THE OBJECTIVES OF INTERNATIONAL FISCAL POLICY OF BRICS COUNTRIES AS NET EXPORTERS OF CAPITAL IN THE RUSSIAN CONVENTIONS OF DOUBLE TAXATION Текст научной статьи по специальности «Экономика и бизнес»

Information for citation:

Vinnitskiy, D. V. (2020) The objectives of international fiscal policy of BRICS countries as net exporters of capital in the Russian conventions of double taxation. European and Asian Law Review. 3 (2), 29-47.

UDC 336.227

BISAC LAW086000 LAW / Taxation DOI: 10.34076/27821668_2020_3_2_29

Research Article

THE OBJECTIVES OF INTERNATIONAL FISCAL POLICY OF BRICS COUNTRIES AS NET EXPORTERS OF CAPITAL IN THE RUSSIAN CONVENTIONS OF DOUBLE TAXATION

DANIL V. VINNITSKIY

Ural State Law University ORCID: 0000-0002-8150-4109

Different fiscal interests of developed and developing countries can predispose different approaches of these countries to various issues in the sphere of cross-border taxation. All of these have been reflected in the content of the OECD Model Convention and in the text of the UN Model Convention. Nevertheless, dynamic changes in the modern world leads to situations where distinctions between developed and developing countries disappear. There are developing countries which take leading economic positions in regard to some indices and overtake developed ones. The globalization of the world economy and the specialization of certain national economies can sometimes even strengthen the existing tendencies and the initial predisposition to the disproportional development of some economic and social sectors within the framework of a certain country. The Russian Federation has gained a status of a net exporter of capital, so this makes the country to revise some of its priorities in international tax policy. The author extensively analyses the Russian international tax policy and characteristics of the Russian treaty network in regard to the regions of the world, correlation of Russian tax treaties and domestic tax law. Moreover, the author focuses on general provisions of tax treaties including double taxation and the primary domestic anti-avoidance rules.

Keywords: tax treaty, OECD, exchange of information, international tax policy, FATCA, anti-avoidance rules, international double taxation

Introduction

Discussions of income tax treaties (tax treaties) traditionally distinguish between 'developed' ('more developed') and 'developing' ('less developed') countries or, in other words, the countries exporting capital and technology and the countries which mainly import capital and technology. Under this approach, wishing to increase their budget proceeds, the former must be interested in mainly applying the residence criterion, while the latter - the source criterion or principle of territoriality.

The above-mentioned difference in the fiscal interests of developed and developing countries can predetermine different approaches of these countries to the understanding of the concept of permanent establishment, to setting the rates of withholding at source taxation on passive income (dividends, interest and royalties) and to resolving other issues in the sphere of cross-border taxation. These aspects have been reflected, in particular, in the content of the OECD Model Convention (OECD Model) and in the text

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of the UN Model Convention (UN Model) which, in turn, explains the differences existing between those two Models.

However, there are some dynamic changes in the modern world which very often lead to situations where distinct dividing lines between developed and developing countries disappear. There are countries and even groups of countries which can take leading economic positions with regard to some indices (overtaking other countries which are traditionally referred to as developed ones) and lag significantly behind with regard to others. The globalization of the world economy and the specialization of certain national economies can sometimes even strengthen the existing tendencies and the initial predisposition to the disproportional development of some economic and social sectors within the framework of a certain country. The BRICS countries can likely serve as a good example of this.

This situation makes it possible for them to act as exporters of capital and technology with regard to some groups of countries, and as importers with regard to others. This duality can be seen in the economic relations with one and the same country or group of countries (for instance, Russia can act as importer of technology with regard to certain industrial sectors and as exporter with regard to others - such as the space industry, military industry and some fields of medicine). Similar tendencies can be identified in the export and import of capital, and in other kinds of economic activities.

In this regard, the analysis of the dynamics of Russian foreign assets in 2008 (the year the global economic crisis began) as presented by the Central Bank of Russia is rather noteworthy. At the beginning of 2008, Russian foreign assets amounted to USD 1.1 trillion. Due to the crisis, they depreciated by 21 %. The foreign liabilities of Russia - which reached USD 1.24 trillion at the same time - lost 46 % of their value due to the situation on the stock market.

According to the Central Bank of Russia, on the whole, the volume of Russian foreign assets increased 4.1 times between 2000 and 2008 to more than USD 1 trillion. Before 2008, the average pace of expansion was almost 25 % per year, but liabilities increased even faster - 32 % per year on the average. (In the period from 2009 to 2013, the growth of Russian foreign assets slowed; e.g. their total volume amounted to USD 1,373.3 billion in 2013, see Table 1, below).

The difference between foreign assets and foreign liabilities decreased sharply and in 2004 became negative. However, during 2008 the value of Russian foreign assets decreased by 8.1 % (USD 89.4 billion): investments increased them by 16.6 % (USD 182.7 billion), but due to revaluation of the rouble, they lost 21 % (USD 234.3 billion); 3.4 % (USD 37.8 billion) was lost because of other changes (e.g. investments in gold, changes in the portfolio investment regime, writing down of debt). At the same time, the value of foreign investment in Russia decreased by 39 % (USD 488.8 billion) per year; the inflow was USD 92.4 billion (+7.4 %), losses because of revaluation accounted for USD 574.7 billion (46 %), and the loss of USD 6.5 billion was related to other changes.

Thus, after the crisis of 2008-2009, for USD 1 trillion of assets, Russia has USD 0.76 trillion of liabilities: the net investment position of Russia has risen to more than 15 % of GDP (from 11 % of GDP). In addition, Russia became a creditor partly due to the public sector (the private sector still has debt of USD 213 billion). Russia's biggest international investor is the public sector; the government and the Central Bank of Russia own 49.4 % of all foreign assets of the country. According to a McKinsey forecast, the foreign assets of Russia could have doubled to USD 2.2 trillion if the world economy had begun its growth in 20101. However, this forecast has not yet come true. The table, below, shows the international investment position of Russia in 2013. It indicates that foreign assets of the country still exceed its liabilities to non-residents; the net investment position of Russia, according to International Monetary Fund methodology, is equal to USD 153.5 billion, but the volume of foreign assets has not changed dramatically (USD 1,373.3 billion in 2013, in comparison with USD 1 trillion of assets in 2008/09).

Tab. 1 International investment position of Russia on 1 January 2013 (USD billion)1

Type of assets/ liabilities Foreign assets Obligations to foreigners Net assets

Direct investment 406.3 496.4 -90.1

Portfolio investments and derivative financial instruments 53.8 275.0 -221.2

Other investments 375.5 448.4 -72.9

International reserves in foreign currency 486.6 - 486.6

Monetary gold 51.0 51.0

Total 1,373.3 1,219.8 153.5

Its status as a net exporter of capital makes it possible for Russia to revise some of its priorities in international tax policy.

Materials and methods

The author used general scientific (analysis, comparison) and specific scientific (statistical analysis) methods.

Results

The results of the author's research are stated in conclusions.

Discussion

General issues

Russian tax treaties

In general, in the period of the 1990s through the early years 2000s, when most Russian tax treaties were concluded, the priorities of international tax policy were not established with sufficient clarity yet and Russia acted as a quite flexible tax treaty partner. There are only a few elements of international tax policy that Russia attempted to implement in the course of tax treaty negotiations, namely the following.

First, Russia entered into tax treaty negotiations with states having very different political and social systems (Russian tax treaty partners included Algeria, France, Germany, Iran, Israel, North Korea, Syria, the United Kingdom and the United States). Thus, non-economic factors did not have any significant effect on the content of tax treaties concluded or on the possibility itself to conclude such treaties. Initially (in the first half and the middle of the 1990s), special attention was paid to concluding tax treaties with European countries and other OECD member countries, which was connected with the general drive towards modernization of the economy and the consolidation of trade and investment relations with the developed economies of the world.

Second, taxes covered by these treaties traditionally included, on the Russian side, the tax on income of natural persons, the tax on profit of organizations2, the tax on assets of organizations and the tax on immovable property of natural persons. There are no examples of Russian treaties concerned with the collection of any other direct taxes, for instance, the unified social tax (which was abolished in 2010), the tax on land, the tax on extraction of natural resources and the tax on property transferred as inheritance

1 Official reports of the Central Bank of Russia. Available from: http://www.cbr.ru [Accessed 17 July 2020].

2 For a brief period of time in the first half of the 1990s, there were special taxes on profits of insurance and banking companies. The tax treaties concluded at that time also covered these taxes, as the legal regime governing their collection was similar to the general legal regime governing the tax on profit of organizations.

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or gift (ineffective since 2006)'. At the same time, a policy aimed at excluding double taxation in cross-border situations caused by the above-mentioned 'other direct taxes' was pursued in domestic tax law.

Third, Russian tax treaties usually followed the OECD Model, using also certain elements of the UN Model in the relations with some tax treaty partners. Regarding allocation rules, Russia sometimes applied different approaches with different countries. Thus, with regard to Western European countries (e.g. France, Germany and the Netherlands) as well as the United States, 0 % withholding rates for interest and royalties were provided for. Tax rates of 5 % to 15 % for the same cross-border situations were established in treaties with other partners. There is currently no Russian tax treaty that provides for 0 % withholding on dividends.

