Amendments to VAT on bonuses rules
Federal Law No. 39-FZ of April 5, 2013
These new rules bring a degree of certainty to VAT procedure when paying bonuses (incentive payments) to customers for achieving specified volumes or meeting other conditions of a supply/service/work agreement. Previously, in the absence of statutory regulation, the need to adjust the VAT tax base for suppliers and make tax deductions for customers when providing bonuses led to numerous disputes. In particular, it is worth noting the widely publicized case of Leroy Merlin in 2012, in which the RF SAC1 Presidium confirmed its position that the VAT tax base must be adjusted upon providing bonuses to retailers and that such payments should be treated as a form of trade discount (RF SAC Presidium Ruling No. 11637/11 of February 7, 2012).
The new rules on the application of VAT to bonuses paid to customers entered into force on July 1, 2013 and eliminated the previous uncertainty. The bonus (incentive) a supplier pays to a customer for the performance of contractual conditions, including for purchasing a specified volume, does not reduce the value of the goods/works/services for VAT purposes, except in cases where such a reduction is expressly provided for in the agreement. Therefore, if there are no special conditions in the agreement, the supplier’s tax base and the customer’s tax deductions applied to a previous delivery need not be adjusted for a bonus.
Notably, the new amendments do not have retroactive force and will not be applied to tax periods before July 1, 2013. Therefore, in the event of disputes concerning previous periods, there is a strong risk that courts will still apply the RF SAC Presidium’s findings in Leroy Merlin. For example, in a Ruling of December 2, 2013 in case No. VAS-3862/12, the RF SAC confirmed that it was correct to
treat a bonus provided to a customer as a trade discount applicable against the value of the goods (cars) and affecting the VAT tax base. At the same time, the RF SAC found courts were correct to cite the position in Leroy Merlin with respect to VAT accrued in 2007 and 2008.
Mandatory pre-court settlement of tax disputes
Federal Law No. 158-FZ of February 2, 2013
As of January 1, 2014, there is a mandatory pre-court procedure for settling tax disputes concerning appeals against all non-regulatory acts of tax authorities, or acts and omissions by tax officials that infringe the rights of taxpayers. Previously, the pre-court complaint procedure was only mandatory for decisions on the basis of tax audits. The following are exceptions to the rule:
Non-regulatory acts adopted following consideration of complaints by regional Federal Tax Service (“FTS”) departments may be appealed to the FTS of Russia or in court.
B) Non-regulatory acts of the FTS of Russia, as well as
the acts/omissions of its officials, can only be appealed in court.
The new law distinguishes two forms of complaint:
Complaint – a complaint concerning an appeal against a non-regulatory act by a tax authority that has entered into force, or acts or omissions of officials
if the said acts or omissions infringe the taxpayer’s
Appeals – a complaint against a decision of a tax authority to impose liability (or not impose liability) that has not entered into force.
The deadline for appeals has been extended to one month from the date a decision is served for all kinds of tax audit and categories of taxpayer (the previous
term was 10 days). The deadline for a complaint has also
been extended and is now one year from the day on which the taxpayer learned or should have learned of the infringement of its rights (the term was previously 3 months).
Supreme Arbitration Court of the Russian Federation.
The amendments also directly affect the complaint consideration process, in particular, the taxpayer has the right to submit additional documents in support of its arguments. The additional documents will be considered by the superior tax authority, provided the taxpayer
can explain why it was not possible to submit the said documents to the tax authority on time.
If the higher tax authority finds procedural breaches in the consideration of tax audit materials, it has the right to set aside the decision of the tax inspectorate and to reconsider the tax audit materials within the
Upon completing consideration of a complaint/appeal, the higher tax authority may make one of the
Deny the complaint,
• Set aside the non-regulatory tax act,
Cancel the tax authority’s decision, fully or partially,
Adopt a new decision in the case,
Declare the acts/omissions of tax officials unlawful and issue a decision on the merits.
If a regional FTS department fails to issue a decision on a complaint/appeal within the designated period, the pre-court settlement procedure is deemed to have
been followed. The period for consideration of an appeal
against a decision issued on the basis of an audit is one month from receipt (may be extended by one month), for other forms of complaint it is 15 days (the period may be extended by 15 days). If these deadlines are missed, the taxpayer has the right to file a claim in court without waiting for a decision on the complaint. If the complaint is considered on time, the period for challenging the decision runs from the day on which the taxpayer learned of the decision.
