Taxadvisor lawyers have prepared a review of such changes. You will learn what kind of register that is, how it is going to work, and what influence it is going to make on participants of leasing transactions. You can download a PDF version of our review here.

This is a corporate blog of Taxadvisor legal company. Here we share our experience and useful information, not only about taxes but also on commercial disputes, intellectual property.

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Alexey’s competences include issues of tax administration and tax calculation procedure, as well as issues of international taxation.

Under Alexey’s supervision and with his participation, besides projects on consulting and protection of interests, projects on structuring, M&A support, projects of methodological nature, as well as transfer pricing projects were carried out for numerous clients.

One of the main changes was the addition of the following norm to para. 2 art. 101 of the Tax Code:

A tax authority must provide a person (or his representative) in regards to whom a tax inspection was carried out with an opportunity to familiarize himself with the tax inspection materials, as well as with the materials of additional tax control measures on the territory of the tax authority no later than two days from the date of submitting the relevant application by such person. Familiarization with such materials is carried out by their visual inspection, preparation of extracts, making copies.

An issue with access to inspection materials is not new, it’s existed for almost 20 years. And it is being solved by microscopic changes made with incredible efforts. One could say: ‘That’s something at least’, however there was a nuance in the form of transitional provisions. Para. 4 art. 2 of the Law No. 130-FZ says:

Provisions of paragraphs 1, 2 and 6.1 art. 101 of part 1 of the RF Tax Code (as amended by this Federal Law) are applied in reaching decisions on the results of tax inspections that were completed after the date of entry into force of this Federal Law.

Yes, we were surprised too. It’s hard to find logic in such regulation. Why can’t the taxpayers who received the Inspection Report before June 1, 2016 take advantage of the improvements? Considering the fact that para. 3 art. 5 of the RF Tax Code points directly to the retroactive effect in relation to the norms establishing additional guarantees to protect the rights of taxpayers. It is surprising that in a similar situation about the action in time of procedural rules the RF Federal Tax Service in the Letter of July 4, 2013 No. CA-4-9/12019@ clarified in favor of taxpayers. Will this approach be repeated this time around? Or the same taxpayers will be denied to become familiar with the reference to the transitional provisions?

In any case, once again we have to wonder about the quality of tax laws.

P.S. It is worth paying attention to the peculiar terminology of para.4 art.2 of the Law No.130-FZ, namely a reference to some completed inspections. In the RF Tax Code, a very specific concept of the last inspection day is used (in para. 15 art. 89 of the Tax Code). Tax Code uses quite clear definition "last day of tax audit" (para.15 art.89 Tax Code). One might get the wrong impression that the inspection is completed by making a decision based on inspection results.

But it’s better to read once than…

So, my colleagues have translated a text of one of the decisions of an Indian court. The translation can be found here.

They must probably have enough problems in the judicial system. But the fact that the decision was written by the judge himself and not by a gowned bureaucrat is a huge plus. Let’s discuss. However, not everyone probably likes that style. And that can also be discussed in the comments below.

And, in order not to make the impression that such a decision is an exception rather than a rule, it needs to be said that it is not. Such types of decisions appear pretty often. I hope that we can upload a couple more texts in the near future.

P.S. It’s interesting that in the past couple of weeks there have been two publications about the judicial system in the big press – an interview with an American judge – Wall Street terror (read here), an analysis of the structure of the Russian judiciary establishment (read here).

The IRS thinks that the company has distorted the amounts of payments for various intangible assets which were being used by subsidiaries outside the US. That is why there was a shortfall in profits in the USA. The effective rate of income tax for 2014 amounted to 23.6% at the nominal rate of 35%.

Coca-Cola insists on the absence of violations, as well as on the fact that it was following the transfer pricing agreement with the IRS of 1996.

Let us remind you that the company’s issues with transfer pricing have been noticed in other countries as well.

National Bureau of Economic Research (NBER) has developed a model that calculates the budget revenues at different fuel prices. Unfortunately, I haven’t found the original research on www.nber.org website (if anyone could give the link in the comments I would be very grateful). The model calculates the economic condition of not only Russia but also the United States, India, the EU, Japan and Korea.

The results obtained suggest the following.

By 2084, fossil fuel reserves will be exhausted (the RF Ministry of Natural Resources agrees with that as well), tax rates around the world will increase dramatically. Due to serious dependence of our budget on tax revenues from the oil and gas sector, Russia is assumed to have the highest rates growth.