This exemption from withholding at source (on royalties and interest) for the residents of many developed countries, which might seem not very profitable in budgetary terms, can be explained by the fact that at that time (in the middle of the 1990s) Russia particularly needed technology and foreign capital and was ready to offer additional preferences limiting some of its tax rights. Currently, these approaches are changing in order to secure consistency in the country's tax policy2. Recently, Russia has not concluded and ratified any tax treaties providing for 0 % withholding at source on passive income such as interest and royalties (Polezharova, 2009: 39), while at the same time Russia has not attempted to renegotiate those previously concluded tax treaties that provide for such exemption.

Fourth, when establishing double taxation avoidance rules in international tax treaties, Russia prefers to apply a tax credit rather than an exemption. However, this credit is limited to the amount of the tax to be paid in Russia. This approach in tax treaties corresponds to the provisions of article 232 of the Russian Tax Code (with regard to the tax on income of natural persons), articles 275, and 311-312 of the Russian Tax Code (with regard to the tax on profits of organizations) and article 386.1 of the Russian Tax Code (with regard to the tax on assets of organizations). However, in many cases Russia does not permit the elimination of international double taxation by unilateral tax credit based solely on domestic law3 (i.e. the existence of a ratified tax treaty with the respective country may be considered as a necessary precondition for applying tax credit procedural rules). Thus, the Russian legislature takes the position that the elimination of international double taxation with regard to many categories of income is a function of tax treaties, but not of domestic law.

Fifth, Russian tax treaties usually contain special provisions devoted to the exchange of information (article 26) and mutual agreement procedures (article 25). However, there is no treaty which provides for (i) the consent of the contracting states to apply an arbitration procedure and there is only one which provides for (ii) assistance in the collection of taxes (article 27 of the OECD Model). Under chapter 8 of the Russian Tax Code, the collection of taxes is often exercised on the basis of a court decision issued beforehand, which excludes the necessity for any special procedures for assistance in the collection of taxes (as such collection can take place through procedures for the enforcement of court decisions).

Sixth, Russia had not typically included a limitation on benefits provisions in its tax treaties before 2010; however it did not refuse to sign tax treaties with such provisions if the other contracting state insisted on it (for example the United States and the United Kingdom). However, since 2010, the Russian Model Convention has obliged the Russian Ministry of Finance to include this provision in all new tax treaties that are concluded or renegotiated.

In addition, as the analysis of judicial practice shows, since 2010 Russia has sought to implement the concept of 'beneficial owner' not only in tax treaties (actually, the concept is found in nearly all Russian tax treaties), but also in its domestic statutory regulation and case law of national courts. Before that time,

1 Law of the Russian Federation of December 12, 1991 No. 2020-1 'On the Tax on Property Transferred as Inheritance or Gift' ineffective when Federal Law 78-FZ came into effect on 1 January 2006. NB: RF Law (and RSFSR Law) are names for statutes adopted by the federal parliament before the Constitution of the Russian Federation came into force in 1993; the present name for these statutes is Federal Law.

2 Model Tax Convention, adopted by the Regulation of Government of the Russian Federation No. 84 of February 24, 2010.

3 In particular, a tax credit for Russian residents may be applied with regard to any cross-border income of natural persons (article 232(1) of the Tax Code of the Russian Federation) and with regard to the cross-border income of organizations in the form of dividends from foreign companies (article 275(1) of the Tax Code of the Russian Federation) exclusively if it is provided for by the applicable international treaty.

domestic legal mechanisms of a similar legal nature (the so-called rule on 'unjustified tax benefit')1 could be applied with regard to a non-bona fide taxpayer. In 2014, several draft laws on the implementation of the concept of beneficial owner were presented to the parliament and for public discussions by business and expert communities. However, as Russia is a civil law country, it is not easy to adopt the concepts developed in common law traditions (in particular, to distinguish between the concepts of 'proprietor' and 'beneficial owner').

The above-mentioned points cannot be regarded as a fully developed doctrine of international tax policy of Russia that takes into account its roles as both an exporter and importer of capital. However, the priorities of this policy were partly specified in the 2010 Russian Model Convention, which is quite close to the OECD and UN Model Conventions and may be actually seen as a variation thereof with slight modifications (mainly regarding additional anti-avoidance measures). Future discussion of the priorities of the international tax policy (accompanied by academic research on these issues) could be coordinated between Russia and other major economies that are in a similar position with regard to relevant economic indices, such as other BRICS countries.

Russian international tax policy and characteristics of the Russian treaty network with regard to the regions of the world

In recent years, Russia has pursued quite an active international tax policy, signing 88 income tax treaties. At present, Russia has 80 tax treaties in force (including two tax treaties - those with Japan and Malaysia - concluded by the former USSR which are still applied by Russia); in addition, several tax treaties have been negotiated and signed but not ratified by the Federal Assembly2. Russian tax treaties generally follow the OECD Model Convention; however special provisions in certain Russian treaties can be found, and some Russian treaties are closer to the UN Model Convention.

The 'traditional' Russian approach to income tax treaties for 18 years was reflected in the model convention of 1992 (1992 Russian Model Convention)3. The difference between it and the OECD Model was not significant4. Now the 'new' Russian approach to tax treaties is seen in the model convention adopted in 2010 (2010 Russian Model Convention)5. The differences between it and the OECD Model are mainly connected with supplementary anti-avoidance measures implemented in the OECD Model, in particular: the limitation on benefits provision, the 'new' exchange of information clause and the provision taking into account domestic thin capitalization rules. One of the most remarkable points is that the 2010 Russian Model provides for less favorable withholding at source on dividends (10 %).

It is important that the Roadmap for the accession of Russia to the OECD Model was adopted by the OECD Council at its 1163rd session on 30 November 20076. Considering that Russia (as one of the major

1 Decision of the Supreme Commercial Court of the Russian Federation of October 12, 2006 No. 53 'On evaluating the justification of a taxpayer's tax benefit by commercial courts'. Gazette (Vestnik) of the Russian Supreme Commercial Court, 2006(12).

2 Website of the Federal Tax Service. Available from: http://www.nalog.ru/rn77/about_fts/international_cooperation/ mpa/dn [Accessed 10 September 2020]; the Russian electronic databases Consultant-Plus. Available from: www.consultant. ru [Accessed 10 September 2020]; the Russian electronic databases Garant. Available from: www.garant.ru [Accessed 10 September 2020], which include tax treaties concluded by Russia, both ratified and not.

3 Regulation of the Government of the Russian Federation of May 28, 1992 No. 352.

4 Differences between the 1992 Russian Model and the OECD Model include the following. First, there is a different sequence of certain articles. Second, article 4 of the 1992 Russian Model allowed the characterization of a building site as a permanent establishment if it lasts more than 24 months. Third, article 6 of the 1992 Russian Model used the residence criterion, but not the effective management criterion for taxation of profits received from the operation of transport in international traffic. Furthermore, article 6 covered not only ships, boats and aircraft, but also railroad and other motor transport means. Fourth, the 1992 Russian Model provided for less favorable conditions for withholding at source on dividends; in particular, the lowest rate for withholding (10 %) applied only if a company held 100 % of the capital of the company paying the dividend; otherwise the 15 % tax rate was applied. However, the influence of the 1992 Russian Model (reproduced nearly word for word in the CIS Recommendation of 15 May 1992 'on Unification of Tax Treaties') on Russian tax treaty policy was quite limited. For instance there are no Russian bilateral tax treaties that contain articles which follow the above-mentioned provisions regarding withholding at source on dividends.

5 Regulation of the Government of the Russian Federation of February 24, No. 84.

6 OECD. (2007). Roadmap for the Accession of the Russian Federation to the OECD Convention (C(2007)103/ FINAL, 3). Available from http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?doclanguage=en&cote =c%282007%29103/final [Accessed 25 May 2020].

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economies in the world) has been represented at the WTO only since 2012 (Khalevinskaya & Vavilova, 2009: 9-15), accession to the OECD had been considered a distant goal. With reference to taxation, the Roadmap stipulates the following: (i) eliminating international double taxation on income and capital through compliance with the key substantive conditions underlying the OECD Model, (ii) eliminating double taxation through ensuring the primacy of the arm's length principle, (iii) engaging in effective exchange of information and (iv) combating harmful tax practices. These tasks are actually pursued in the framework of Russian tax policy, and the effectiveness of development in this regard is vital not only for the Russian economy itself, but also for the global regime of tax transparency. Thus, the accession of Russia to the OECD could additionally stimulate the development of legal regulation of cross-border taxation in Russia and around the globe as well.

The discussion below considers the Russian tax treaty network with regard to various regions of the world.

EU Member States. Russia has tax treaties in force with 27 EU Member States. Estonia is only EU Member State with which no tax treaty is in force. The treaty with Estonia was signed on 5 November 2002, but has not yet been ratified by the Federal Assembly.