Rules have also been introduced setting the procedure and terms for appeals, requirements for the form and content of the complaint/appeal, and grounds for leaving an appeal without consideration.
New grounds for requesting clarifications and documents from taxpayers
Federal Law No. 134-FZ of June 28, 2013
Amendments have been made to the list of grounds for requesting clarifications and documents from taxpayers contained in art. 88 of the Russian Federation Tax Code (“RF TC”). As of January 1, 2014, the tax authorities are entitled to request clarification of the grounds for a reduction in tax payable during a documentary audit of a return/calculation in which the taxes payable have been reduced. Taxpayers are also entitled to submit extracts from tax and accounting registers, and other documents to the tax authorities in support of the information in the declaration/calculation.
If a revised return/calculation with a reduction in the taxes payable is submitted two years from the filing date of the return/calculation, the tax authority has the right to request the taxpayer provide the following for the respective tax in the corresponding period:
Primary and other supporting documentation for the revisions to the return/calculation,
• Analytical tax accounts used to generate the said indicators before and after revisions.
As of January 1, 2015, another (in addition to VAT refunds) ground for requesting documents during an audit of VAT returns has been introduced –
inconsistencies between the information reflected by a taxpayer in the VAT returns and the information received from other taxpayers, if such inconsistencies suggest that VAT was underpaid or the requested VAT refund is larger than owed. In this case the tax authorities have the right to request VAT invoices, primary and other documentation relating to the relevant transactions.
Since July 30, 2013, the tax authorities have also had the right to request any documentation relating to a transaction from the parties to the transaction or other parties in possession of documents/information relating to the transactions, not just information on a specific transaction (art. 93.1 RF TC).
Changes to property tax Federal Law No. 202-FZ of November 29, 2012 Federal Law No. 307-FZ of November 2, 2013 Moscow Law No. 63 of November 20, 2013
2013 saw significant legislative changes with respect to property tax, affecting the taxation of both movable and immovable property.
Taxation of movable property
The amendments introduced by Federal Law No. 202-FZ of November 29, 2012 mean that movable property booked as a fixed asset after January 1, 2013 is not subject to property tax.
The RF Finance Ministry issued a number of clarifications of the new rules on movable property in 2013. In particular, the guidance confirms that no obligation to pay property tax arises for movable fixed assets acquired after January 1, 2013 that were previously (before January 1, 2013) in use or on the balance sheet of the seller (for example, RF Finance Ministry Letter No. 03-05-05-01/2767 February
7, 2013). In the event of modernization or refurbishment works, the taxpayer must pay property tax on immovable property booked after January 1, 2013 with respect to
the work increasing the value of such equipment in 2013
(RF Finance Ministry Letter No. 03-05-05-01/6096 of March 1, 2013).
The RF Finance Ministry has also provided commentary on certain issues relating to the application of the
new rules to capital investments into leased property by tenants. In particular, the property tax exemption does not apply with respect to the tenant’s capital investments in the form of inseparable improvements to leased property; such improvements are taxable for the tenant until disposal (RF Finance Ministry Letter No. 03-05-05-01/7760 of March 14, 2013).
At the same time, the property tax preferences for certain kinds of movable property were accompanied by the abolition of significant benefits for the industrial sector. As of January 1, 2013, public railways, main pipelines, and structures forming an inalienable part of the said facilities (in accordance with the respective RF Government list) will be subject to property tax at
a reduced rate for a six-year period. At the end of this
transitional period, the said property will be subject to property tax at the full rate.
Taxation of immovable property
The mass cadastral appraisal of capital structures was completed in 2013, which accelerated the introduction of amendments to the procedure for property tax on immovable property as of 2014.
Federal Law No. 307-FZ of November 2, 2013 amended the RF TC with respect to the procedure for calculation of corporate property tax on certain forms of commercial real estate. As of January 1, 2014, the property tax base for a range of properties is to be determined on the
basis of the approved cadastral value of the immovable property (the tax base was previously calculated on the basis of the balance sheet or inventory value2).
