There are a large number of ambiguities and disputed issues in Russian tax law.
Unfortunately, one cannot obtain an advance clearance or ruling in Russia; accordingly, it is not always possible to avert a dispute in ambiguous cases. Taxpayers can request the Ministry of Finance (MinFin) to give clarification on ambiguous pieces of legislation. However, although it provides exemptions from penalties and fines, MinFin clarification letters in response to such requests are non-binding. Furthermore, MinFin can provide clarification on interpreting the law but does not respond to information requests concerning specific taxpayer situations. Nor does it go into detail on how a specific deal or transaction by a taxpayer should be interpreted for tax purposes.
The only exception is the possibility of concluding a pricing agreement. This option became available to taxpayers in Russia in 2012, when new transfer pricing (TP) rules were introduced. The first pricing agreement was concluded in November 2012, and eight such agreements have been concluded to date. Nevertheless, this option has not become workable in practice because of the unwillingness of tax authorities to conclude such agreements.
Given this inability to obtain any kind of binding clarification, taxpayers must complete their tax returns based on their own understanding of the tax law. If a taxpayer makes an error in completing its return and discovers this error itself, it is entitled to file an adjusted return. There is no deadline for filing adjusted tax returns. However, if because of an error a taxpayer becomes entitled to a refund of overpaid tax, such a refund can be made only if a relevant request is filed with the tax authorities within three years of the tax overpayment. The tax authorities verify that taxpayers have a correct understanding of the tax law during tax audits.
Most disputes initiated by taxpayers in Russia originate either from the results of a tax audit or from a taxpayer's request for a refund of certain tax amounts (refund of overpaid or overcharged taxes, value added tax (VAT) refunds). The following should be considered regarding disputes related to tax audit results.
There are three types of tax audit in Russia:
- a desk audit, which is generally a formal review of a tax return conducted within three months of its filing. The tax authorities have only limited rights during this period. As such, disputes resulting from desk audits are rather rare, except for certain categories (e.g., VAT refunds, confirmations of tax benefits and certain other cases);
- a special TP audit, which verifies the accuracy of TP calculations. This type of audit was introduced in 2012 under the new TP legislation. The first TP audits were initiated in summer 2014, but to date just a few decisions have been made in these cases, and no court case has been finished yet; and
- field audits, which are the predominant type of audit. The tax authorities can go back three years preceding the year an audit is initiated. It is a full-scope audit. Since 99 per cent of field tax audits result in additional taxes being charged, disputes are very common. Disputes based on field tax audits are usually the largest and most complex.
If the tax authorities discover errors during any type of audit, they will issue a certificate describing the violations committed by the taxpayer. The taxpayer must then generally file its objections to this certificate within one month (20 business days for special TP audits). Objections are considered by the same tax authority, in the taxpayer's presence; the tax office could conduct additional control measurers (it is optional) and then issues a final resolution on the audit after reviewing all objections.
If the taxpayer disagrees with the final resolution, it can file an administrative appeal to a higher tax authority within one month. This appeal constitutes a mandatory pre-litigation stage. On average, the higher tax authority takes one to two-and-a-half months to review an appeal. In most cases, the higher tax authority upholds the resolution of the lower authority. However, recently a positive trend has emerged of the tax authorities being more objective when hearing appeals and more frequently supporting the taxpayer's position. Once a taxpayer has filed such an administrative appeal with a higher tax authority, it will then have no liability to pay the additionally assessed tax until its appeal has been heard. If the taxpayer fails to file an appeal within the one-month time frame, however, then the tax authority's decision will take effect and the additionally assessed tax may be collected from the taxpayer. However, the taxpayer can still file an appeal with the higher tax authority within one year of the date on which the decision was adopted, to comply with the procedure for a mandatory pre-litigation appeal.
A taxpayer can bring its case to court within three months of obtaining an unfavourable ruling from a higher tax authority. To initiate litigation, a taxpayer files a motion to dismiss the ruling with the court of first instance. The taxpayer may not go to court, however, if the pre-litigation procedure has not been followed.
Another major group of disputes relate to receiving cash funds from the state budget. The most common types are disputes related to refunding or offsetting overpaid tax; refunding or offsetting overcharged tax; and VAT recovery.
Usually, these disputes arise in two instances: the tax authority resolves to deny a refund or offset of tax (resolution to deny VAT recovery); or the tax authority takes no action and does not issue a resolution on refunding or offsetting tax, although it is obliged to refund and offset the relevant tax (refund VAT).
In the first instance, taxpayers can appeal against the tax authority's resolution denying the refund or offset of tax (denying VAT recovery). To appeal against such resolutions, taxpayers must first file with the higher tax authority (within one year of obtaining the resolution), and only then with the court (within three months of obtaining the higher tax authority's resolution).