The first tax treaty with Malta was signed on 15 December 2000, but was not ratified by the Federal Assembly. On 24 April 2013, a new version of the treaty was signed which recently came into force after ratification by Federal Law 46-FZ of 2 April 2014. The ratification of the first version of the treaty with Malta was suspended by the Federal Assembly for nearly 13 years, as the Committee on International Affairs considers Malta to be a tax haven. Although the Federal Assembly is in no hurry to ratify the treaty with Malta, Russia has a tax treaty with Cyprus, a jurisdiction that is actively used for tax planning purposes. Indeed, Cyprus is one of the significant investors in the Russian economy1. Finally, Russia and Malta signed a new version of the treaty (on 24 April 2013) which corresponds to the 2010 Russian Model.

Also, there are eight treaties with European countries that are not EU Member States, namely Albania, Iceland, Norway, Switzerland and successor states of the former Yugoslavia (Croatia, Macedonia, Montenegro and Serbia)2.

Many Russian tax treaties with EU Member States have one key common feature: 0 % withholding on interest and royalties (e.g. the tax treaties with Austria, Cyprus, Denmark, Finland, France, Germany, Hungary, Ireland, Luxemburg, the Netherlands, Sweden and the United Kingdom). Under Russian treaties with Eastern European countries, taxation of interest and royalties at source is usually limited to 10 % (e.g. Albania, Croatia, Macedonia, Poland, Slovenia and former Yugoslavia3).

CIS countries. Russia has tax treaties with all but one of the Commonwealth of Independent States (CIS) countries (i.e. all except for Georgia)4. In addition, specific agreements5 on indirect taxes determining the collection of VAT and excise taxes under the so-called principle of the country of destination have been signed with all 11 CIS countries. In addition, Russia has agreements with all CIS countries on the exchange of information and on providing assistance in the collection of taxes. One aspect of the free trade area is the standardization of indirect taxes within the CIS.

In addition, Belarus, Kazakhstan and Russia are also members of the Customs Union. These countries have concluded special multilateral tax agreements devoted to the calculation of VAT and excise taxes in cross-border situations, enhanced exchange of tax information and procedures for applying residence criteria to natural persons.

Asia. Russia has quite a wide network of tax treaties with non-CIS Asian countries. In particular, there are 21 treaties in force (including the two with Japan and Malaysia which were concluded by the former

1 In 2010, the new Protocol was signed which amended the tax treaty with Cyprus (Protocol to the Russian-Cyprus Treaty, of 1 Oct. 2010, ratified 2 Apr. 2012). This Protocol contains additional anti-avoidance provisions (e.g. limiting treaty benefits with regard to capital gains derived from Russian real estate).

2 For purposes of consistency of classification, the author does not take into account here the CIS countries, although some of them are geographically situated in Europe.

3 The Russian tax treaty with former Yugoslavia of 12 October 1995 is applicable with regard to Serbia and Montenegro; Russia has concluded new tax treaties with the other former Yugoslav republics Croatia, Macedonia and Bosnia and Herzegovina.

4 Georgia has cancelled its participation in most of the CIS agreements; some of them de facto were replaced by WTO law.

5 Actually, independent tax agreements on VAT have been concluded by Russia with eight CIS countries: Armenia, Azerbaijan, Belarus, Georgia, and Kazakhstan, Kyrgyzstan, Moldova and Uzbekistan.

USSR). The network of tax treaties with Asian countries includes major players such as China, India and Indonesia, as well as other countries such as Iran, Israel, Korea, Kuwait, Lebanon, the Philippines, Qatar, Saudi Arabia, Syria, Thailand, Turkey, Singapore, Sri Lanka, and Vietnam, and even rare signatories of tax treaties such as Mongolia and North Korea1.

Two other tax treaties have been signed but not ratified yet, namely those with Laos (14 May 1999) and Oman (26 November 2001). Those treaties have languished, unratified, for more than 10 years, and it is quite possible that they will never come into force, as they deviate from the 2010 Russian Model.

Africa. The Russian tax treaty network with African countries is not wide, and includes Algeria, Botswana, Egypt, Mali, Morocco, Namibia and South Africa. Also, a treaty was concluded with Ethiopia (26 November 1999), but it has not yet been ratified. The ratification of the treaty with Ethiopia was suspended by the Federal Assembly for nearly 12 years, although there are no evident legal reasons for that. This could be because Ethiopia effectively provides unilateral measures for the elimination of double taxation with regard to the Russian investments.

North America. Russia has tax treaties with Canada and the United States. The tax treaty with the United States (17 June 1992) is one of the first tax treaties concluded by Russia after the disintegration of the Soviet Union. The tax treaties with both of these countries reflect some characteristics of their tax policy, in particular, the tax treaty with the United States is close to the US Model treaty (as regards, for example, limitation on benefits, taxation of citizens and the absence of a special article on capital gains).

Australia, New Zealand and neighboring Pacific island. Russia has tax treaties with Australia and New Zealand. In June of 2013, Russia and Fiji announced at bilateral meetings in Fiji their intention to commence negotiations for a tax treaty.

Latin America. Russia has several tax treaties in force with countries of Latin America, namely Argentina (concluded on 10 October 2001), Chile (concluded on 19 November 2004), Cuba (concluded on 14 December 2000), Mexico (concluded on 7 June 2004) and Venezuela (concluded on 22 December 2003). Although the tax treaty with Brazil (concluded on 22 November 2004) was ratified by Federal Law 300-FZ of 30 December 2008, the Ministry of Finance announced in 2014 that it is not in force2. As no explanation was provided in that announcement, one may assume that the contracting states have renounced the treaty.

Other treaties and agreements. There are some old tax agreements concluded by the former USSR which concern the taxation of operations connected with international traffic (shipping, air transport and automobile transport in case of the Netherlands and Germany). There are such tax treaties with Algeria (11 June 1988), Argentina (20 March 1979), Finland (5 May 1972), France (4 March 1970), Germany (21 February 1980), Greece (27 January 1976), Iraq (19 December 1962, Arts 9-10), Ireland (3 May 1974), Italy (16 September 1971 and 20 November 1975), Japan (31 July 1975), the Netherlands (11 November 1974), Norway (11 February 1971), Sweden (8 February 1971), Switzerland (18 January 1968) and the United Kingdom (3 May 1974). There is no information available regarding the termination of such agreements with Algeria, Argentina, Germany, Greece, Iraq, Italy, Japan, the Netherlands and Norway3. For instance, the Russian government, in Regulation 11 of 9 January 2014 on Amending the List of Countries with Regard to Which the Charge for the Use of Russian Roads was Introduced, directly mentioned the respective agreement with Germany as being effective.

One of the characteristics of Russian international tax policy is that Russia has concluded many tax agreements (including multilateral ones) on indirect taxation. However, all of these are with members of the free trade area (CIS member states) and with Russian trade partners in the Customs Union.

Finally, the development of energy supply infrastructure and the construction of new oil and gas pipelines raise questions as to the approaches to the taxation of these forms of economic activities in an international context. One possible solution could be connected to the negotiations and conclusions of special tax agreements. Good examples of such agreements include the agreement between Russia and

1 For tax planning purposes, the tax treaties with Lebanon (withholding tax rate for dividends, 10 %; interest, 5 %; royalties, 5 %), Singapore (withholding tax rate of 5 %/10 % for dividends, of 7.5 % for interest and royalties) and Qatar (withholding tax rate for dividends, 10 %; interest, 5 %; royalties, 0 %) are likely of significant interest.

2 Letter of the Ministry of Finance of the Russian Federation of February 12, 2014 No. 03-08-06/5641.

3 The others (i.e. the agreements with Finland, France, Ireland, Sweden, Switzerland and the United Kingdom) were cancelled in connection with the entry into force of the respective tax treaties.

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Turkey on supplying Russian natural gas to Turkey across the seabed of the Black Sea (15 December 1997) and the Protocol to that agreement establishing a tax regime for the activities directly connected with the constriction of the pipeline.

Russian tax treaties and domestic tax law

Russian tax system and taxes covered by tax treaties

When describing the international tax policy of a country, it is important to compare the provisions of its international tax treaties with its domestic tax law. In Russia, matters of cross-border taxation are governed by different chapters of the Russian Tax Code devoted to the tax on profits of organizations (Chapter 25, articles 246-247, 269, 284, and 306-312), the tax on income of natural persons (Chapter 23, articles 208-209, 215, 224, and 232) and the tax on assets of organizations (Chapter 30, articles 373-374, and 386.1)). These three taxes are usually the most significant in an international context, as the tax on property of natural persons1 is trivial in terms of money (the basis for its imposition is not the real market price of the property). In addition, this law does not provide for mechanisms to tax foreign property of natural persons who are Russian residents.

Old tax treaties concluded by the former USSR (which are no longer in force) also refer to a land tax and a tax on means of transport (see e.g. article 2 of the former treaty between the USSR and Spain of 1 March 1985). However, now these taxes are not relevant for modern tax treaties because under articles 257, 258(1) and 389 of the Russian Tax Code, they are levied only with regard to tax objects connected with Russian territory.

