On August 14, 2014, RF Government Resolution No. 805 approved a standard agreement between the Russian Federation Government and the governments of foreign states on the exchange of information in tax cases ("Standard Agreement"). This step continues the government's policy of expanding the tax administration ability of the RF FTS in cross-border business activities and its capacity for obtaining information from abroad.
Strictly speaking, the Standard Agreement is not an act with direct effect, as it does not directly give rise to legal consequences for taxpayers. However, this document reflects Russia's negotiating position with respect to the exchange of information with other states. It is assumed that the specific bilateral agreements between Russia and other states will largely be based on the provisions of the Standard Agreement. In this sense it is hard to overestimate the significance of the document.
Below we provide a brief analysis of the provisions of the Standard Agreement that we believe are of the greatest significance.
- Information exchange applies to all taxes, not only those with respect to which international tax agreements have been concluded (as a rule, international tax agreements are applicable to income taxes and/or property taxes, less frequently VAT).
- The obligation of the state receiving the request to provide information is limited (by art. 2 of the Standard Agreement) to only the information at the disposal of the authorities of that state, or at the disposal or under control of persons present in the jurisdiction of that state. This language is not well drafted, as it inevitably leads to the question of whether the state authorities of the respective state can and should provide information that is not at their disposal but which is held by persons present on the territory of that state. A negative answer to this question (which follows from a literal reading of the Standard Agreement) implies that the scope of application of the information exchange agreement will be narrower than the scope of information exchange provided for in existing agreements on the avoidance of double taxation. For example, in accordance with art. 26.4 of the Agreement with Cyprus of December 5, 1998, non-possession of the requested information is not grounds for refusal to provide the information, if it can be obtained from third parties without contradicting the law or administrative practices of the state from which it was requested. Similar provisions are contained in art. 26.4 of the Agreement with Luxembourg of June 28, 1993 and art. 25a of the Agreement with Switzerland of November 15, 1995. Therefore, in this respect many agreements for the avoidance of double taxation will inevitably enter into conflict with information exchange agreements based on the Standard Agreement, which will in turn lead to disputes between states, or between states and taxpayers, as to the lawfulness of the provision or non-provision of information that is not generally available to the tax or other authorities of foreign states (for instance, information on trusts). Article 2 also contradicts other provisions of the Standard Agreement (namely, art. 5.2) by directly establishing the obligation of the competent authority in the state to which the request is made to gather the information necessary to respond to the request for information if the authority does not have sufficient information to respond to the request.
- The Standard Agreement provides only one option for the exchange of information – provision of information upon request. This effectively disavows the provisions of the multilateral OECD Convention on Mutual Administrative Assistance in Tax Matters, signed by the RF on November 3, 2011, which was to have been ratified this year and which provided for automatic and spontaneous exchange of information as well as requests. Therefore, despite declarations that it wishes to expand the tax administration abilities of its tax authorities in cross-border business activities, the RF government is once again limiting those abilities in practice.
- The requested information is provided in the form of written testimony and/or certified copies of documents, with no legalization or apostille required for such documents.
- The Standard Agreement allows the state from which information has been requested to refuse to provide information on the owners of public companies, open funds, or collective investment schemes.
- Requests for information must be substantiated with the following information:
- information identifying the taxpayer being audited, for which the information is requested;
- the period for which the information is requested;
- the purpose for which the information is requested;
- information on the person from whom the said information may be obtained, and the basis for this assumption;
- justification for the use of the requested information by the competent authority of the state making the request in accordance with the law and administrative practice of the state making the request, and that this information could be obtained by the competent authority of the requesting state if it was on the territory of the requesting state. This restriction appears to have been introduced to prevent tax authorities bypassing national restrictions to obtain prohibited information from foreign sources;
- confirmation that the competent authority has exhausted all of its possibilities for obtaining the requested information on its own territory or that obtaining such information on the territory of the state making the request would involve incommensurate difficulties.
- The requested information is provided within 60 days of receipt of the request, if the said information is already at the disposal of the competent authority of the state to which the request is made, or within 90 days if the competent authority of the state to which the request is made is not in possession of the requested information at the time of the request.
- The Standard Agreement provides for representatives of the competent (tax) authority of the requesting state to participate in the questioning of individuals and document checks in the state to which the request was made as an independent means of information exchange between states. However, the state to which the request is made has the right, but not the obligation, to provide the opportunity to take part in such tax supervisory measures. The Standard Agreement does not specify how the participation of representatives of the requesting state in tax supervisory measures in the territory of the requesting state should be formalized, and regulation of this matter is left to the legislation of the state to which the request is made. The Standard Agreement also does not specify how the results of the representatives of tax authorities from the requesting state taking part in tax audits on the territory of the state to which the request is made should be drawn up. It appears that this matter is to be decided by the legislation of the requesting state.
- The standard agreement contains a list of cases in which the state to which the request is made may refuse to provide information to the requesting state or deny participation in a tax audit. These include:
- requests that do not comply with the requirements of the information exchange agreement (in particular, which do not state all the required information);
- requests that require the disclosure of trade, business, industrial, commercial, professional or state secrets. However, information held by banks and other financial organizations, agents, and attorneys-in-fact (including nominee holders and fiduciary managers), as well as information on the owners of companies, partnerships, trusts, funds, founders of trusts, beneficiary owners of trusts, founders and members of boards of trustees, and beneficiaries of funds, cannot be treated as a protected secret not subject to disclosure. This means, in our view, that the state to which a request is made can only deny the provision of information to the requesting state if the law of the state to which the request is made expressly treats the said information as a secret referred to in art. 7.2 of the Standard Agreement and the disclosure of the said information is expressly prohibited by the law of the state to which the request was made;
- the requested information discloses confidential relations between a client and advocate, legal counsel, or other lawful representative, if it relates to receiving advice or relations between a representative and the represented person in the course of representing the represented person in any kind of procedural acts (for example, as part of criminal or civil/commercial proceedings), now or in the future;
- cases in which the use of the information by the requesting state will result in tax discrimination against citizens or legal entities established under the law of the state to which the request is made compared to the citizens or legal entities established under the law of the requesting state that are in similar circumstances.
Notably, a taxpayer challenge against the tax authority's demand in the requesting state (for example, additional tax assessments resulting from an audit) is not grounds for the state to which the request was made to refuse to provide information, even if the information will be used by the requesting state to justify the disputed demand.
- Information obtained under an information exchange agreement can be used in the course of tax proceedings (audits, consideration of objections, administrative appeals, court proceedings in cases arising from administrative legal relations, compulsory collection of unpaid taxes, fines and late payment interest), as well as for the purposes of criminal prosecution. Therefore, the information may be provided to authorities investigating tax-relating criminal cases and courts, as well as the tax authorities. Other authorities (such as FAS) can only obtain this information with the written consent of the tax authority of the state to which the request was made. Otherwise, in our view, the received information would have to be treated as inadmissible evidence).
As can be seen, the Standard Agreement contains provisions that, once adopted, will significantly affect the rights of taxpayers. It remains unclear how the conclusion of information exchange agreements by Russia will work in practice, and to what extent the provisions of actual information exchange agreements will differ from the provisions of the Standard Agreement. Nevertheless, the approval of this document as such is clear evidence that taxpayers should no longer hope that information on their activities abroad will remain inaccessible to the Russian tax authorities.