Real estate subject to the new rules
Business and shopping centers and premises therein,
Non-residential premises for which the cadastral passport/BTI passport states the purpose is for offices, retail facilities, restaurants and/or personal services, or at least 20% of the total space of which is actually used for such facilities,
Real estate of foreign organizations, if the foreign organization does not operate through a permanent establishment in the RF or such facilities are not related to the activities of the foreign organization through its permanent establishment in the RF.
A business center is a freestanding non-residential building in which the premises belong to one or more owners and which meets at least one of the conditions below:
One of the forms of permitted use of the land underlying the building permits the placement of office buildings of a certain kind; or
At least 20% of the premises in the building (according to the cadastral passport) are offices; or
At least 20% of the total office space in the building is actually used as offices.
Similar rules apply with respect to shopping centers.
For foreign companies not operating in the RF via a permanent establishment.
No later than the 1st day of the year, the competent regional executive authority must determine a list of immovable property3 for which the tax base is
determined on the basis of cadastral value, and make this information publically available. If other immovable property is added to the list in the course of the year, it is deemed to be on the list for the following year.
If the cadastral value of a building has been determined, and the cadastral value of premises in the building (subject to taxation) has not been determined, then the tax base for such premises is determined pro rata the cadastral value of the building and the size of the premises.
The new rules set maximum rates of property tax for immovable property taxed on the basis of cadastral value. For RF regions (except Moscow), the maximum tax rate must not exceed: 2014 – 1%, 2015 – 1.5%, 2016 and thereafter – 2%.
Amendments to Moscow legislation
Moscow Law No. 63 of November 20, 2013 (“Law”) establishes the following tax rates for immovable property in Moscow taxed on the basis of cadastral value: 2014 – 0.9%, 2015 – 1.2%, 2016 – 1.5%, 2017 – 1.8%, 2018 – 2%.
Starting January 1, 2014, only business and shopping centers with a total area of more than 5,000 sq. m, and premises therein, situated on land plots with a permitted use for business, administrative and commercial buildings, retail facilities, restaurants and/or personal services will be taxed on the basis of cadastral value.
As of January 1, 2015, all buildings and structures deemed intended for use or actually used for the placement
of business, administrative of commercial facilities, retail facilities, restaurants and/or personal services in
accordance with the RF TC rules on business and shopping
centers will be taxed on the basis of their cadastral value.
The law does not expressly list non-residential premises as a separate property type subject to property tax based on cadastral value.4
The law provides a number of benefits for small enterprises that pay property tax (subject to conditions), as well as educational, medical and scientific organizations.
It should be noted that the new Law is drafted rather vaguely. Due to the insufficient legal skill in drafting the
Law, it is likely that the application of these rules may cause numerous disputes in practice.
We also note that a draft law has been submitted to the RF State Duma that would limit the right of property owners to contest cadastral valuations in court if the cadastral valuation procedure was performed without violations (Draft Law No. 391238-6 on Amendments to Article 24.19 of the Federal Law on Appraisal Activities in the Russian Federation). The draft law proposes that disputes seeking the declaration of cadastral valuations as inconsistent
with market value will be considered by a commission
for disputes concerning cadastral appraisals within 6 months of a cadastral appraisal being approved. The commission’s decision may subsequently be appealed in court. It is therefore worth considering challenging the
cadastral appraisal of a property in the commercial courts before the respective amendments are made.
RF SAC Presidium makes final decision on the method for calculating maximum interest for the purpose of thin capitalization rules
RF SAC Presidium Ruling No. 3715/13 RF of September 17, 2013
Discussions concerning the procedure for calculating the maximum interest applicable for the purpose of thin
capitalization rules (art. 269.2 RF TC) have been underway for some time. This question is regularly raised by the tax authorities during audits and is the subject of litigation
in thin capitalization cases. At the same time, the court
practice on this issue is also characterized by inconsistency.
The provisions of art. 269.2 RF TC are worded in a manner open to ambiguous interpretation. In view of the way in which the profit tax base is calculated, two approaches to calculating the maximum interest have formed:
Stated in sections 1 and 2 above. On November 29, 2013, the Moscow Government determined a list of immovable property meeting the indicated requirements in 2014, for which the tax base will be the cadastral value (Moscow Government Resolution of November 29, 2013 No. 772-PP).