In some tax treaties (e.g. those with Algeria, Denmark and the Netherlands), specific taxes on income from natural resources are mentioned among the taxes covered by the treaty2. However, these treaties (like others) do not cover the Russian tax on extraction of natural resources (which is provided for by chapter 26 of the Russian Tax Code). Taking into account its legal and economic nature, this tax cannot be considered a tax on income or capital, as it is levied in connection with the granting of the right to use deposits of natural resources (the latter provision characterizing the tax is found in articles 335-336 of the Russian Tax Code).

Residence criterion for companies; taxation of permanent establishments

Under article 11 of the Russian Tax Code, a company is deemed to be a resident of Russia if it is incorporated under Russian law in Russian territory. The place of effective management of a company is not usually very significant for taxation in a Russian domestic context. However, the criterion of the place of effective management is used in Russian tax treaties. For instance, under article 4(3) of the Russia-Spain treaty, if a company ('a person other than an individual') 'is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated'.

Under Russian tax law, subsidiaries with foreign participation (i.e. residents of Russia) and also branches or permanent establishments (PEs) of foreign companies are subject, as a rule, to the same tax treatment as national companies (article 11(2) and article 247 of the Russian Tax Code). However, there are some differences of minor importance.

Profits of the PEs of foreign companies are taxed on the basis of the separate accounting method, although the formulary apportionment method is also allowed under some Russian tax treaties. In principle, article 306 of the Russian Tax Code (setting forth taxation rules for PEs) and the respective provisions of Russian tax treaties are in line with article 5 of the OECD Model.

Nevertheless, domestic tax law provides for some specific rules (which, of course, may be changed by an applicable tax treaty), namely:

Russian tax law does not specify any time period during which a building site is not deemed to constitute a PE. However, such a time limitation is found in all Russian tax treaties (typically a 12-month period);

it is significant that the tax base and the tax are calculated separately by each PE of a foreign company and may not be consolidated. Russian treaties contain no special rules in this regard, but under domestic rules, in exceptional cases, the tax base of PEs operating within a single production process may be calculated jointly; and

1 Law of the Russian Federation of December 9, 1991 No. 2003-1 'On Taxes on Property of Natural Persons'.

2 Namely, the Danish tax levied under the Tax Act on Hydrocarbons (Skatter i Henhold til Kulbrinteskatteloven), as well as the Dutch corporate tax levied in accordance with the Law on Extracting Natural Resources of 1810 (Mijnwet 1810) or in accordance with the Law on Extracting Natural Resources on the Continental Shelf of the Netherlands of 1965. (Mijnwet continentaal Plat 1965). The similar tax is mentioned in the tax treaty with Algeria.

typically, all income and expenses of a PE must be taken into account for tax purposes, including passive income and extraordinary expenses. Sometimes tax treaties contain specific provisions that render the tax treatment of PEs different from the tax treatment of resident companies. For instance under the Russia-Germany (article 3 of the Protocol) and Russia-Netherlands (article 25(3) of the Treaty) tax treaties, interest on loans and advertising costs may be considered as deductible expenses without any restrictions established by domestic law. One can suppose that these provisions do not allow the application of thin capitalization rules (with regard to interest) and other restrictions1. However, the judgment of the Russian Supreme Commercial Court2 supports the opposite approach.

In some cases, the provisions of Russian tax treaties are not supported by the provisions of domestic law, which is why it seems difficult to exercise the tax rights of the country in such situations, taking into account only the text of a tax treaty itself which is aimed at limiting the tax rights of both contracting states, but not at broadening them. For instance article 5(5) of the treaty between the Russia and Mexico (concluded 7 June 2004, effective from 1 January 2009)3 provides as follows:

'Notwithstanding the foregoing provisions of this Article, an insurance enterprise of a Contracting State shall, except in regard to reinsurance, be deemed to have a permanent establishment in the other Contracting State if it collects premiums in the territory of that other State or insures risks situated therein through a person other than an agent of an independent status to whom paragraph 6 applies'.

There are currently no provisions in article 306 of the Russian Tax Code which could be used as the basis for such an interpretation of the permanent establishment concept in the context of Russian domestic tax law.

There is no dividend withholding tax or any other type of tax at the level of a PE on the remittance of PE profits to a foreign head office. From this perspective, a PE is more attractive for investors than a subsidiary.

Taxation of dividends: Incentives for major investors

Under Russian tax law, there are different tax rates with regard to different kinds of dividends (article 284 of the Russian Tax Code), namely:

if dividends are distributed to non-residents: 15 %;

if dividends are distributed to residents: 9 %; and

in addition, there is 0 % tax rate for dividends that applies if the organization/receiver of dividends has held more than 50 % of the shares of the organization which pays the dividends for not less than 365 days.

Article 284(3) of the Russian Tax Code sets forth a special procedure for the confirmation of the right to apply the 0 % rate. This tax rate is not applicable if the company receives dividends from a tax haven jurisdiction. The list of such jurisdictions (a so-called black list) was approved by the Russian Ministry of Finance4 and includes 42 states and territories, including two EU Member States, namely Cyprus and Malta. Nevertheless, a 0 % tax rate is an major incentive for the establishment of corporate groups in the Russian jurisdiction.

Dividends received abroad by a Russian company are not exempted from taxation in Russia. A tax credit may be allowed only if it is provided for under the relevant tax treaty (article 275(1) of the Russian Tax Code). However, all Russian tax treaties contain provisions granting a tax credit for cross-border dividends.

Russian tax law also establishes, as a rule, the taxation of the net amount of dividends (i.e. dividends to be paid less dividends previously received by the distributing company); if dividends are paid to a non-resident the tax is to be levied on the gross amount of dividends (articles 275(2) and (3) of the Russian Tax Code). However, some tax treaties allow the application of elements of imputation systems that exist in the foreign jurisdiction (e.g. article 23(1)(b) of the Russia-Spain tax treaty).

1 Decision of the Federal Commercial Court of the West Siberian District of November 4, 2002 No. F04/4084-377/ A81-2002 (concerning interest); Decision of the Federal Commercial Court of the Moscow District of February 2, 2006 No. KA-A40/14211-05 (on January 30, 2006 the judgment without justification was announced) (concerning advertising expenses).

2 Decision of the Supreme Commercial Court of November 15, 2011, case No. 8654/11.

3 IBFD. Your Portal to Cross-Border Tax Expertise. Available from: www.ibfd.org [Accessed 12 August 2020].

4 Decree of the Ministry of Finance of the Russian Federation of November 13, 2007 No. 108n.

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Evidently, Russian tax treaties can change the domestic system of taxation of cross-border dividends also in some other regards. As a rule, tax treaties concluded by Russia limit withholding on dividends to 5 %, 10 % or 15 %. Russia currently does not have any tax treaties that provide for 0 % withholding1.

In November 2013, the new regulation on the taxation of dividends was introduced and is aimed at restricting abusive practices in cross-border situations. It became effective on 1 January 2014 and affects the payment of dividends to depositary receipt holders by Russian issuers (articles 2(8) and 3(3) of Federal Law 282-FZ; article 275 of the Russian Tax Code). Federal Law 282-FZ sets new rules regarding the dates of dividend announcement, record and payment. The Russian Tax Code (article 275) now requires disclosure of beneficial owner information in order to avoid a 30 % non-disclosure withholding tax rate. Both federal laws apply to only those dividend payments that are approved at shareholders' meetings with record dates in 2014 or thereafter. Thus, from 1 January 2014, the amount of tax that will be withheld from a beneficial owner is dependent upon compliance with requirements regarding disclosure of beneficial owner information.

Taxation of interest

Under Russian domestic law (article 310 of the Russian Tax Code), the gross amount of interest that is paid by a Russian company directly to a foreign company (which does not have a PE in Russia) is subject to 20 % withholding. However, many tax treaties reduce the effective tax rate (not more than 10 %, but even 5 % or 0 % in some cases).

Some opportunities for tax planning arise due to the provisions of the tax treaties with France, Germany, the United Kingdom and the United States concerning rules against restrictions on interest deductions. As mentioned, such articles were interpreted (before changing the case law from 15 November 2011)2 as prohibiting the application of thin capitalization rules3.

Taxation of royalties in cross-border situations

According to statistics, the total amount of royalties paid to foreign organizations in the 7 years from 1999 to 2006 increased 250 times (to USD 2 billion in 2006, from USD 8 million) (Kizimov, 2007). On 1 January 2008, a new part of the Russian Civil Code devoted to copyright and intellectual property was adopted. This new law (which provides for detailed regulation of intellectual property in accordance with international standards) has additionally stimulated the use of royalties as an instrument of international tax planning. The use of royalty schemes as an instrument of international tax planning in cross-border situations involving Russia has been fuelled by the fact that approximately 30 Russian tax treaties provide for 0 % withholding at source on royalties.

From a practical perspective, when using royalty schemes as an instrument for tax planning in Russia, it is crucial to take into account the general rules concerning the deductibility of expenses (i.e. article 252 of the Russian Tax Code). Such expenses must have economic justifications and may not be initiated only for tax benefit considerations (business purpose test)4. The number of disputes before Russian courts connected with the above-mentioned problems is increasing dramatically.