In the second instance, taxpayers can file a complaint about the tax authorities' inaction with the higher tax authority (within one year; however, there is some uncertainty regarding when exactly the one-year period should begin – in most cases, in practice the period begins from the tax authorities' deadline for adopting a relevant resolution), and only then file with a court (within three months of obtaining the higher tax authority's resolution).
In either case, when filing an appeal with a court, taxpayers often file a second (property) claim: that is, in addition to filing a motion to dismiss a relevant resolution (complaint about inaction), taxpayers also ask the court to obligate the tax authority to adopt a resolution on refunding (offsetting) the tax. Property claims can be filed within three years of the date of tax overpayment or overcharging of tax. The second claim simplifies the subsequent enforcement of the court's decision. Property claims are also filed independently (e.g., when the deadline for filing the first (non-property) claim is missed, or if a taxpayer is seeking to avoid the pre-litigation procedure). Property claims have some procedural specifics; in such situations, courts may take differing approaches to the legality of filing a property claim.
In addition to the disputes described above (based on audit results and to obtain tax amounts from the budget), taxpayers may initiate other disputes. Taxpayers can appeal against other unlawful non-regulatory acts, actions and omissions of the tax authorities (including requests for payments, resolutions to recover, inaction on issuing a resolution). The appeal procedure is on the whole identical to that for appealing a tax audit decision. First, one must file an appeal with the higher tax authority within one year, and then file with a court within three months of the date one receives the higher tax authority's decision.
Another type of dispute involves appealing against regulatory acts. In the case of tax disputes, if the law is ambiguous, taxpayers or the tax authorities can request clarification letters from MinFin, or MinFin can provide clarifications independently. In certain cases, clarification letters are binding on the tax authorities. If such letters violate taxpayers' rights, taxpayers can appeal against them as if they were regulatory acts. In this case, appeals should be filed with the Russian Federation Supreme Court (SC) (the highest judicial instance for civil cases and, since 6 August 2014, for commercial and tax cases as well).
Taxpayers can sometimes purposefully instigate a tax dispute. This could be necessary to test a specific disputable position if the taxpayer is not certain its position is correct, and is seeking to verify its validity in court without waiting for a field tax audit (which could occur after two to three years), and further does not want to assume the risk of liability. To instigate a dispute, the taxpayer files tax returns and purposefully does not claim any tax benefit (expenses, benefits, etc.), and pays the entire tax amount listed in the returns. After a certain period, the taxpayer then files adjusted returns in which it additionally claims the relevant tax benefit (expenses, benefits, etc.) that it did not claim before, and requests a refund of the overpaid tax amount. Since the tax authorities are not eager to refund taxes, they would most probably search for reasons not to refund the tax, issue a resolution to deny the tax refund or simply do nothing.
The taxpayer can appeal against a resolution to deny a refund of overpaid tax or the inaction of the tax authorities. Such a dispute could result in the setting of an interesting judicial precedent that is important for the taxpayer (although Russia is not formally a common law country, the courts do seek to establish uniform judicial practice, and the positions of the highest judicial instances effectively serve as virtual precedents). If the case is won, the taxpayer can then as far as it is possible safely use the relevant tax benefit in future. If the case is lost, the taxpayer can avoid penalties and clarify the law more quickly than if the dispute had only arisen during a field tax audit. However, the tax authorities do not always respond as expected to such an instigation, and may refund overpaid tax without a dispute only to challenge the claimed benefit or expense at a later date during a field tax audit.
All of the above by and large applies for both legal entities and individuals; however, there are some differences:
- legal entities and entrepreneurs litigate in arbitrazh courts, whereas individuals litigate in general jurisdiction courts (see Section III); and
- legal entities and entrepreneurs litigate extensively, and initiate most tax disputes, while individuals litigate much less in disputes, and such disputes are largely initiated by the tax authorities. This is because the tax authorities can levy additional taxes on legal entities and entrepreneurs using the pre-litigation procedure, but on individuals only through litigation. Thus, individuals need not initiate disputes on their own.
The above-mentioned disputes are initiated by taxpayers. Disputes initiated by the tax authorities include disputes concerning the collection of taxes, penalties and fees when they cannot be collected out of court (e.g., from individuals, and when a relevant statute of limitations is missed for legal entities). The tax authorities can also initiate some other types of disputes (e.g., to recover damages caused to the state due to a bank unlawfully debiting a taxpayer's account after receiving a resolution by the tax authorities to suspend transactions, which prevents the tax authorities from collecting arrears, overdue penalties and fines as provided by the Tax Code), but they are infrequent and of a rather specific nature.