A) Cumulative total method. In this method the maximum interest bookable as expenses for profit tax purposes is recalculated at the end of the first quarter, first half, nine months and calendar year (tax period), on the basis of the controlled debt/equity ratio on each of
the said dates. At the same time, this recalculation affects the entire amount of interest accrued for the respective period (first quarter, six months, nine
months, year). In this approach, the maximum interest recognized as an expense for profit tax purposes is finally determined on the basis of the controlled debt/ equity ratio at the end of the year.
The alternative approach to calculating the maximum interest, which is used in most cases by the Russian tax authorities, is the so-called “discrete method”.
In this method, the maximum interest on controlled debt is also determined on the basis of the controlled debt/equity ratio at the end of the first quarter, six months, nine months and calendar year. However, the significant difference from the cumulative method
is that the amount determined in each quarter is not
subsequently revised. That is, the controlled debt/ equity ratio for six months, nine months and the year only affects the interest accrued in the second, third, and fourth quarters, respectively.
As the courts had not developed a consistent approach to this issue, it was not clear beforehand which method the supreme court would follow.
The SAC Presidium’s Ruling No. 3715/13 of September 17, 2013 in the case of ZAO ER-Telecom Holding supported the discrete method. The court based its choice on the following arguments:
The court cited art. 328.1-2 RF TC, pursuant to which interest is booked in accordance with the conditions of a loan agreement, subject to the restrictions established in art. 269 RF TC, on the date that the interest is recognized as an expense for the purposes of profit tax, which under art. 272.8 RF TC is the end of the reporting period to which the interest relates.
The court also interpreted the cumulative method of calculation (including with respect to expenses) for profit tax purposes as meaning simply summing expenses calculated for separate periods (quarters)
within a tax period (year), without adjustment at the end
of the tax period. This was stated with application to interest, so it remains unclear whether this interpretation will be applied universally to all expenses and income.
Finally, the court asserted that the rules in art. 269.2 exclude the use of cumulative totals. In doing so, the RF SAC Presidium effectively treated art. 269.2 RF TC as containing special rules with respect to art. 318.3, which establishes that the base for calculating the maximum standardized expenses is formed using a cumulative total.
Consequences for taxpayers
The RF SAC Presidium’s ruling puts the following practical issues before taxpayers:
Taxpayers that have been calculating maximum interest using a cumulative total will need to recalculate the interest booked as expenses using the discrete method for at least the three previous years, if they are open to a tax audit.
Taxpayers that used a one-time equity increase at the end of the year to avoid the application of thin capitalization rules will need to review their tactics.
Taxpayers need to make a decision as to whether they will apply the approach stated by the RF SAC Presidium in Ruling No. 3715/13 with respect to the cumulative total method for other standardized expenses (advertising, insurance, etc.). In some situations it may be advantageous for the taxpayer to
calculate its expense limits using a cumulative total (for
example, when the taxpayer does not reach the limit in certain periods, but exceeds it in others), and in other situations, on the contrary, use of the discrete method may be more attractive (for example, if the taxpayer posts losses in certain tax periods). In this connection, the SAC Presidium’s Ruling creates a certain amount of uncertainty in the approach to limiting deductions of certain standardized expenses. It is to be expected that in cases where the circumstances make it in
the tax authority’s interest to apply the discrete method they will cite the universality of the legal position stated in the Ruling on the ZAO ER-Telecom Holding case. In cases where fiscal interests make the cumulative total method preferable, the tax authorities will likely attempt to limit the application of the Ruling, citing the special application of thin capitalization rules.
Tax accounting of inseparable improvements. The IKEA Mos case
RF SAC Presidium Ruling No. VAS-3589/2013 of October 8, 2013
The proper treatment of works of a capital nature, carried out by a future tenant during the construction of a building by the future landlord, and before the building
is commissioned and title registered, formed the subject of dispute with the tax authorities in the IKEA Mos case, which has been running for more than three years.
The tax authorities based their claim on the argument that fit out works made by future tenants before the landlord commissions and registers title to a new shopping center are carried out on a gratuitous basis for the benefit of the building’s owner. In this case, the tax authorities asserted, the value of the fit out works should be added to the value of the building for property tax purposes and included in the owner’s taxable income for profit tax purposes.