Methods for avoiding double taxation

Russian tax law does not provide for the exemption from taxation of foreign profits and assets of a company. Under the general rule, the tax credit method should be applicable (i.e. article 311 of the Russian Tax Code for the tax on profits of organizations; article 386.1 of the Russian Tax Code for the tax on assets of organizations).

A tax credit may be allowed for the full amount of tax due to be paid with regard to the respective tax object. It is necessary to submit a confirmation of taxes paid abroad. Thus, under article 311(3) of the Russian Tax Code, offsetting of foreign tax on profit (income) is possible provided that documentation is presented to prove the payment of a foreign tax, as follows:

if a foreign tax was paid directly by the taxpayer, the respective foreign tax authority must confirm this information; and

1 In the author's opinion, the only exception is in article 4 of the draft tax treaty with the United Arab Emirates; Ruling of the Government of the Russian Federation of February 7, 2011 No. 161-r. The treaty was ratified by Federal Law 107-FZ of 7 June 2013.

2 Decision of the Supreme Commercial Court of November 15, 2011, case No. 8654/11.

3 On the contrary, in accordance with article 7 of the Protocol to the Russia-Spain tax treaty, article 25 of the tax treaty ('Non-discrimination') has never been regarded as an obstacle to applying thin capitalization rules.

4 Decision of the Supreme Commercial Court of the Russian Federation of October 12, 2006, case No. 53.

if a foreign tax was withheld in a foreign state, confirmation from the tax agent (i.e. the withholding company) is required.

Certain problems of a technical nature can sometimes arise when a taxpayer is not able to obtain a certified document in another jurisdiction which will be accepted by the Russian tax authorities due to the absence of a certification procedure in that foreign jurisdiction. This type of problem should not become an obstacle to the avoidance of double taxation. Indeed, case law shows that taxpayers have sometimes successfully challenge a refusal by a tax authority to offset foreign taxes on the basis of exclusively formal reasons1.

For foreign companies carrying out active or passive economic activities in Russia, the application of a tax treaty requires, under Russian tax law, the confirmation of status as a resident in the respective state. Regarding the tax on profits of organizations, this procedure is governed by article 312(1) of the Russian Tax Code, which states:

'In order to apply a tax treaty concluded by the Russian Federation, a foreign company shall present to the tax agent (e.g. resident company) paying a profit, a confirmation concerning the residence status in the respective state. The document on residence status shall be certified by the competent authority of that foreign state. Moreover, the document (certificate of residence) shall be translated into Russian'.

A certificate of residence may be submitted before the payment of taxes in Russia (in which case the amount of tax must be calculated by taking into account the provisions of the tax treaty) or after the payment (in which case the excess tax must be refunded). To seek a refund, the following documents are required:

application for a refund using the established form;

certificate of residence;

a copy of the treaty (or other document) on the basis of which the profit (income) was received;

a copy of the documents confirming a tax payment that must be refunded.

The list of required documents is exclusive (i.e. no other documents may be demanded). The documents must be submitted to a tax authority where the withholding company was incorporated. The statute of limitations for submitting the above-mentioned documents is 3 years.

However, case law reveals that Russian courts do not regard these procedural rules as a strict requirement for the refunding of tax; other types of documents are also accepted as proof of the right of a taxpayer to obtain a tax refund2.

Many disputes concern the issue as to whether it is necessary for a taxpayer to confirm the taxpayer's residence every year. The Russian Ministry of Finance 'chose' an affirmative answer to this question3. However, courts typically have not supported that approach to the issue4. In general, case law - which is quite positive for the taxpayer - was developed with regard to the validity of the certificate of residence. Courts have normally rejected assertions by a tax authority that the confirmation must refer to the time period during which the income (profit) is paid to a foreign organization, as the law provides that the confirmation must be submitted by a foreign organization 'before the date of income payment', but not 'in every tax period'. Many cases have affirmed this approach5.

Finally, some Russian tax treaties provide for a tax sparing credit, such as the Russia-Cyprus treaty. Under that article 23(3) of that treaty, a tax sparing credit may be allowed for 'the tax which would have been payable but for any provisions concerning tax reduction, exemption, or other tax incentives, enacted by Russia for the purpose of encouragement of the economic development'.

1 Decision of the Federal Commercial Court of the Western-Siberian District of October 23, 2006 No. F04-6935/ 2006(27577-A81-37).

2 Ibid.

3 Letter of the Ministry of Finance of the Russian Federation of May 16, 2008 No. 03-08-05, Letter of the Ministry of Finance of the Russian Federation of August 21, 2008 No. 03-08-05/1.

4 One exception is the Federal Commercial Court of the North-Caucasus District. Federal Commercial Court of the North-Caucasus District, Case F08-2574/2006-1074A (number of the case in the third instance) /A32-28988/2005-48/341 (number of the case in the first instance), 13 June 2006 (holding that information concerning the valid tax period must be indicated in the certificate of residence).

5 Federal Commercial Court of the North-Western District (March 12, 2008), case No. A56-2997/2007 (the law does not limit the effective time period of the certificate of residence); RU: Federal Commercial Court of the North-Western District (June 25, 2008), case No. A56-37381/2007 (current tax law does not provide for the annual confirmation of residence of a foreign organization).

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Exchange of information: Basic information

All Russian tax treaties contain provisions on the exchange of information. However, there is no special procedure established for that purpose under domestic law. Only article 102 of the Russian Tax Code mentions that the tax secrecy regime for information collected by the tax authorities is not an obstacle to the exchange of information under an applicable tax treaty. Article 102(1)(4) provides that such information must be excluded from the domestic tax secrecy regime.

On 3 November 2011, Russia signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters1. Thus, according to the information announced on the Exchange of Tax Information Portal of the Global Forum on Fiscal Transparency, Russia has exchange of information relationships with 114 jurisdictions through 89 tax treaties, no TIEAs and one multilateral mechanism, the Convention on Mutual Administrative Assistance in Tax Matters. However, perhaps this statistics does not take into account that some of the tax treaties and multilateral conventions have not been ratified.

Preferential regimes

Additional opportunities for foreign investors appeared in the context of the new Russian legislation on special economic areas. For instance, under article 284(1) of the Russian Tax Code, the corporate tax rate for residents of special economic areas may be reduced to 13.5 % (from the general tax rate of 20 %).

Federal Laws on the Skolkovo Innovation Centre2 and on Introducing Amendments to Certain Legislative Acts of the Russian Federation in Connection with the Adoption of the Federation Law on the Skolkovo Innovation Centre3 also provide many opportunities for investors. In particular, one significant tax incentives is a 10-year exemption from corporate profit tax granted to project participants. This incentive terminates once the annual amount of income derived from selling goods or services exceeds RUB 1 billion (i.e. approximately USD 33 million) within a tax period. Project participants with annual profits not exceeding RUB 1 billion are relieved from the obligation to maintain accounting records.

However, investments in the framework of applying special economic area legislation (including Skolkovo) and preferential tax regimes are not supported by most existing tax treaties, i.e. Russian tax treaties typically do not provide for a tax sparing credit.

Russian tax treaties and the primary domestic anti-avoidance rules

1. Transfer pricing rules. Until 1 January 2012, articles 20 and 40 of the Russian Tax Code provided for the most significant transfer pricing rules. Under these articles, transfer pricing rules are applicable only if the prices in question deviate from market prices by 20 % (article 269(1) of the Russian Tax Code with regard to interest). However, these rules have never been reproduced in the respective articles of any Russian tax treaty. Indeed, Russian treaties typically contain the standard wording of article 9 of the OECD Model. It could be assumed that the tax authorities did not have the right to apply tax treaty rules that are less favorable for taxpayers. Many scholars have justified that a tax treaty may limit tax jurisdiction, but the tax treaty itself cannot be the basis for additional restrictive measures against taxpayers4.

In particular, Klaus Vogel characterized the above-mentioned issue in the following words: 'it is disputable whether treaty law or, for systematic reasons, domestic law should first be examined'. He argued that a treaty acts like a stencil which is placed over the pattern of domestic law and covers certain parts (Vogel, 1997: 33-34). Michael Lang prefers to explain the nature of the issue as a manifestation of 'the limiting effect' of tax treaties. Simply speaking, '[...] in [tax treaties] the contracting states mutually agree to limit their taxing rights. Thus, [tax treaties] affect the legal systems of both contracting states. In both states, domestic tax law is restricted' (Lang, 2010: 31-33).

Meanwhile, several decisions of Russian courts contradict the academic approach to the issue5. In the framework of the specific case, in particular, the Federal Commercial Court of the North-West District in

1 This Convention was developed jointly by the Council of Europe and the OECD, and became available to be signed by the Member States of both organizations on 25 January 1988.

2 The strategic goal of the Skolkovo Innovation Centre is to concentrate international intellectual capital, thereby stimulating the development of innovative projects and technology. In the course of implementing the project, companies engaged in innovative development are discovered. After a selection process, some of these will become project participants of the Centre. For detail, see http://rustradeusa.org/eng/256/366.

3 Federal Law of the Russian Federation of September 28, 2010 No. 244-FZ; Federal Law of September 28, 2010 No. 243-FZ.

4 Not all Russian tax treaties provide for synchronized appropriate adjustments in both jurisdictions when applying transfer pricing rules. In particular, there is no such guarantee for taxpayers in the Russian tax treaties with Belgium or Germany. This could result in double taxation in some cross-border situations.

