8. Taxation 8.1 Introduction Over the Past 16 Years Russia Has Been Engaged in a Significant Reform of Its Tax System, Which Has Been Implemented in Phases
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Doing Business in Russia 8. Taxation 8.1 Introduction Over the past 16 years Russia has been engaged in a significant reform of its tax system, which has been implemented in phases. This reform has improved procedural rules and made them more favorable to taxpayers, has reduced the overall number of taxes, and has reduced the overall tax burden in the country. Part I of the Tax Code of the Russian Federation (the “Tax Code”) came into effect in 1999, dealing largely with administrative and procedural rules. More recent amendments to Part I clarified certain administrative and procedural issues raised by over 10 years of practice of the application of Part I of the Tax Code (in particular, regarding tax audit procedures, procedural guarantees for taxpayers, operations with taxpayer bank accounts and bank liability). The provisions of Part II of the Tax Code regarding excise taxes, VAT, individual income tax, and the unified social tax (currently replaced by social security contributions) came into force in 2001, followed by the profits tax and mineral extraction tax provisions of the Tax Code in 2002. In 2003 further amendments introduced a simplified system of taxation, a single tax on imputed income, a new Chapter on transportation tax, and established a special tax regime for production sharing agreements in Russia. A Chapter on corporate property tax came into effect as of 1 January 2004. In 2005 the water tax, land tax, and state duty Chapters came into effect. On 1 January 2013 a Chapter on a patent system of taxation (for small businesses) and on 1 January 2015 a Chapter on trade levy took effect. Most of these Chapters of the Tax Code replaced and significantly updated or improved tax laws that were initially enacted as far back as 1991. On 1 January 2015 the remaining Chapter of the Tax Code covering the property tax on individuals came into force, replacing the old 1991 legislation. In 2006 the inheritance and gift tax that had been in existence since 1991 was repealed. In addition, over the last several years, various amendments have been made to the Tax Code, Baker & McKenzie 95 including several recent key changes largely intended to address the economic downturn in Russia. Recent major changes include the adoption and further enhancement of the so-called “Deoffshorization Law” introducing fundamentally new rules on taxation of profits of controlled foreign companies (CFC rules), tax residency of foreign companies and beneficial ownership rules in Russia. These rules substantially change the way businesses operate in Russia, affect most of the wealth management and private holding structures for Russia and mean that immediate review and action may be required. Certain other changes include entry into force of the OECD-Council of Europe Convention on Mutual Administrative Assistance in Tax Matters, a long-term freeze of the tax consolidation regime, substitution of the Central Bank refinancing rate by a higher “key rate”, the introduction of a tax amnesty program, and creation of a uniform system of administration of tax and non-tax payments by transferring the authority to collect customs duties and insurance contribution to the Federal Tax Services. Thus, tax reform continues to be an ongoing process. 8.2 Types of Tax The Tax Code sets forth three levels of taxation: federal, regional and local. Currently, federal taxes include VAT, excise taxes, profits tax, individual income tax, mineral extraction tax, state duty, special tax regimes, and several other taxes. Regional taxes include corporate property tax, transportation tax, and gambling tax, while local taxes include land tax, individual property tax, and the trade levy. Social security contributions are payable to the State Pension Fund, Social Security Fund, and Federal Mandatory Medical Insurance Fund. There are five types of special tax regimes that may be applicable to certain activities and/or categories of taxpayers: single agriculture tax, simplified system of taxation, single tax on imputed income from certain kinds of activity, taxation of production sharing agreements, and the patent system of taxation. These special tax regimes have the 96 Baker & McKenzie Doing Business in Russia status of a federal tax and may provide exemptions from certain federal, regional, and local taxes. 