On 12 July 2017, the Federation Council (the upper house of the Russian Parliament) approved Federal Law "On Amendments to Part One of the Russian Tax Code" (the Law) which, when signed by the Russian President, will introduce new unjustified tax benefits rules into the Russian Tax Code.
The concept of unjustified tax benefits was introduced by Resolution No. 53 of the Plenum of the Supreme Arbitrazh Court "On Assessment by the Arbitrazh Courts of Justifications for Taxpayers Receiving Tax Benefits", dated 12 October 2006. Development of this concept later shaped substantial court practice. This was a court made doctrine and not part of the Russian Tax Code.
In 2014, draft law No. 529775-6 was submitted to the Russian State Duma introducing such concepts as "taxpayer acting in good faith", "abuse of rights" and "taxpayer's due diligence" into the Russian Tax Code. Proposed rules suggested a pro-fiscal and formalistic approach. However, due to the active involvement of the business community some of the more aggressive concepts were rejected and the text was made more consistent with Resolution No. 53.
What the Law says
The Law limits the right to reduce the tax base in the following cases:
- misrepresentation of "economic events" in statutory and tax accounting (the term is not defined); or
- transactions (a) where the principal purpose is underpayment of tax or obtaining tax offset (refund) or (b) where the obligations under a transaction were not actually performed by the counterparty and/or its subcontractor authorized by contract or by law.
The burden of proof of the above facts during tax audits remains with the tax authorities. Also, the Law expressly states that the mere existence of the following circumstances (which are often cited by the tax authorities) does not per se prove tax abuse:
- primary documents are signed by unidentified or unauthorized persons;
- a counterparty failed to pay taxes (in the absence of any other factors);
- a taxpayer could have obtained the same economic result through other transactions resulting in higher taxes.
When signed by the Russian President, the Law will become effective this year one month after its official publication.
Implications for taxpayers
The Law is mainly aimed at combating "fly-by-night companies" and aggressive tax planning schemes with letterbox companies. The importance of exercising contractual obligations by a counterparty in person has increased. In fact, the Law partially upholds current court practice whereby tax liabilities can be shifted from a non-bona fide counterparty to a taxpayer who fails to demonstrate due diligence in selecting suppliers, however, does not resolve existing problems with applying these rules.
The Law does not provide for clear requirements for unlawful misrepresentation of economic events and fails to set limits for related tax assessments, which may cause broad interpretations and trigger new tax claims. The concepts of bona fide efforts and due diligence that have been previously used by taxpayers to support their position have been neglected. Moreover, the introduction of the new rules to the Russian Tax Code may trigger a re-examination of previously established approaches that were favorable for taxpayers and may therefore increase uncertainty.
Actions to consider
The Russian Tax Code will now include important provisions that will affect a wide range of business operations. Taxpayers may consider the following:
- monitor key trends in application of the law and court practice in view of the new provisions of the Russian Tax Code;
- review and adjust counterparty selection procedures and approaches to preparing of "defense files" to meet due diligence standards in the counterparty selection process;
- consider reviewing current business operations and approach to their accounting in order to avoid potential claims;
- consider the potential "cumulative" effect of the new anti-abuse rules and trends in international practice related to signing the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (see Legal Alert, dated June 2017).