5 Federal Commercial Court of the North-West District (September 18, 2013), case No. A52-4072/2012.

fact concluded that the Russian right to tax was not merely permitted by the applicable treaty, but actually arose from it1. In the present author's opinion, that conclusion seems very significant in light of its possible consequences, but is more than questionable, as it contradicts the traditional understanding of the main function of a tax treaty, namely the avoidance of double taxation and the prevention of fiscal evasion with regard to taxes on income and capital. In addition, article 9 of the discussed treaty (which reproduces article 9 of the OECD Model) permits adjustments to the taxable income of associated enterprises where conditions are made or imposed between two companies in their commercial or financial relations which differ from those which would be made between independent companies. However, the adjustment in question should be prescribed in the domestic law of the contracting state in which the adjustment is made - otherwise there has been no avoidance of tax (Vinnitskiy, 2015).

Since 1 January 2012, Russia has applied the standard OECD approach in the sphere of transfer pricing issues. The respective rules were included in chapters 14.1-14.6 of the Russian Tax Code. However, the above-mentioned 'old' rules are still in force and should be applicable with regard to interest (article 269(1) of the Russian Tax Code).

2.'Beneficial owner' and 'treaty shopping'. To date, Russian tax law does not contain general definitions of anti-avoidance concepts such as 'beneficial owner' or 'treaty shopping', although in March and May of 2014, several draft legislative acts were submitted to the government and to the Federal Assembly. However, the concept of beneficial owner can be found nearly in all Russian tax treaties. In particular, the concept of beneficial owner is used in most Russian tax treaties with regard to dividends, interest and royalties. The November 2013 amendments to article 275 of the Russian Tax Code should provide additional grounds for applying the concept with regard to withholding at source on cross-border dividends (see section 5.3.3.).

Provisions concerning treaty shopping (limitation on benefits) are found only in some Russian tax treaties, for example those with the United States and the United Kingdom. A similar provision against treaty shopping was included in article V of the Protocol to the Russia-Spain tax treaty.

One should bear in mind that the Russian judicial doctrine of 'justification of tax benefits' (which is similar to the business purpose test), which was developed for domestic situations, could also be used against 'treaty shopping'2 if there is no specific regulation otherwise applicable.

International tax policy and the way ahead

During the last 3 years, the most significant developments in Russian international tax policy were connected with exchange of information. The analysis of the system of Russian tax treaties (as mentioned) shows that among them there are tax treaties which follow the OECD Model (e.g. with Western European countries) or the UN Model (e.g. with Azerbaijan, Lebanon and Vietnam). The content of the treaty provisions on the exchange of information is greatly determined, first, by the date of conclusion of the treaty. Thus, only those treaties concluded on the basis of the 2005 or 2008 versions of the OECD Model include a rule on information held by a bank or another financial institution (article 26(5)). In addition, the treaties concluded based on the new OECD Model contain an additional provision that 'the other Contracting State shall use its information gathering measures to obtain the requested information, even though the other State may not need such information for its own tax purposes[...]' (article 26(4)).

Among Russian tax treaties, that with Switzerland stands out as it was the only one which did not have a provision on the exchange of information (before the signing of the above-mentioned Protocol of 25 September 2011). The most basic version of the article on the exchange of information (consisting of only one paragraph) is found in the treaty with the Netherlands (article 27), but nevertheless its terms render the effective exchange of information possible (and not only with regard to the taxes covered by the treaty), which has been confirmed by case law (Nagornaya, 2007).

Most Russian tax treaties include an article concerning exchange of information which consists solely of two paragraphs. As a rule, in these treaties the article follows article 26 of the 1977 OECD Model. Therefore, the rules on the exchange of information in these treaties concern only taxes covered by the treaty and not taxes of every kind. Furthermore, in these cases the treaties provide that requested information must be 'necessary' and not merely 'foreseeably relevant' (as provided for in the later treaties).

1 The question raised before the Court was connected with the correlation of article 269(2) of the Russian Tax Code (i.e. domestic thin capitalization rules) and article 9 of the applicable tax treaty (i.e. the associated enterprise rules).

2 Ruling of the Supreme Commercial Court of the Russian Federation of October 12, 2006 No. 53.

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At present, only several tax treaties follow the latest OECD Model regarding the exchange of information article. In all cases, these are treaties in which the version of article 26 was specifically changed by a separately signed protocol1. It is significant that the protocols provide an obligation to furnish the information even if there is no domestic interest in the information in the requested state (article 26(4) of the OECD Model), and also include a provision on bank or other financial institution information (article 26(5) of the OECD Model).

The treaties with Denmark (8 February 1996) and Slovakia (24 June 1994) can be singled out as a separate group, although they were concluded quite a long time ago in comparison with other Russian treaties, and no protocols have been signed regarding the exchange of information. They do, however, contain special clauses that were partly similar to article 26(4) of the OECD Model2. A similar provision in this sense (but not coinciding in its wording with the OECD Model) is found also in article 26(3) of the tax treaty with Algeria3.

As a rule, existing Russian tax treaties never include provisions on the automatic or spontaneous exchange of information. However, there are several exceptions to this rule. For instance, the following provision on automatic exchange of information in the tax treaty with India is noteworthy: 'The exchange of information or documents shall be either on a routine basis or on request with reference to particular cases or both. The competent authorities of the Contracting States shall agree from time to time on the list of the information or documents which shall be furnished on a routine basis' (article 26(2)). In addition, article 25(4) of the treaty with Mexico contains a spontaneous exchange of information provision.

Also significant are tax treaties with Canada (5 October 1995), Denmark (8 February 1996) Mexico (7 June 2004), Slovakia (24 June 1994) Sweden (15 June 1993) and the United States (17 June 1992). Under these treaties, the relevant article provides that, upon request, the competent authority of a contracting state must provide information in the form of deposition of witnesses and/or authenticated copies of original documents. These treaty provisions may be important, in particular, for Russia, taking into account the requirements of domestic law regarding evidence submitted to the commercial courts, as well as to the courts of general jurisdiction (e.g. in the framework of criminal proceedings).

An example of the existing problem is seen in the dispute between the Inspectorate of the Federal Tax Service in the city of Petropavlovsk-Kamchatskiy and Akros, a fishing company4. In justifying a decision which entailed the additional payment of profit tax, the tax authorities used information about the relations of Akros with Norwegian residents which came from the Norwegian tax authorities. However, on the basis of articles 75 and 255 of the Russian Code of Commercial Procedure, the courts characterized this evidence as inadmissible. According to the facts of the case, 'the Russian tax authorities received from Norway official information on the results of the conducted inspections prepared by the tax authorities of Norway, and copies of documents supposedly made by the Russian taxpayer concerning the supplies of fish produce to Norwegian residents in 2000-2001 and the payments for this produce, certified by the officials of the tax authority of Norway'. However, these documents were presented without consular legalization and/

1 Protocol to Russia-Cyprus Income and Capital Tax Treaty (1 Oct. 2010); Protocol to Russia-Luxembourg Income and Capital Tax Treaty (November 21, 2011); Protocol to Russia-Switzerland Income and Capital Tax Treaty (September 25, 2011); Protocol to Russia-Czech Republic Income and Capital Tax Treaty (April 27, 2007); Protocol to Russia-Italy Income and Capital Tax Treaty (June 13, 2009); Protocol to Russia-Germany Income and Capital Tax Treaty (October 15, 2007); Protocol to Russia-Armenia Income and Capital Tax Treaty (October 24, 2011), Treaties IBFD.

2 See e.g. article 26(3) Convention between the Government of the Russian Federation and the Government of the Kingdom of Denmark for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Regard to Taxes on Income and on Capital (Moscow, November 8, 1996), Treaties IBFD: 'If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall endeavor to obtain the information to which the request relates in the same way as if its own taxation was involved notwithstanding the fact that the other State does not, at that time, need such information. If specifically requested by the competent authority of Contracting State, the competent authority of the other Contracting State may provide information under this Article in the form requested, such as depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts or writings), to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes' (emphasis added).

3 Article 26(3) Russia-Algeria Income and Capital Tax Treaty, Treaties IBFD ('If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall endeavor to obtain the information to which the request relates in the same way as if its own taxation was involved notwithstanding the fact that the other State does not, at that time, need such information'.).

4 Supreme Commercial Court (January 18, 2008), case No. 14556/07.

or apostil which the Court held violates the Hague Convention of 5 October 19611. The Russian Supreme Commercial Court held that article 26 of the tax treaty between Russia and Norway (26 March 1996) may not be considered the reason to ignore the requirement to certify the authenticity of the signature of an official who signed the document, the seal or the stamp.

The final conclusion of the Russian Supreme Commercial Court was also quite remarkable. The Court held that:

'the above-mentioned article on the exchange of information between the competent authorities of the states concerns the fulfillment of the provisions of the given Convention on the taxation of the residents of one state in the other one. In this case, the tax authorities of Norway conducted the inspection of the Norwegian residents at the request of the Russian Federal Tax Service. This inspection was not connected with resolving the issues which are necessary for applying the provisions of the Convention of 26 March 19962'.