The model also forecasts which measures of economic policy can most efficiently reduce the negative effects in our country. According to experts’ opinion, those measures include:

• transition to personalized pension accounts (What might that mean? - author's note);

• abolition of corporate income tax;

• an increase in the birth rate by 25% (The measure is understandable, but when you think about the implementation  methods, a famous anecdote about the owl and strategy comes to mind - author's note)

As a result, according to the baseline scenarios the effective tax rate on personal income were calculated.

As can be seen from the graph, the personal income tax rate can range from 30 to 70%. Please note that this is an effective rate rather than the nominal rate. As at such a rate will be motivated to work, is not clear. However, researchers recommend to abolish corporate income tax, it could encourage investment.

In general, We will have quite boring reality, where there will be no mining tax and other resource taxes, no income taxes. And the memories and stories about that, what was once upon a time there was a wonderful personal income tax rate of 13%, will be more like the legends and myths.

On the other hand, the authors clearly hope that humanity will not ruin yourself up in 2084. This is a big plus.

The fourth one literally says the following:

The Right to Challenge the IRS’s Position and Be Heard

Such a trivial thing – ‘to be heard’. There’s something in it though. Some qualitative characteristic. And this simple idea of ‘being heard’ is so much needed at any stage of appealing.

By the way, IRS kindly provides the declaration of rights in Russian. Canada has a similar declaration of rights, which contains no less than 16 rights and 5 additional principles relating to the administration of small businesses. I will give several examples which, to my mind, definitely evoke the feeling of envy Here’s one:

You have the right to expect us to be accountable.

and the other one:

You have the right to expect us to warn you about questionable
tax schemes in a timely manner.

But let’s get back to IRS. One could say that all those rights are described in quite a general and declarative manner. Who is going to respect them? And that’s where an interesting authority comes onto play, which, as I understand, is part of the IRS structure but is an independent and supervisory authority of the service operations. It is called Taxpayer Advocate Service (TAS). The authority’s slogan is ‘TAS – Your voice at the IRS’.

TAS assists taxpayers in handling disputes, helps low-income citizens, etc. They make an annual report for the Congress, in which they systematize the administration problems and suggest ways to solve them. The report’s structure focuses around each of the taxpayers rights listed in the Declaration. The 2014 report in full version is around 1000 pages, a short summary is about 100 pages.

I really want to believe that I will have the time to write about the most interesting aspects of the report. For starters, I’d like to mention an interesting fact about the general literacy of taxpayers in the US:

Less than half of taxpayers know that they have some kind of rights when dealing with tax authorities. And only 11% can name those rights.

Meanwhile, I suggest to speculate on whether Russian taxpayers need such Declaration.

P.S. And we haven’t even discussed the annual reports of tax authorities in India :-)

Photo: Hartwig HKD

The court also considered the issue, whether a permanent establishment of a foreign organization is formed if it only leases real estate in the territory of the Russian Federation. This qualification seriously affects the procedure for calculating the property tax – from inventory value or book value.

The RF Ministry of Finance prepared a draft of The Main Tax Policy Directions (MTPD). The parliamentary hearings will be held on June 2 in the RF State Duma. We’ve prepared a brief overview of the measures that are noteworthy.

The MTPD could not ignore the current geopolitical situation, that is why the preamble states that tax policy should meet the current global challenges, among which are, first of all, sanctions.

Deoffshorization

Probably the shortest section of the MTPD.

One of the most important and controversial things is taxation of capital gains in liquidation of CFC. The MTPD directly indicates the desire to impose taxes on these gains, but not at the time of liquidation of the CFC but in further realization of the assets. Apparently, this approach eliminates the few advantages of voluntary disclosure and (or) liquidation of the CFC.

It was noted that Russia actively participates in BEPS and, in general, we are in the trend. It is still planned to launch automated information exchange in 2018. Clarification of the rules on the CFC will be continued after the final version of the relevant report.

Thin capitalization and accounting of interest payments

There were quite a lot of suggestions here:

• It is suggested to extend the minimal 0% rate mode and, possibly, make it permanent. More details on these changes were mentioned in our alert.

• It is proposed to consider extending the thin capitalization rules to domestic financing. Reclassification of interest into dividends will operate, but dividend exemption on strategic participation will be applied.

• Following the release of the final recommendations of the OECD on ‘Restricting possible corporate profits erosion due to interest payments’ in the framework of para. 4 of BEPS Plan realization, changes in the national legislation will be made.

Tax administration

The MTPD suggests introducing preliminary clarification on taxation of planned transactions (analogue of tax ruling). However, no details on this issue have been revealed. Let us remind that this issue is in the roadmap on tax administration.

In order to expand taxpayers opportunities to act with due diligence, it has been suggested to provide access to indicators of counterparties’ tax reporting, their number of staff, the amount of taxes paid. A questionable measure from which it is hardly worth expecting any results. Because one shouldn’t expect that there won’t be any claims is a counterparty reflected implementation in the reporting and conjured something with deductions. In this scenario, it's more like shifting the blame on others.