In the course of the case, the courts of three instances found in favor of the tax authorities, ruling that the fit out works were performed to the benefit of both tenants and the landlord as a person with an interest in being able to lease the premises, including on the basis of the following arguments:
The shopping center was commissioned with the results of works performed by future tenants already in place, the owner received title to the building with all installed systems, the owner did not make payment for the works.
The landlord approved the fit out works, which had to comply with the landlord’s instructions, construction standards, the center design guide and the final plans in accordance with the conditions of the agreement.
The said works were essential for the use of the premises for retail purposes.
This judicial interpretation of fit out works performed by a tenant before the commissioning of a building and
registration of title could have adverse consequences for both landlord and tenant. In particular, these conclusions could be used to apply “mirrored” tax consequences
for the future tenant – the cost of the future tenant performing fit out works to the benefit of another person on a gratuitous basis would not be bookable by the tenant for tax purposes.
OOO IKEA Mos filed an application for supervisory review of the judgments. An RF SAC ruling of July 9, 2013 in case No. VAS-3589/2013 transferred the case to
the RF SAC Presidium for supervisory review, stating that the tenants’ performance of the disputed works before the commissioning of shopping centers was not intended to be a gratuitous benefit to the landlord, but followed from their interest in opening their stores at the same time as the shopping center officially opened to the public.
Identical economic relations (absent special instructions) must be subject to the same tax consequences, i.e., in this case the tax consequences with respect to fit out works cannot be different depending on the time at which such works were performed.
The disputed capital investments were subject to the rules in arts. 256 and 258 RF TC on capital investments into fixed assets provided for lease.
On October 8, 2013, the RF SAC Presidium invalidated the inspectorate’s decision assessing IKEA Mos additional profit and property tax in this incident. At the time of writing the reasoning for the decision had yet to be published, however, it is probable that the RF SAC Presidium based its decision on the conclusions in the RF SAC Ruling transferring the case for supervisory review.
Despite the positive outcome in the IKEA Mos case, the risks relating to the recognition of fit out works carried out by the tenant before the landlord commissions and registers a building may still apply if there are defects in the documentation relating to the fit out works between the landlord and the tenant. In particular, it is essential to avoid conditions indicating that the landlord intends to accept the results of the works upon completion, or
that the tenant intends to transfer such works without an
agreement as to payment (for example, conditions in an agreement that the future landlord will accept the works from the tenant upon completion).
New aspects of the application of the unjustified tax benefit doctrine to cross-border transactions. The NB TRUST case
MO FAC Ruling No. A40-11909/12-75-59 of
October 4, 2013
The NB Trust case is interesting in that it marked a new level in the application of protective doctrines from Russian tax law, especially the notion of unjustified tax benefit. Unjustified tax benefit is usually applied by Russian tax authorities and courts in cases where they wish to deny a taxpayer a VAT deduction or the inclusion of certain expenses as costs. This case showed that the concept of unjustified tax benefit can be successfully applied to prevent income being moved out of the Russian tax jurisdiction.
In the opinion of the Russian tax authorities and courts, in this case the taxpayer created a system for moving the income of a Russian bank abroad. This was done by the Bank assigning the receivables under high-interest loans
at face value to an affiliated Cyprus company. The Cyprus company’s acquisition of the receivables was financed directly by the Bank placing interbank deposits with a non-resident bank, which provided the said funds to the affiliated Cyprus company as a loan. The bank placed
the funds on deposit with the intermediary bank for financing the affiliated Cyprus company’s acquisition of the receivables at a lower rate of interest than the interest on the loans for which the Bank assigned the receivables to the affiliated Cyprus company.
The tax authorities considered that the Bank had derived an unjustified tax benefit by transferring a high-return asset (loans issued to third parties) to the affiliated Cyprus company and replacing it with a low-return asset (automatically renewing interbank
deposits with an intermediary bank). As a result, the difference between the high-interest return on the acquired receivables, and the interest on loans from the intermediary bank, was taxed in Cyprus at a lower rate, which enabled the Bank to save on Russian profit tax by redistributing a part of its income on the high-interest loans to a low-tax jurisdiction. Given the sham nature
of the transactions and the absence of any economic
justification, the tax authorities decided that the loans had remained on the Bank’s balance sheet and the interbank deposits had effectively not been made. The tax authorities therefore established that the Bank had understated its profit tax base.
