Since 1998 the main laws governing taxation have been codified in the two parts that make up the Tax Code. Tax Code Part I was adopted in 1998 and entered into force on 1 January 1999. It regulates general taxation matters, setting out the most important provisions of the Russian taxation system. It also specifies the procedures on how taxes are introduced and repealed, and defines all aspects of interactions between state, taxpayers and tax agents. The first part of the Tax Code also provides the general principles of taxation and the rules for tax administration including the rights and obligations of taxpayers and tax authorities. The below list gives an overview of the provisions of Tax Code Part I.
Tax Code Part II is devoted to the different types of taxes (tax regimes) and is divided in chapters containing such rules for each tax separately. (The Awara Tax Guide explores the most important of these rules throughout the book.)
In addition to the intention that the legal provisions of all federal taxes and levies would be fully detailed in the Tax Code, the Tax Code aims to determine (article 17) who are taxpayers of a given tax; objects of taxation; tax base; tax period; tax rates; provisions for recording, reporting and settlement of the tax (tax administration); and exemptions (if any).
For regional and local taxes the Tax Code sets out common principles with an aim to unify taxation through the whole of Russia. Regional and local governments are left with some discretion to set tax rates, extend some exemptions and decide on other taxation matters within the framework of the Tax Code (article 12).
The aim has been that the Tax Code in principle sets a closed list of taxes and levies (articles 13, 14 and 15). This principle has, however, not been fully adhered to. Some important provisions of tax law are still contained in other laws.
Some of the provisions of the Law on Tax Authorities of the Russian Federation (originally of March 1991) are still in force. Similarly some of the provisions of the Law on Corporate Profit Tax of December 1991 are still in force (although the bulk of the law has been abolished).
There are also a number of obligatory official charges (duties, dues) which are not recognized as taxes (quasi-taxes) but which de facto are of tax nature in the sense of being mandatory contributions imposed by the lawmaker and collected for the purpose of financing state functions and expenditure).
It is also worth noticing that some other important laws also contain important taxation specific provisions, such laws are:
Determining which laws concern taxation we also need to consider what as such is a tax. We would suggest defining a tax as a mandatory charge imposed by the lawmaker and collected for the purpose of financing state functions and expenditure.
By an explicit provision of the Tax Code (article 3) all compulsory payments and charges that are of the nature of a tax and levy as defined in the Tax Code fall under the general regulations of the code. Thus taxes, levies, other dues and charges would also be regulated by the same set of principles and rules. The regulations concerning employer’s social contributions are a case in point. Presently an employer pays such contributions to the Pension Fund, Social Fund and Medical Fund. These funds are considered to be off the balance of the Russian State budget. Some experts would like to draw from this the conclusion that employer’s social contributions were therefore not to be considered to be under the general tax laws.
Prior to a change of law (with effect of January 2010) the employer’s contributions were paid in form of a so-called unified social tax which was regulated by the Tax Codes and especially its chapter 24. And yet before the Unified Social Tax was introduced in 2001, the contributions were paid similarly to four different funds.
Below is a list the different types of taxes and tax regimes by category, based on the hierarchical status of the taxes and dues: Federal, Regional or Local (Municipal). After the list of types of taxes follows a list of the special tax regimes.
The Russian law may provide for some special taxation regimes (systems of taxation) for the calculation and payment of taxes for certain types of activities or taxpayers.
Currently, the following special tax regimes are in force:
By quasi-tax payments we mean those legally imposed obligatory payments which in essence are like taxes albeit not regulated by the Tax Code, namely:
The great Russian tax reform was undertaken during President Putin’s first term in office in 2001-2002 which saw the emergence of chapter 25 on Profit Tax; chapter 26 on Mineral Extractions Tax; chapter 27 on Sales Tax (later abolished January 1st, 2004), chapter 26.2 on the simplified system of taxation for small and medium sized companies; chapter 26.3 on unified imputed Tax; chapter 28 on transport tax; and chapter 29 on taxation of gambling business. Further reform in the years 2003-2005 brought a special system of taxation for production sharing agreements (chapter 26.4) fishing, hunting and trapping dues (Chapter 25.1); unified agricultural tax (Chapter 26.1); Chapter 29 on corporate property tax; on state duty (Сhapter 25.3) and land tax (Сhapter 30).
