Investigators have been given back the power to initiate criminal cases for tax offences. This opens the door to investigation of tax violations for the previous 10-year period and creates a higher risk of arbitrary initiation of criminal cases and raids for alleged tax offences regardless of whether any tax underpayment has been assessed by the tax inspectorate.
What the law says
A criminal case for tax offences may be initiated independently from the tax authorities even if a particular tax violation has not been investigated in a tax audit. This effectively gives investigators full powers to pursue tax violations for the previous 10-year period (the statute of limitations for tax crimes).
These changes to the Russian criminal procedural rules were introduced by Federal Law No. 308-FZ “On the Introduction of Amendments into the Criminal Procedural Code of the Russian Federation,” dated 22 October 2014 (the “Law”). The Law entered into force on the same date.
Changes to procedure for initiation of criminal cases
Historically, the right to independently initiate criminal cases for tax offenses was withdrawn from investigators at the end of 2011, when changes were introduced into the Russian Criminal Procedural Code allowing initiation of criminal cases in limited circumstances only when a tax assessment resulting from a tax audit was not fully settled in a timely fashion.
The Law empowers investigators to initiate criminal cases for tax offences regardless of whether a particular tax violation has been the subject of a tax audit, whether a tax assessment has been made, and whether there is a tax dispute, including in court. This effectively reinstates the full powers of investigators to identify and prosecute tax offences committed during the previous 10-year period.
Prior to initiation of a criminal case the Law requires the investigator to inform the tax authorities and requires the tax authorities to confirm whether the tax violation has been the subject of a tax audit. However, the investigator may decide to initiate prosecution even prior to receipt of confirmation from the tax authorities if there is enough evidence of a tax crime. The investigator is not bound by the results of previous tax audits and is not required to involve the tax authorities in the investigation.
Changes when seeking to avoid criminal charges by voluntary payment
Historically, a person could escape criminal liability for a tax offence if, by the end of the pre-trial investigation and before the commencement of court proceedings, the damage to the Russian budget was fully compensated, which was determined as the amount of the tax assessment resulting from a tax audit.
According to the Law, the damage to the Russian budget is determined by the investigator in accordance with Russian tax legislation taking in account the calculation of applicable late payment interest and tax penalties received from the tax authorities. Thus, given that the amount of tax underpayment will be determined by the investigator, there is a risk of arbitrary interpretation of tax rules by the investigator and an increase of tax assessments made outside tax audits.
Actions to consider
Individual and corporate taxpayers (and their responsible persons) now face higher risks of arbitrary initiation of criminal cases and raids for alleged tax offences relating to the past 10 years. These risks should be taken into account in taking decisions on entering into transactions in Russia, especially those involving tax planning elements. Internal procedures on the appropriate action in the event of raids against the company and/or its management should be put in place.