The court found in favor of the tax authorities on the basis that the transactions to assign loans to the affiliated Cyprus company showed clear signs of being sham transactions, namely:
The systematic and corresponding provision of interbank loans by the bank and the transactions to assign loans to the bank’s corporate borrowers (with identical interest transferred by the Cyprus company to the intermediary bank, which then paid interest on the interbank deposit)
It was not possible to actually carry out the disputed transactions, given the time, location of the property, or volume of material resources. In particular, the bank balances of the affiliated Cyprus company did not permit it to independently acquire the loan receivables without funding from the Bank, which was provided on a systematic basis
Furthermore, in accordance with the information provided by Cyprus tax authorities, the company had not hired employees (other than a general director), paid minimal taxes, and owned no fixed assets. This information was also taken into consideration by the courts in issuing the decision.
Therefore, the disputed transactions met the standard criteria for transactions intended to derive an unjustified tax benefit. Importantly, this case is one of many examples of the tax authorities successfully apply the unjustified tax benefit doctrine to a cross-border transaction.
OECD Base Erosion and Profit Shifting (BEPS) Action Plan
Last month the leaders of the G20 gathered together to discuss means of strengthening the global economy. Among the key issues covered at the meeting were the action steps to pursue fiscal transparency and the fight against abusive tax practices.
The bulk of steps aimed at combatting what are considered to be the most blatant tax avoidance techniques, known as the Action Plan on Base Erosion and Profit Shifting (the BEPS Action Plan), was unveiled for public discussion at the G20 meeting. This article outlines the five actions embedded in the BEPS Action Plan which the author considers most significantly to impact existing business undertakings.
1) The new tax framework for electronic commerce
Electronic (or digital) commerce has been characterized as one of the most challenging areas for tax jurisdictions. The mobility of the e-commerce industry makes it very hard for governments to enforce their tax jurisdictions on digital businesses. Indeed, virtual goods and services do not require much if any presence of a service provider
in a given market, thus being almost impalpable for
purposes of the traditional tax concepts used to attract income to source jurisdiction. Thus, it is currently
quite easy for digital service providers to get most of their revenues from developed or emerging-market economies untaxed, by establishing their presence in low-tax jurisdictions and exploiting the lack of presence in the source states.
The BEPS Action Plan calls for developing a new framework for attribution of e-commerce income to the tax jurisdiction of the source state. We would probably see looser presence criteria apply to the digital goods and service providers to drag their revenues to source taxation. Or states may go even further and enforce their source-state tax jurisdiction in each case where revenue from the supply of digital goods or services is proven
to be derived from their territories, making taxation of
e-commerce similar to taxation of passive income (such as dividends, interest or royalties).
Strengthening controlled foreign corporation (CFC) rules
CFC rules have proven to be an effective mechanism against tax deferrals. These rules normally target routing profits through subsidiaries located in low tax jurisdictions, thus deferring taxation of these profits in the tax residence state of the subsidiary’s ultimate
beneficiary. The rules usually allow the state of residence of an ultimate beneficiary of income to tax this income irrespective of whether the income is effectively received by ultimate beneficiary or is retained at the level of the low-tax subsidiary. The key issue here is to properly design the criteria to be used for distinguishing abusive arrangements from legitimate business practices. This sometimes makes the CFC rules either too complicated to apply (e.g., the CFC rules in the US), or too simple
to circumvent (and thus useless). The principles
incorporated in the CFC rules obviously breach the core principle of income taxation, which is “no tax without access to wealth” and thus should apply as an exception (and not as a general rule). Identifying a legitimate balance has been declared one of the priority tasks of the OECD for the forthcoming two years.
3) Imposing further restrictions on deductibility of interest
The BEPS Action Plan proposes development of further restrictions on interest deductibility, in several ways. Firstly, it is suggested to eliminate hybrid mismatches, i.e., situations where a single financing arrangement
is treated as debt financing in a source state (thus
providing for deductible expense in the hands of a payer of interest) but is nevertheless considered equity financing (generating dividend income) in the state of a recipient of income (thus making the income recipient eligible to enjoy a participation exemption or lower taxation in its state of residence). Secondly, taxpayers may expect further restrictions on interest deductibility in general, either based on the arm’s length standard which applies through transfer pricing rules or by establishment of additional qualitative or quantitative criteria of deductibility. The continuing drastic expansion of the scope of Russian thin capitalization rules by the Russian tax authorities is in line with the proposed BEPS approach, which would likely be considered by the Russian Government as encouraging and legitimizing further crackdowns.