The previously feared tax police was abolished as of July 1st, 2003 and its powers were transferred to the Economic Security Department of the Ministry of Interior. There has been further liberalization of the laws concerning taxation, among this the rule that the initiation of criminal investigations in taxation matters may be undertaken only after receiving a correspoding case from the tax authority. Since Russia’s tax policies often undergo sudden dramatic changes, in 2011 a rule was introduced that criminal proceedings for tax offenses may be brought only after the receipt of the case file from the tax authorities (but it was canceled on October 22, 2014). Earlier, by effect of January 2010, the law was amended so as to exempt from criminal liability first time offences if the subjecte first paid the corresponding taxes.
By effect from January 1st, 2010 the Social tax was abolished and replaced by the system of employer’s social contributions (Employer’s Social Contributions and Employee Social, Medical and Pension Benefit in Russia chapter of the Tax Guide).
On January 1st, 2012, the new legislation on Russian Transfer Pricing (TP) rules with significant amendments came into effect. It aims at approaching the Russian laws closer to international practice, in fact closely resembling OECD principles, but with specific Russian considerations. The new legislation extended the number of price supporting methods in controlled transactions and strengthened requirements for their documentation. Russian TP rules have the following key provisions: a list of related parties, a list of controlled transactions, five TP methods for determining arm’s length prices/profitability, a list of sources of information, and compliance requirements. Furthermore, the new Russian TP rules allow the “largest” Russian companies to conclude advanced pricing agreements (APAs) according to special procedures (for a period of max. 3 years).
In 2014, all cross-border related-party transactions became subjects to Transfer Pricing (TP) regulations, notwithstanding their value. In other words all international companies conducting transactions with their Russian subsidiaries and other related companies in Russia. In particular, all financing and loan transactions (with few exceptions), royalty and licensing, supply and service agreements between Russian companies and their foreign related parties fall under these regulations even if these transactions have zero value.
These TP regulations have placed an extra administrative burden on Russian companies trading with their foreign related companies. Under these rules, when taxpayers have cross-border related-party transactions, they are required to keep so-called TP documentation and to provide tax authorities with reports on controlled transactions. The reports for 2015 are to be filed by May 20, 2016. Tax authorities may also request taxpayers to present the relevant TP documentation. Analyzing transactions and preparation of TP documentation is a necessary precondition for effective preparation and filing of reports to tax authorities. For controlled transactions conducted during a calendar year, companies are required to file a report with the tax authorities at the very latest on May 20th of the following year.
The amendments to the Russian TP rules foresee a gradual tightening of the rules between the years 2012 and 2017.
One of the striking anomalies of Russian tax laws was addressed by a law withdrawing movable assets from the base of tax on corporate property; it came into force January 1st, 2013 (concerning assets acquired after the date).
As of 30th June, 2013 the Russian law introduced the concept of beneficial owner. A beneficial owner is an individual, who ultimately, directly or indirectly (through third parties), owns (or holds a participation of more than 25%) a client (legal entity), or is able to affect a client’s actions. Since then, banks have been required to take measures to identify the beneficial owners of their clients and update this information at least 1 time per year.
Over the past two decades, Russia has achieved some success in developing the Customs Union (consisting of Russia, Belarus, and Kazakhstan) and finally becoming a member of the World Trade Organization (WTO).
The history of the formation of the Customs Union dates back to the CIS countries’ Treaty of September 24th, 1993 entitled “On funding of Economic Union”, which expresses the participating countries’ intention to create the Customs Union. This treaty implied that a large number of CIS countries would be included in the new economic space. The next stage was the signing of the Agreement on the Customs Union on January 6th, 1995 between the RF and the Republic of Belarus; later, the Republic of Kazakhstan, the Kyrgyz Republic, and Tajikistan acceded to this. In 1999, the participants in the Agreement on the Customs Union of 1995 entered into the Treaty on the Customs Union and the Unified Economic Space. The most significant changes in the organization’s activity, its goals, and the bodies’ competence, were made via protocols to the above-mentioned treaty in 2006 and 2007. As a result of lengthy negotiations, during the preparation of the draft Customs Union, Kyrgyzstan, Tajikistan, and Uzbekistan withdrew from it for various reasons. This Agreement has been suspended since January 1st, 2015 and will be discontinued. The Treaty on Funding of the Unified Custom Territory and Forming of the Custom Union was concluded by and among the RF, the Republic of Belarus, and the Republic of Kazakhstan. As a result, the Customs Union came to include three countries: Russia, Belarus and Kazakhstan. One of the most significant results of the Customs Union’s work was putting the unified Customs Code of the Customs Union into effect as of July 6th, 2010.
