The need for changes in the Russian Tax Code. More amendments made to the Tax Code

On July 18, the Russian President signed a law on combatting tax evasion that is also known as the law “on codification of unjustified tax benefits.”

The possibility of the law being adopted has been under discussion for a long time; however, the lawmaking activity in this area started only in 2017. The deputies of the Russian State Duma needed a bit over half a year to rewrite completely the initial text of the draft law and to adopt changes to the Russian Tax Code. It is planned that the law will take effect from August 20, 2017.

Pursuant to the new law, Article 54.1 establishing “the limits of exercising rights on calculating the tax base” is added to the Tax Code. The provisions of this article set the following restrictions:

1. Ban on decreasing a tax base (and tax amount) as a result of distorting facts of economic activity or objects of taxation;

2. Admissibility of decreasing a tax base (and tax amount) subject to the following conditions:

• The main purpose of a transaction/operation is not avoidance of a tax payment;
• The obligation under a transaction is performed by a party to the agreement or a person to whom the executing right under the agreement or the law is assigned.

The obligation to prove the taxpayer’s violation of the restrictions is imposed on the tax authorities.

However, the said legal provisions raise certain reasonable questions and apprehensions among businessmen and the legal community. In particular, the following issues remain uncertain:

1. The law does not define the notion of “distortion of facts of economic activity” and does not establish the criteria evidencing such “distortion”; therefore, it appears that the content of this notion is not specific and there is a risk of it being interpreted arbitrarily.

2. The law in effect introduces an additional obligation for the taxpayer on checking the party actually performing the obligations under the agreement. If the performing party is an individual and not a party to the agreement, the negative tax consequences will affect specifically the taxpayer. This provided, in such a situation neither the reality of the economic operation, nor the absence of tax claims against the participants of the transaction matters.

3. Unfortunately, the law does not establish unambiguous consequences of non‑compliance with the restrictions provided. According to the practice formed in cases on unjustified tax benefit, the main consequence of non-observance of the restrictions should be reconstruction of the tax obligations and establishing the actual amount of tax liability. However, the law does not establish directly the consequences, putting the taxpayers in a situation of uncertainty without grounds.

The remaining provisions of the law repeat the provisions of Ruling No.53 “On the arbitration courts’ assessment of reasonableness of tax benefit being received by a taxpayer” of the Plenum of the Supreme Commercial Arbitration Court of the Russian Federation dated October 12, 2006 (hereinafter the “Ruling No.53”) and the court practice formed. This provided, the grounds for recognizing benefit as unjustified cannot be:

• The possibility for a taxpayer to achieve the same result of economic activity when performing other transactions;
• Source documents being signed by unauthorized persons;
• Contracting party’s violation of tax legislation.

According to comments of the lawmakers, the main purpose of the amendments adopted is to deal with bad faith taxpayers whose actions are aimed at unjustified tax benefits from cooperation with fly-by-night companies.

We believe that an evident omission is that the law does not establish priority of real economic operations over observance of formalities, which puts bona fide taxpayers at risk and does not allow to protect their interests. Furthermore, the issue on correlation between the provisions of the new law and provisions of Ruling No.53 remains unresolved.

Undoubtedly, the adoption of this law is among the main events of this year. However, unfortunately, it raises more questions than it answers. In our opinion, many questions as to certainty of its provisions and correlation with the practice formed can impede its effective application. We can only hope that explanations from the Federal Tax Service and court practice will help develop uniform approaches and application of the law in line with its initial purposes.

Federal Law No.163-FZ “On introducing amendments to Part I of the Russian Tax Code” dated July 18, 2017.

Ruling No.53 “On the arbitration courts’ assessment of reasonableness of tax benefit being received by a taxpayer” of the Plenum of the Supreme Commercial Arbitration Court of the Russian Federation dated October 12, 2006.