4) Full disclosure of tax planning strategies
Full disclosure of tax planning strategies is something practiced in some of the developed countries (such as the US and the UK) but is as yet unknown to Russian taxpayers. The G20 countries are no longer satisfied with the abilities of their tax administrations to detect tax planning arrangements during routine tax audits. It is proposed to require taxpayers to disclose “aggressive or abusive transactions, arrangements, or structures”.
The suggestion poses a number of difficult questions, however. Will governments be able to provide for undisputable and unambiguous criteria to define what is an “aggressive or abusive” transaction, arrangement or structure, so that the taxpayers could determine the ambit of their reporting requirements? Should
taxpayers escape non-disclosure penalties if they have a good faith dispute with tax administrations regarding the nature of a particular transaction or structure (i.e., whether it is abusive or legitimate tax planning)? Finally, how would the full disclosure requirements comply with the well-established principle of protection against self–incrimination, which prevents states from forcing
individuals to deliver testimony which could then be used to convict them (and thereby indirectly protecting legal entities, which are after all comprised of individuals)? Thus, vigorous actions of taxpayers against the disclosure requirements on constitutional grounds may be expected.
Development of domestic measures to prevent treaty abuse
Although the BEPS Action Plan is not specific on this matter, it may be envisaged that states will be
encouraged to develop domestic sets of rules preventing
what they believe to be treaty abuse practices. In other words the states will have to determine who is entitled to treaty benefits and who is not. Shifting this issue to the domestic level (rather than making it a matter for treaty negotiations between the contracting states) raises a reasonable concern about the ability of states to achieve a uniform approach to address treaty abuse unilaterally. It is obvious that the OECD guidelines on the subject matter (however detailed and clear they are) will not be able to ensure coherence and uniformity, if the states are free to establish the conditions for access to treaty benefits by legislating domestically. This would inevitably cause disproportionate application of the tax treaties, with some of the states pursuing a more liberal
treaty-access policy than others. Thus, it looks more appropriate to encourage the states to negotiate and incorporate treaty protection mechanisms within the treaties themselves. This, of course will require expansion of the treaty provisions, and corresponding changes to the OECD and the UN model conventions could be of major assistance in this respect.
Needless to say implementation of the BEPS Action Plan will become a major point of attraction for tax practitioners in the coming years. The business community is only
left to hope that the states will take an even-handed
approach by balancing public and private interests, so that the proposed steps will enhance the tax environment worldwide rather than damage the global economy.
Clarification of tax agent status
RF SAC Plenum Ruling No. 57 of July 30, 2013 Federal Law No. 306-FZ of November 2, 2013
In 2013, it was notable that the tax authorities were paying increased attention to taxation of the income of foreign companies withheld at source of payment in Russia. In view of the complexity of tax administration for foreign companies not registered with the Russian tax authorities, both legislators and the RF SAC Plenum decided to impose new obligations and liabilities on Russian companies acting as tax agents.
First, RF SAC Plenum Ruling No. 57 of July 30, 2013 included the conclusion that the tax authorities have the right to recover from the tax agent tax not withheld at payment of income to a foreign company, plus penalties accrued up to the time of payment. The RF SAC previously permitted the recovery of taxes (plus late payment interest and fines) from a tax agent in connection with income paid abroad only with respect to VAT (RF SAC Presidium Ruling No. 15483/11 of April 3, 2012). The RF SAC’s opinion here appears well founded, given that the said obligation of the tax agent corresponds to the right to apply VAT deductions in the amount of the tax paid.
However, the extension of this position to the recovery from a tax agent of income tax withheld at source
has no legal basis. Notably, the RF Finance Ministry disagrees with this position, and has stated that Russian organizations acting as tax agent are not obligated to pay
tax on the income of foreign organizations from sources in the RF out of their own funds (see, for example, RF Finance Ministry Letter No. 03-08-05/32574 of August 8, 2013). However, this RF SAC Plenum Ruling is highly likely to change enforcement practice with respect to collecting amounts not paid by foreign entities without a
Russian tax registration from tax agents, since neither the lower courts nor the tax authorities will be able to ignore this ruling. At the same time, it is still not clear whether this rule will apply to all tax agents, or only those paying income to residents of states which have double taxation treaties that do not have provisions allowing the Russian Federation to recover unwithheld taxes from the foreign recipient of the income.