In 2014, the countries of the Customs Union signed the Treaty on the Eurasian Economic Union, which was also joined by Armenia, and an agreement on accession to it by the Republic of Kyrgyzstan was signed, which has so far not entered into force. This agreement is one more step in the integration of countries of the former USSR.
Another step on the road to integration, this time with European countries, is the subsequent accession of Russia to the WTO. On August 22nd,2012 Russia entered the World Trade Organization (WTO). As a result of lengthy negotiations, a transitional period was set for the WTO rules to take effect inside Russia, depending on the type of goods for which the rules are valid.
A new special regime of simplified system of taxation is in force from 2013 for certain individual entrepreneurs engaged in certain types of small business activities (Tax Code chapter 26.5). This tax regime is referred to as the system of taxation by license (actually in Russian “taxation by patent”). Perhaps the most important and significant changes in tax law have happened in the courts. The Russian Constitutional Court and the Supreme Commercial Court have actively through case law in a system that reminds of the precedents of Anglo-Saxon law.
According to the Constitution, the general principles of taxation are determined by federal law, which federal law in this case is the laws incorporated in the Tax Code. Notwithstanding this provision, the Constitutional Court and the Supreme Commercial Court has a wide practice of actively developing principles which cannot be directly identified in statutory laws. Considering the activities of these courts, the Russian law could even be considered to be to a significant level determined and developed through a system of precedents. Although the Supreme Arbitration Court in the process of reform of the judicial system has ceased to exist since August 5, 2014, it appears that the formation of the case law will be continued by the Supreme Court.
The constitutional provisions directly concerning taxation are scarce but the Court frequently refers to more broad categories of constitutional principles. The principles can be divided according to the subjects they are addressed to: lawmaker, courts, (tax) authorities, and taxpayers. Broadly, the principles could be subsumed under two broad categories, one being the principle of a state of justice (or shortly principle of justice), and the other the principle of a bona fide taxpayer. Here the first is chiefly addressed as a guideline for due behavior of lawmaker, courts and authorities and the second as a measure of due behavior of taxpayer.
The Constitutional Court and Supreme Commercial Court practices have developed principles combatting abuse of rights in taxation by means of malicious or antisocial exercise of otherwise legitimate rights. Typically the expression of these principles distinguishes between taxpayers in good faith (“dobrosovestny”) and taxpayers in bad faith (“nedobrosovestny”). The Constitutional Court introduced the principle of bona fides taxpayer in a resolution of December 12th, 1998. In this decision the Court proclaimed that the obligation to pay taxes is to be considered fulfilled from the moment when the bank has executed the transfer of funds from the taxpayer’s bank account. Enforcing payment of the tax a second time would mean an unconstitutional infringement on private property. The background of the case was a situation where the taxpayer had given a relevant payment order to the bank but due to the insolvency of the bank the funds had not finally been remitted to the state budget.
In a later resolution of July 25th, 2001 the Constitutional Court confirmed that in tax law the presumption of bona fides taxpayer is valid. At the same time the Court pointed out that the principle according to which the tax liability was considered to be extinguished from moment when bank had accessed the funds in taxpayer’s accounts was valid only in relation to bona fides taxpayers and did not concern mala fides taxpayers. The Constitutional Court later distributed this principle to cover payment of all taxes and levies.
In a much published case of July 14th, 2005, the Constitutional Court used the principle of mala fide taxpayer to extend the statute of limitation for tax offences (normally being three years). The taxpayer is denied the protection offered by the statute of limitation if it has resisted or otherwise countered the efforts of tax control by, for example, refusing to submit necessary documents and data or delayed the submission. The Supreme Commercial Court has chosen to introduce the principle unjustified tax benefit (“neobosnovannaya nalogovaya vygoda”) instead of the principle of mala fide taxpayer.