This reasoning is quite debatable, as in the framework of the case the Court de facto refused to accept the arguments of the Russian tax authorities that the taxpayer (a Russian resident) did not show in its tax returns certain income from Norwegian sources. And the justification of the Court's decision was entirely based on the conclusion that the tax treaty did not grant to the Norwegian tax authorities the right to submit to a Russian court the respective evidence concerning hidden income of a Russian resident. At the same time, it was explicitly established in the course of the trial that the Norwegian tax authorities acted in accordance with the request of the competent Russian tax authorities. Thus, it seems that the Court did not provide, in this specific example, the necessary explanation of what constitutes an obstacle to the acceptance of the information submitted by the Norwegian tax authorities in accordance with article 26 of the Russia-Norway tax treaty.

However, the case discussed above is merely an example of some deviations in judicial approaches to interpretation of exchange of information clauses. It could not be viewed as an official recommendation for the further development of case law. On the contrary, there are a number of positive examples of the application of an exchange of information clause by lower Russian commercial courts3.

An analysis of the Russian tax treaty network would not be complete were it not to take into account the special bilateral agreements on the exchange of information relevant for taxation that were concluded by Russia with a number of states (first, these are member states of the CIS and other former Soviet republics). These agreements follow their own model; indeed the TIEA Model4 was not used in this case. Also, there are several multilateral agreements concluded in the framework of the CIS which provide for the exchange of tax information. In general, these agreements (bilateral and multilateral) fully support the effective exchange of information between the contracting states. Especially noteworthy in this regard is such an agreement with Georgia (of 9 December 1997), as the 'standard' income tax treaty (4 August 1999) containing article 26 has still not been ratified by the parties.

The following countries have effective agreements of this kind with Russia: Armenia, Azerbaijan, Belarus, Bulgaria, Cuba, Georgia, Greece, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Tajikistan, Turkmenistan, Ukraine and Uzbekistan.5 In addition, there are two significant regional multilateral agreements on this topic (in the framework of regional economic integration), to which Russia is a party:

1 Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (1961). Available from http:// www.hcch.net/upload/conventions/txt12en.pdf [Accessed: 10 April 2020].

2 Supreme Commercial Court (January 18, 2008), case No. 14556/07.

3 In particular, many positive (for the tax authorities) examples are connected with the application of article 269 (2) of the Russian Tax Code (thin capitalization rules). In order to justify their position and to apply article 9 of the respective tax treaty (on adjustment of income), the tax authorities quite often invoke the information and documents submitted by foreign tax authorities.

4 OECD. (2002). Model Agreement on Exchange of Information on Tax Matters. Models IBFD. The OECD. Retrieved from http://www.oecd.org/ctp/exchangeofinformation/taxinformationexchangeagreementstieas.htm

5 See Russia-Azerbaijan Agreements (January 9, 2001 and January, 25 2002); Russia-Georgia Agreements (December 9, 1997 and July 1, 1994); Russia-Kyrgyzstan Agreement (August 26, 1999); Russia - Armenia Agreements (April 25, 1996 and March, 21 1994); Russia - Belarus Agreement (July 28, 1995); Russia - Kazakhstan Agreements (September 30, 1998 and July 6, 1998); Russia - Moldova Agreements (October 8, 1996) (two agreements were concluded on the same date, regarding (i) cooperation and exchange of information and (ii) cooperation and mutual assistance); Russia - Tajikistan Agreements (April 23, 1996 and January 14, 1998); Russia - Uzbekistan Agreements (November 11, 1993 and 25 Apr. 1995); Russia - Turkmenistan Agreement (Jan. 21, 2002); Russia - Ukraine Agreements (May 28, 1997 and January 19, 1999); Russia - Bulgaria Agreement (March 2, 2003); Russia - Cuba Agreement (January 21, 2004); Russia - Mongolia Agreement (May 18, 2001); Russia - Greece Agreement (October 12, 2000).

the agreement between the tax authorities of Belarus, Kazakhstan, Kyrgyzstan, Russia and Tajikistan on mutual cooperation (Minsk, 30 September 1998);

the agreement between the tax authorities of Belarus, Kazakhstan, Kyrgyzstan and Russia on mutual assistance (Bishkek, 25 March 1998).

There are also multilateral agreements that involve the exchange of information within the framework of the Customs Union of the Belarus, Kazakhstan and Russia, but they are mainly relevant for cross-border indirect taxation within the Customs Union. Moreover, the practice of direct exchange of tax information between regional tax authorities of the member states of the Customs Union is quite common. This exchange of information can sometimes be quite informal and concerns both direct and indirect taxes.

Professional databases1 also contain information on 'technical' agreements between tax authorities on administrative support and exchange of tax information. While the practice of concluding such agreements was developed by the former Department of International Cooperation and Exchange of Information of the Russian Ministry of Taxes and Duties (now the Federal Tax Service of Russia)2, approximately 10 years ago the policy of pursuing such agreements was ceased. Nevertheless, several such agreements have been concluded, namely with: Denmark (21 January 2002), France (28 January 2004), Norway (22 September 2004), Poland (26 April 2004) and Sweden (18 September 2000). Currently, there has been no indication that any evidence received by the Russian tax authorities under these agreements has ever been presented in court proceedings.

A significant recent event in the area under discussion concerns Russia's joining, on 3 November 2011, of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters; however this instrument has not yet been ratified by Russia3. The importance of the changes for the Russian legal system lies in the fact that after ratification of the Convention, additional forms of gathering tax information, including automatic and spontaneous exchange of information, will be available.

On the whole, this general analysis speaks of the consistency in the Russian policy aimed at widening its participation in the international exchange of tax information. Among the arguments in favour of this conclusion is the 2010 Russian Model Convention, which forms the basis for negotiations regarding new bilateral tax treaties, as well as protocols to existing ones. This Model follows the 2010 version of the OECD Model with regard to the wording of article 26 on exchange of information. The 1992 Russian Model was mainly in line with the 1977 version of the OECD Model.

The existence of this Model and of the above-mentioned bilateral and multilateral tax treaties is quite essential for effective participation by Russia in the international exchange of information, as its domestic law contains strict limitations (mentioned above) on providing personal information, including tax information, in cross-border situations (see section 5.3.7)4. But it remains significant even in the case of the special international agreement on the exchange of tax information that the state receiving the information from the Russian authorities is able to secure its proper protection5.

The analysis of the available sources concerning the actual operation of the mechanisms of exchange of information shows that the situation here can vary. With some states, there is actually no exchange of tax information at all, while with others, such exchange already exists and is quite active. For instance, the secretariat of the Inter-Parliamentary Assembly of the Eurasian Economic Community (EurAsEC) provides information on the number of requests for tax information received by Russian tax authorities:

1 There is no information regarding the official publication of these agreements in Consultant-Plus. Available from: www. consultant.ru [Accessed: 15 September 2020].

2 The status of the tax administration was changed in 2004. Regulation of the Government of the Russian Federation of September 30, 2004 No. 506.

3 Available from: http://conventions.coe.int/Treaty/Commun/ChercheSig.asp?NT=127&CM=1&DF=&CL=ENG [Accessed 9 November 2020]. On 5 June 2014, it was announced that the Russian government submitted to the Federal Assembly the law on the ratification of the convention; Rossiyskaya Gazeta. (2014) The Russian Federation has the opportunity to return uncollected taxes around the world. Available from: http://www.rg.ru/2014/06/05/dolgi-site.html [Accessed 15 November 2020].

4 Federal Law of the Russian Federation of July 27, 2006 No. 152-FZ 'On Personal Data'.

5 Ibid, article 12.

Tab. 2 Tax information requests received by Russian tax authorities

Year Requests received Including those from tax authorities of EurAsEC member states

2008 460 96

2009 286 72

2010 252 57

2011 (through 19.05.2011) 128 19

2012-2014 No official statics No official statics

As for Belarus and Kazakhstan, as mentioned, a practice of exchange of information at the level of regional tax authorities has developed. According to some estimates, the number of requests from Belarus in this format reached approximately 10,000 per year in 2009 and 2010; from Kazakhstan the number was much lower (only up to 40 requests)1.

Although any information received by the tax authorities is confidential, this does not cover information that should be disclosed within the framework ofjudicial proceedings (e.g. in the text ofjudicial decisions on tax disputes). This has become especially evident with the development of electronic databases that include the text of all the decisions rendered by courts and all other relevant documents in judicial proceedings.

At present, such a system has been established in the commercial courts and is working successfully. In the courts of general jurisdiction, it is working only partially. Indeed, a certain number of judgments can be found on the websites of the Russian Supreme Court and regional courts of general jurisdiction. In addition, professional legal databases include some decisions of courts of general jurisdiction, specifically rulings and judgments of the Russian Supreme Court, reviews of regional case law and - exceptionally -some other judgments of lower courts.