Legislation on tax agents has also introduced a new procedure for withholding tax when paying foreign persons income on securities held in depositary programs, or deposit accounts of a foreign nominee or authorized holder (Federal Law No. 306-FZ of November 2, 2013). At the same time, in most cases the depositary must act as tax agent (the issuer retains the function of tax agent for payments on securities held in the accounts of owners). The tax is calculated and withheld by the
tax agent on the basis of information provided by the
recipient of the income (ultimate beneficiary).
At the same time, a depositary acting as tax agent must withhold tax at source at a lower rate established by a double taxation treaty, unless the application of such lower rate is dependent on some special conditions (such as, equity interest, value of direct investment). In this case, the depositary must present a summary of information on persons exercising rights with respect to the securities, and the quantity of securities broken down by country of origin of the actual recipients of the income, and the applicable rates of tax. The law does
not define the term “actual recipient of income”, and as a result it is possible that in practice the tax authorities will demand more detailed information on the recipient of the income on the securities.
If the application of the lower rate under a double taxation treaty is contingent on the performance of special conditions, the depositary must withhold tax at the higher rate provided in the agreement. The overpaid tax will be refunded to the foreign taxpayer directly via the tax authorities.
If this information is not provided, the tax agent must withhold tax on the income at 30% of the persons exercising rights under the securities have not submitted all or part of the information to the tax agent.
Amendments to the RF TC with respect to
taxation of securities and financial transactions
Federal Law No. 420-FZ of December 28, 2013 on Amendments to Article 27.5-3 of the Federal Law on Securities and Parts I and II of the RF TC
On December 28, 2013, the RF President signed a law making significant amendments to the RF TC concerning calculation of the tax base for financial transaction. Most of the provisions of the law enter into force on January
1, 2015, except certain rules entering force in 2014 and 2016. Below we highlight the most important innovations in this law.
The restrictions on the deduction of interest currently provided in art. 269.1.1(1) RF TC will be cancelled
with respect to debt obligations arising as a result of
transactions with independent persons. With respect to controlled transactions, the income/expense
will be recognized for tax purposes in accordance with transfer pricing rules (“TPR”).5 For controlled transactions in which one party is a bank, the TPR do not require a justification provided the rate is within an
interval established by law for certain currencies. These
amendments enter into force on January 1, 2015.
As of January 1, 2014, interbank lending transactions up to 7 days inclusive are not deemed controlled transactions
As of January 1, 2016, the actual price may be applied for tax purposes in securities and derivatives transactions between independent persons.
• The law clarifies that a taxpayer that using the accrual method has the right to determine interest income/ expenses monthly irrespective of the payment date, provided such interest is paid on the basis of an agreement valid for more than one accounting period.
Please note that under Federal Law No. 39-FZ of April 5, 2013, the tax authorities do not have the right to control transfer pricing with respect to transactions involving the granting of a loan, (including commercial and goods credit), suretyship, or bank guarantee for which the income/expenses are recognized after January 1, 2012 and which were concluded before January 1, 2012. This exemption only applies with respect to loans (including commercial and goods credit), suretyships and bank guarantees for which the conditions were not amended after January 1, 2012.
This revised rule of art. 328 RF TC is intended to eliminate the disputability of tax accounting of interest income/expenses and applies as of January 1, 2014.
An investment tax deduction has been introduced for personal income tax with respect to income received from the sale of traded securities owned for a period of more than three years and purchased after January 1, 2014, in an amount not exceeding 3,000,000 rubles per year (adjusted on the basis of a special securities multiplier). A tax deduction is also provided for transactions using an individual investment account (up to 400,000 rubles per year).
As of 2014, the obligation to generate VAT invoices and keep registers of VAT invoices issued and received, and purchase and sales ledgers, for transactions subject
to VAT but exempted on the basis of article 149 RF TC,
The law also introduces numerous revisions relating to the procedure for determining the tax base for VAT, personal income tax, and profit tax with respect to transactions with depositary receipts, securities,
derivative transactions, and transactions via an individual investment account.