The anti-abuse principles are also connected with considerations that have to do with establishing the business purpose (“delovaya tsel”) and identification of the substance under the form of a transaction or a series of transactions are given (often referred to as “form-over-substance” but should more correctly be referred to as “substance-over-form”). According to the business purpose principle, SCC has determined that the aim to reach a tax benefit cannot be regarded as a valid business purpose. According to the substance-over-form principle the courts must not restrict themselves to regarding the form transactions are given but identify the real underlying circumstances and intentions.
The Court has given detailed criteria of what constitutes an attempt to gain an unjustified tax benefit in a resolution of October 12th, 2006. According to the Court, under a tax benefit means a reduction of the tax liability as a result of, inter alia, decreasing the tax base, applying a tax deduction, a tax exemption, application of a lower tax rate, as well as obtaining the right to a refund from the budget. A tax benefit may be considered unjustified particularly in cases where the transactions have not been recorded in accordance with their real economic essence or when transactions have been recorded without regard to any reasonable economic or other good business considerations. A tax benefit cannot be considered justified, if it has been obtained beyond any connection with real entrepreneurial or economic activities.
However, the Court stresses that that the ability to achieve the same economic result with a lower tax burden by other legal means shall not serve to recognize an unjustified tax benefit. In particular the below listed circumstances may, according to the Court, serve as evidence of unjustified tax benefits:
At the same time the Court points out that certain types of circumstances cannot be held as such to constitute evidence of an unjustified tax benefit, such are the following:
However, the Court points out, that the above listed circumstances in combination or together with other circumstances, in particular those that were referred to above as serving as evidence of unjustified tax benefits, may accumulate to evidence of unjustified tax benefits. The Court also rules that the justification of the tax benefit cannot be dependent on the type of capital uses, equity or debt, new issues of shares and bonds etc.
As a result of reforms in the system of taxation, a whole array of taxes was abolished during the years 2003-2013 namely:
Tax administration and administration of quasi–tax payments (such as employer’s social contributions) are handled by the following authorities:
The Economic Crime Unit has the right to carry out tax inspections if there are sufficient grounds to suspect a crime. The Economic Crime Unit’s special rights include the right to launch criminal investigations of the financial operations of the taxpayer, the right to tap telephones, intercept correspondence and exercise control over electronic mail (when sanctioned by a court). In investigative activities the Economic Crime Unit is guided by general rules of criminal procedure, which are in equal degree in force for workers of Investigation Committee in the process of investigation of other crimes.
The Tax Code enumerates the powers of the tax authorities in article 31; article 32 contains a corresponding list of obligations of the tax authorities; and article 33 sets the obligations of the officials of the tax authorities. These latter would provide the fundaments for developing principles of due tax administration practices but have not yet received due attention in court practice and therefore remain underdeveloped. In addition to the Tax Code there is still in force the law on Tax Authorities which also contains some provisions concerning the rights of the tax authorities (art. 7). The table below enumerates the main obligations as per these laws.
Upon discovering violations the tax authority has the right to apply to a court in matters that go beyond the taxation discipline (art. 31(14) of the Tax Code in the version effective of 2012; art. 7(11) of the Law on Tax Authorities of the Russian Federation of 21.03.1991 (as amended)). For example, tax authority may apply to court for:
The Tax Code provides an explicit list of the rights of the taxpayers. These provisions are mainly in article 21 and 81 and are presented in the below table.
An open list of a taxpayer’s obligations are found in art. 23 of the Tax Code. Among these we note the obligations to:
The Tax Code (art. 102) qualifies as a tax secret practically any information that has come to the attention of tax and other relevant authorities regarding the taxpayer. In fact, the law separately lists only the data or information that cannot be considered as a secret. Some types of data are expressly excluded from the scope of tax secrecy, namely:
In a curious twist of logic the tax secrecy laws have by the tax authority been converted to means of protecting the tax authority against the legitimate interest of the taxpayer to take part of the material in his case. Unfortunately the Supreme Commercial Court has validated this approach in its rulings September 21st, 2010 and May 28th, 2010, both in the same case.