing the system of tax administrations under the so-called branch principle when tax audits are conducted in respect of the taxpayers of a certain industry (area of economic activities). Thus, in 2004 the Russian authorities introduced tax administration of the major taxpayers at the federal level in interregional inspections by the tax administration, specialized under the branch principle and at the regional level - in the specialized inter-district inspections by the FTS1.
As the Constitutional Court held that the Russian government must determine the system of tax authorities and their 'specialization' taking into account certain management tasks, feasibility and cost-effectiveness2. However, it is not evident to what extent the branch principle could be applicable in cross-border situations (for example with regard to permanent establishments and controlled companies established by non-residents).
References
Alekseevskih, A. (2016) Rosfinmonitoring Refused to Create a State Register of Beneficiaries. Izvestia [News]. Available from: http://izvestia.ru/news/626520 [Accessed 9 March 2017].
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Budilin, L. S. (2015) We Will Live Now in a New Reality: Legislation on CFCs, International Exchange of Information and International Tax Planning. Zakon [Law], 2, 44-58.
Chirkov, M. O. (2012) Innovatsionnye podkhody k formirovaniyu modelei povedeniya nalogoplatel'shchikov [Innovative Approaches to the Development of Models of Taxpayer Behaviour]. Izvestiya Altaiskiy State University [Tidings of Altaiskiy State University], 2-1(74), 347-352. (In Russian).
Gemmella, N. & Hasseldine, J. (2012). The Tax Gap: A Methodological Review. Working Paper 09/2012. New Zealand, Victoria University of Wellington.
Golova, I. (5 May 2015) Ready for Exchange: Russian Banks Will Disclose Data on European Clients. Rossiyskaya Business-Gazeta, 996 (17). Available from: http://www.rg.ru/2015/05/05/fatca.html [Accessed 13 October 2015].
Milyukova, Y. (12 May 2016) Russia Has Access to Information About the Accounts of Its Citizens in 80 Countries. Toder, E. (2007) What is the Tax Gap?, Tax Analysts: Current and Quotable. Available from: urban.org [Accessed from 10 February 2014].
Pepelyaev, S. & Zaripov, V. (2013) The Rating of Tax Events of 2012: From a Practitioner Perspective. Imushchestvennye otnosheniya v Rossiiskoi Federatsii [Property Relations in the Russian Federation], 4 (139), 109-113.
Information about the author
Danil V. Vinnitskiy - doctor of juridical sciences, professor, head of the Financial law chair, director of the BRICS Law Institute, Ural State Law University (54 Kolmogorova St., Yekaterinburg, 620034, Russia; e-mail: vinnitskydv@soeka.ru).
© D.V. Vinnitskiy, 2020
Date of Paper Receipt: September 3, 2020
Date of Paper Approval: November 3, 2020
Date of Paper Acceptance for Publishing: December 1, 2020
1 Order of the Ministry of Taxes and Charges of the Russian Federation of April 16, 2004 No. SAE-3-30/290@.
2 Ruling of the Constitutional Court of the Russian Federation of January 13, 2000, case 10-0.