The problem of introducing a general anti-abuse rule (GAAR) is also indicated,  as well as the need for the introduction of these regulations into the Tax Code. Besides that, the RF Supreme Court Plenum on unjustified tax benefit does not include, according to the Ministry of Finance, all possible ways of abuse. It seems that somewhere in the world there’s a manuscript where absolutely all methods are described, and someday it shall be found. Here it is worth paying attention to the bill on the same topic, which is being discussed in the State Duma. However, it is nowhere near even remote analogues of GAAR, and it has been suggested to deny deductions and expenses if a signature on the invoices is the wrong one or the signatory denies having signed it.

Property tax

The main changes will concern the functioning of the privileges in respect of movable property. The MTPD separately indicated that the privilege introduced in 2013 was used by taxpayers for exemption from taxation of old rather than new property. This required changes, which came into force from 2015.

The Ministry of Finance admits that new regulations also have their issues. In particular, if property was obtained within reorganization, even if previously the property was legitimately exempt from tax.

In this connection monitoring will be carried out, and within the expansion of property taxation on the cadastral value of the exemption for movable property will be expanded.

P.S. If you are interested, you can read a similar document prepared by, as they say, our partners from the US Treasury.

Photo: Victor Kapustin

Today we released a review of a rather interesting tax dispute. Almost 3 billion rubles was added into a taxpayer’s income, which was received by him from a holding company.

First instance court and court of appeal supported the tax authorities. Read more in our alert.

Let us remind you that you can subscribe to our alerts here.

I would like to draw attention to the elusive ‘trifle’ – draft number 688389-6. It was adopted in the first reading on May 22.

Hiding behind an unappealing title ‘On Amendments to the Tax Code of the Russian Federation in terms of Improvement of Tax Administration’ is the following. It is suggested to exclude the second sentence of the second paragraph of p.2. Here’s what the ‘victim of improvements’ looks like:

In case the person, in respect of whom tax audit was carried out, files the application for access to the case files, the tax authority must familiarize such person (or his representative) with a tax audit materials and materials of additional tax control measures not later than two days before the tax inspection materials revision.

The Explanatory note is traditionally silent on this matter. Why make a noise, really? It’s better to do things quietly.

It has become truly difficult to understand the lawmakers’ motifs and signals. Is that a start of a new trend? Maybe they shouldn’t issue the inspection report either?

The lack of transparency of legislative activity in the Russian Federation has become proverbial. And we are talking here not so much about the process but about documenting and transparency of amendments justifications, expert reports, transcripts of discussions in the committees, etc. And it is the essential justifications, not ‘highly intellectual’ explanatory notes such as: ‘Adoption of the draft would not require financial expenditures of the budget, so we must adopt it’.

And since the said minimal requirements aren’t there, keeping up appearances is not only pointless, but in general they were probably invented by cowards. This fact is quite a significant demonstration of the process of adopting the bill number 675906-6.

So, on December 12, 2014 deputy G. Khor introduced the text of the bill to the State Duma. Paragraphs 2-4 of art. 269 were changed completely, and paragraphs 5-7 were added. Explanatory note says that the bill aims at clarifying the "controlled debt" concepts, namely:

• extends this concept by incorporating the debt liabilities between any dependent persons, and not only between ‘the mother’ and ‘the daughter’;

• excludes from the concept the debt to banks, secured by guarantees or assurances of foreign dependent persons.

On January 30, 2015 this text was adopted in the first reading and 7 days are given to make amendments.

New law desepticon

February 13, 2015 appeared Amendments, recommended by the Committee of the State Duma's Budget and Taxes. They imply that no trace of the first reading of the text left.

Now the bill is completely devoted to the amendments in para. 1 art. 269 of the RF Tax Code (the full analysis can be found here).

In just two week’s time the issues of ‘thin capitalization’ have sunk into oblivion. Is there an explanation to such a radical change? No, there isn’t.

Perhaps, it can be explained by ‘expediency’. The amendments to para. 1 art. 269 of the RF Tax Code are more necessary, important, etc. But such explanation is illogical, because, when necessary, additional amendments can be added to the bill. And there are a lot of such examples in practice.

Invesment climate? No, it's only in scientist's books.

Interestingly, many taxpayers have rushed to make changes in tax accounting and risk assessment on the ‘thin capitalization’ after the 1st reading. They believed on Government's bare word.

Well, we beat and beat. Not the first and not the last time.

Has anyone made after this any conclusion? Unlikely. No one is outraged, at best, we have kitchen talkings..