An analysis of the court judgments published (in e-databases or paper form) shows that, as a rule, the case law of the commercial courts always allows the identification of the taxpayer with regard to whom the court judgment was rendered. The case law of the courts of general jurisdiction is not homogeneous: sometimes only the surname and the initials may be mentioned in the text of the judgment (with no home address); in other cases in the full name is specified; and, in many cases, the personal data is removed from the text of judgment and is replaced by an enciphered name (e.g. Mr N or Ms A). The case law of the courts of general jurisdiction may also vary with regard to revealing the location of the taxpayer's property and the list of such property, the amount of tax paid, income received and so on2.

The tax authorities are, as a rule, very careful about revealing certain information on taxpayers. In particular, they do not typically publish their administrative decisions. However, there are some exceptions to this approach, although it is quite difficult to establish the criteria according to which certain information was selected for publication.

Consider the following examples that illustrate the situation which tends to arise. The tax administration in Murmansk Oblast has published a list of debtors with regard to the transport tax of individuals in the town of Apatity3, and the administration of the city of Petropavlovsk-Komchatskiy has published a list of major taxpayers of the city4, obviously received previously from the tax authorities. Currently, there

1 As there are no exact statistics on the matter, experts offer rough estimates of the number of processed requests at the regional level.

2 Courts of Sverdlovsk Oblast, case No. 2-404: Judgment of September 14, 2010 held by the Asbestovskiy town court, available from http://actoscope.com/yfo/sverdobl/asbestovsky-svd/gr/17reshenie-ot-1409201025102010-117325; case No. 2-60/2011: Judgment of January 24, 2011 held by the Tagilstroyevskiy district court in the town of Nizhniy Tagil, available from: http://actoscope.com/yfo/sverdobl/tagilstroevsky-svd/gr/1/reshenie-ot-24012011-o-vziskanii-nal22022011-1250874; St. Petersburg City Court, case No. 33-5097: Judgment of April 11, 2011, available from http://www. gcourts.ru/case/1023801; case No. 9676: Judgment of June 28, 2011, available from: http://www.gcourts.ru/case/1154354 [Accessed 20 November 2020].

3 Available from: http://www.r51.nalog.ru/umns/re/51_nedoimka_51/3821794 [Accessed 27 November 2020].

4 Available from: http://pkgo.ru/nalogoplat.html [Accessed 27 November 2020].

EUROPEAN AND ASIAN LAW REVIEW

is no information indicating that any of the taxpayers whose information was revealed in such a way objected to it or turned to the courts for the protection of their privacy.

For a long time, the issue of access to taxpayer data by individuals was not considered by legal scholars or in practice as having any practical significance. Usually, especially in the 1990s, there were simply incidents when some representatives of creditors (who were not quite informed about the provisions of current Russian law) approached the tax authorities with requests concerning the financial situation of their debtor. As a rule, the tax authority refused to provide any information, referring to the confidentiality covering any taxpayer information.

In recent years, due to the common practice of holding public tenders for supplying certain goods or services, the organizers of such tenders found it necessary to have some information on the candidates for participation in the tender, at least with regard to whether they had any problems with the tax authorities. So the traditional refusals of the tax authorities to provide any information on taxpayers began to be challenged. This specifically concerned the necessity of providing information on whether the taxpayer has fulfilled its current tax obligations, whether the taxpayer has any arrears and whether any tax sanctions are to be applied with regard to the taxpayer in question. The courts sided with the proponents of transparency in this sphere, especially taking into account the fact that article 102 of the Russian Tax Code does not provide for tax secrecy with regard to information on wrongdoings committed by the taxpayer.

However, in this case tax information on the taxpayer is required not for tax law purposes but for securing the stability of commercial relations.

Under the general rule, the violator of rules on the storage and exchange of tax information may be subject to the following sanctions: (i) criminal law sanctions (article 183 of the Russian Criminal Code on the illegal collection and disclosure of information that is recognized as a commercial, tax or bank secret), (ii) measures connected with the status of a civil servant (e.g. dismissal of the violator from civil service) and (iii) civil law sanctions in the form of state compensation1. Although these rules establish that the subject liable to pay damages is the Russian Treasury, but the Russian Treasury may nevertheless seek redress from the person (official) who directly caused the violation. The law also permits a claim of compensation for mental torture which may be made directly by the party suffering damage against the person who caused this damage2.

The matters mentioned above touch upon the problems of the possible response of the Russian legal system to Russian banks seeking to comply with the requirements of the Foreign Account Tax Compliance Act (FATCA)3. From the perspective of a purely formal approach, Russian lawyers perceive the FATCA rules as exterritorial in their effect and 'unable to lead to lawful legal consequences' in Russia. The one-way compliance with these rules by Russian banks would hypothetically come within the purview of article 183 of the Russian Criminal Code (regarding disclosure of bank secrecy to foreign authorities in the absence of an international treaty).

Taking these legal risks into account, draft law 506758-6 on the Transfer of Information to Tax Authorities of Foreign States was submitted to the Federal Assembly. However, on 21 May 2014, the Committee of the State Duma on security and anti-corruption practices issued a legal opinion that draft law 506758-6 contradicts international law and the Russian Constitution4. Meanwhile, many Russian and international banks incorporated in the Russian jurisdiction have, de facto, joined the FATCA system. Finally, the Federal Assembly passed Federal Law 173-FZ of 28 June 2014 on the Specifics in Conducting Financial Transactions with Foreign Nationals and Legal Entities, on Amendments to the Russian Administrative Offences Code. It allows financial institutions to submit tax information on foreign nationals and entities to a respective foreign tax administration in the case of prior consent by the foreign national or entity. In the absence of consent of a foreign client or in the case of a lack of necessary information, financial institutions have the right to terminate contracts to provide services to the respective foreign nationals and (or) entities.

In principle, as is clear from the official reaction, Russia supports the strengthening of the instruments for the exchange of information5. In particular, this could be achieved by concluding additional protocols to

1 Articles 1069-1071 of the Civil Code of the Russian Federation.

2 Articles 1099-1101 of the Civil Code of the Russian Federation.

3 Available from: http://www.cticompliance.com/assets/pdf/FinalFATCAText.pdf [Accessed 30 November 2020].

4 Available from: http://fatca.rU/jarovaja-proekt-zakon-506758-6/#comment-193 [Accessed 30 November 2020].

5 Letter of the Ministry of Finance of the Russian Federation of April 24, 2012 No. 03-08-07.

develop existing tax treaties, in particular, taking into account the possible implementation of the FATCA rules in the context of the protocols that can be applicable on the mutual basis. However, there is a serious risk that the form of introducing the given rules based on the principle of exterritorial effect of national legislation may have a negative effect on reaching a mutually acceptable decision which could contribute to transparency and cooperation. In light of the above, it would seem reasonable to consider the possibility of selecting the Global Forum on Transparency and Exchange of Information for Tax Purposes (or/and other relevant institutions) as the way to reach a desirable decision. Any selective unilateral measures with exterritorial effect (which are, in fact, just a typical example of the override of tax treaty law), from a long-term perspective, do not help in the development of global tax law based on the concepts of justice and transparency.

Conclusions

The international tax policy of the Russian Federation has not still fully developed. This policy is considered to be a mixture of provisions stated both in the OECD Convention and UN Model Convention which is partly specified in the 2010 Russian Model Convention. Cooperation of the Russian Federation with other countries in a similar position has a significant impact on the priorities of the international tax policy of the country. The Russian Federation acts as an active participant of the international tax interaction

This issue above and the accession of Russia to the OECD stimulates the development of legal regulation of cross-border taxation in Russia and around the globe. However, provisions of tax treaties concluded between Russia and contracting parties usually corresponds to the characteristics of cooperation between countries and Russian national interest.

Sufficient number of international tax policy issues are still in question, and position of the Russian Federation and its authorities are on the way of discussion and so called accommodation.

References

Khalevinskaya, E. D. & Vavilova, E. V. (2009) The World Trade Organization and Russian Economic Interests. Moscow, Magistr, pp. 9-15.

Kizimov, A. S. (2007) Royalty as an Instrument of International Tax Planning. Nalogovaya politika i praktika [Tax Policy and Practice], (2), 11-18.

Lang, M. (2010) Introduction to the Law of Double Taxation Conventions. Amsterdam, Linde, pp. 31-33.

Nagornaya, E. N. (2007) Extra-Judicial Procedure, Nalogovye Spory: Teoriya i Praktika [Tax Law: Theory and Practice], (5).

Polezharova, L. V. (2009) International Double Taxation: Avoidance Mechanism in Russia. Moscow, Magistr.

Vogel, K. (1997) Klaus Vogel on Double Taxation Conventions (3rd ed.). Deventer, Kluwer Law International, pp. 33-34.

Vinnitskiy, D. (2015) Thin Capitalization Rules between Sister Companies under the Russia-Luxembourg Tax Treaty. Conference Tax Treaty Case Law around the Globe. Tilburg University - Vienna University, pp. 302-312.

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, Yekaterinburg, Russia (54 Kolmogorova St., Yekaterinburg, 620034, Russia; e-mail: [email protected]).

© D. V. Vinnitskiy, 2020

Date of Paper Receipt: September 17, 2020

Date of Paper Approval: November 17, 2020

Date of Paper Acceptance for Publishing: December 1, 2020