8.3 Tax Audits The Russian tax authorities may conduct chamber and on-site tax audits of taxpayers. The tax authorities may audit several different taxes simultaneously as part of an on-site tax audit. However, except in cases of a liquidation or reorganization, or when a higher tax authority inspects the activities of a lower tax authority that conducted an on-site audit, or when a taxpayer files an amended tax return claiming a lower level of taxation, a tax for a given period may only be audited once. The taxpayer may also be repeatedly inspected for the same tax period upon a decision of the Head of the Federal Tax Service of Russia. In the event that during a repeated tax audit the tax authorities find an underpayment that was not found during a previous tax audit, a penalty for such underpayment would not be applied to the taxpayer, except for cases where the undetected violation resulted from a conspiracy between the taxpayer and the tax authorities. As a general rule, the term of an on-site tax audit may not exceed two months, but this term may be extended by up to six months in exceptional cases. Also, in exceptional cases provided by the Tax Code, the Russian tax authorities may suspend an on-site tax audit. However the overall term of suspension may not exceed nine months. The results of a tax audit relating to taxes reviewed may only be reconsidered by the supervising tax authorities. In any case, however, the tax authorities may only audit the three calendar years preceding the year of the tax audit. As a general rule a three-year statute of limitations applies to the imposition of penalties for tax violations, although this term could be extended if the taxpayer impeded a tax audit by the tax authorities. Also, the tax authorities may levy for outstanding taxes, late payment interest and penalties unilaterally without a court decision (except against individuals). If the taxpayer does not settle its tax liabilities (if they amount to a criminal offense) within two months after expiry of Baker & McKenzie 97 the term for payment provided in a tax demand the tax authorities are required to forward the file to the Russian Ministry of Internal Affairs for review. In certain circumstances the amount of outstanding taxes (that the taxpayer failed to pay within a three-month period) may be collected from the taxpayer’s affiliated companies. This may be possible if the taxpayer, instead of paying the outstanding tax amounts, made payments to the bank accounts of such affiliated companies. Transfer pricing audits are performed by a special department in the Federal Tax Service separately from the regular tax audit process. The audits will be performed in-house only and may not be performed as part of on-site regular tax audits. A transfer pricing audit for 2013 must have been initiated not later than 31 December 2015; the term for initiation of a transfer pricing audit for 2012 expired in 2014. For 2014 and future periods a transfer pricing audit may be initiated within 2 years after the tax authorities receive the notification of controlled transaction and cover the three calendar years preceding the year when the audit was initiated. Starting from 1 January 2014, taxpayers and tax agents that wish to challenge a non-normative act of the Russian tax authorities or action/inaction of their officials are required to use a pre-trial administrative appeal procedure (the only exception is for acts adopted directly by the Federal Tax Service). A decision on the results of a tax audit that has not yet entered into force may be appealed within one month after issue of the decision. All other non-normative acts of the tax authorities or decisions on results of a tax audit that have already entered into force may be appealed within one year of issue or from the moment when the taxpayer found out that his or her rights had been violated by the decision. 8.3.1 Tax Monitoring Starting from 1 January 2015, certain major Russian taxpayers are permitted to apply for a tax monitoring regime conducted by the Russian tax authorities. 98 Baker & McKenzie Doing Business in Russia Under the new tax monitoring regime, a taxpayer, if he or she so chooses, will provide tax accounting documents and information to the tax authority in electronic format, or grant the tax authorities access to its accounting systems. In return, the taxpayer will have an opportunity to agree its tax position with the tax authorities by obtaining a “reasoned opinion of a tax authority” and the taxpayer will be exempt from almost all chamber and on-site tax audits for the period of tax monitoring. The period of tax monitoring is one calendar year following the year when a taxpayer applied for the tax monitoring regime. Taxpayers can change to the new regime voluntarily if they meet all of the following conditions: x total annual amount of value added tax, excise taxes, corporate profits tax and mineral extraction tax payable to the federal budget for the previous calendar year is not less than RUB 300 million; x total annual income for the previous calendar year according to the accounting records is not less than RUB 3 billion; x total value of assets as of 31 December of the year preceding the year of application according to the accounting records is not less than RUB 3 billion.