Ekaterina Kopylova, Tax Compliance tax consultant, gave an overview of important tax events in February in Pravo.ru digest and in our publication.

Modernization of the fiscal system

Event:

On February 29, in his Address to the Federal Assembly, the President drew attention to the need to modernize the tax system and instructed the State Duma to prepare a "concrete set of proposals."

During his speech, the President presented his understanding of a "fair tax burden": the introduction of a progressive taxation system in the Russian Federation. 

Along with this, Vladimir Vladimirovich voiced other tax proposals:

• Introduce an amnesty for SMEs that are forced to resort to a scheme of artificial business fragmentation when switching from USN to OSNO.
• Expansion of certain tax benefits. 
• Increase the amount of tax deductions for children, introduction of new social deductions and other proposals.

Significance of the event:

The initiatives announced by the President will undoubtedly have a radical impact on the Russian tax system. 

It is not surprising that these proposals have generated a lively discussion in the professional community, in the business environment and among ordinary citizens, because they are comprehensive and concern taxation of absolutely all categories of taxpayers.

The first shock was the announcement of large-scale changes so soon after the recent assurances of the authorities that there are no plans to increase the tax burden on business and citizens.

However, without clearer parameters of the proposed mechanisms and rates, it is difficult to give an accurate assessment of the upcoming reforms. It is only obvious that we will soon see dramatic changes, and it will not be the same as before.

Quality of counseling services

Event:

The Supreme Court of the Russian Federation referred for a new hearing case No. A40-111577/2022 of LLC "Posuda-Center Service" v. Ernst & Young (CIS) B.V. on recovery of losses from a consulting company. Tax consultants prepared a methodology for accounting for commodity losses (stolen goods) for profit tax purposes for a retail company. The application of this methodology resulted in negative consequences for the taxpayer in the form of additional tax charges under GST, as the consultants did not point out to the client the necessity of contacting law enforcement authorities to document the absence of guilty parties when writing off losses from theft of inventories (inventory) as expenses. The company decided to recover losses from the lawyers in court.

Significance of the event:

The outcome of this case will, in any event, result in the need to make adjustments to both the terms of the legal services agreements and to the opinion or counseling process.

Consultants need to include terms in the service agreement to limit the liability of the parties. Not only because of the principle of freedom of contract, but also because of expediency, consultants should consider strengthening clauses or footnotes in their contracts with clients, and in the advice, methodologies, opinions or memoranda themselves, changing the wording of the advice to clients.

Application of benefits by legal entities

Event:

In Case No. A40-143580/2021 LLC "Managing Company "Universal Investments" in the Decision of the SCEC of the Supreme Court of the Russian Federation of 26.02.2024 No. 305-ES23-24042 the Court considered the issue of the right of a company managing investment assets of the fund in the form of land plots to apply a reduced rate of land tax. 

The Supreme Court of the Russian Federation overturned the acts of the lower courts and issued a new decision rejecting the claims of a legal entity which is not entitled to apply a reduced land tax rate of 0.3% in respect of land plots transferred to its trust management with the type of permitted use "individual residential construction" regardless of whether these plots are being developed or whether any entrepreneurial activity is being carried out on them.

Significance of the event:

The ruling of the Supreme Court of the Russian Federation eradicated the practice of applying a reduced land tax rate for any legal entities using land plots as assets, because the point of establishing privileges is to provide support to taxpayers who acquire land plots for individual construction and to meet their own needs, rather than conducting profit-making activities on them.

Price verification and deadlines for verification of controlled transactions

Event:

In February 2024, amendments to Article 105.17 of the Tax Code of the Russian Federation were adopted to remove uncertainty in the interpretation of the rule on the timing of the commencement of tax audits of controlled transactions.

The State Duma passed in the second and third readings Bill No. 488070-8, by which the two-year deadline under subparagraph 1 of para. 2 of Article 105.17 of the Tax Code of the Russian Federation will be abolished. It was proposed to adopt the following wording of the said norm: "2. An audit is conducted by officials of the federal executive body authorized for control and supervision in the field of taxes and fees, based on the decision of its head (deputy head) to conduct an audit".

The Constitutional Court of the Russian Federation in its Resolution No. 41-P in Case No. A40-36350/2021 on 14.07.2023 (the case of Vimpel-Communications PJSC) concluded that in order to make a decision on the appointment of an audit under the TCR, new information on the audited or other transactions provided in a revised notification is relevant only if it corrects the essential information of the initial notification, and if the new information is not essential, the term should be calculated from the time of submission of the initial notification.

The Constitutional Court of the Russian Federation pointed out to the federal legislator how the appealed provision of the Tax Code could be amended, namely to differentiate the time limits for the appointment of an audit.

Significance of the event:

The initial interpretation of Article 105.17 of the Tax Code of the Russian Federation did not allow determining precisely when the two-year period for reviewing a transaction between related parties began to run, namely from the date of filing a notification or from the date of filing a revised notification of such transaction. 

If before the amendments were introduced the tax authorities had to be guided by the position set forth in the Resolution of the Constitutional Court of the Russian Federation No. 41-P dated 14.07.2023 (Vympel-Communications case), now the new amendments to the Tax Code of the Russian Federation in respect of the procedure for calculating the decision-making period for tax audits of controlled transactions eliminate the "uncertainty" in interpretation.

As noted by the RF Constitutional Court, the day of submission of the initial notification is the moment from which the period for conducting an audit is counted only if the revised notification was submitted by the taxpayer with the correction of insignificant information (correction of technical errors). When deciding on a tax audit, the tax authority must critically assess and take into account the content and nature of the changed data of the original notification.

It appears that in 2024 tax price control will continue to expand following the adoption of a large package of transfer pricing amendments to the Tax Code in 2023.

Limitations and nuances of collecting tax debts from individuals who control businesses

Event:

The Federal Tax Service of Russia in Letter No. D-5-18/23@ dated 09.02.2024 clarified the provisions on the possibility of collecting damages from individuals in the amount of tax arrears and penalties not paid by the organization, recognized as constitutional by the Resolution of the Constitutional Court of the Russian Federation No. 39-P in 2017 (on the "case of G.G. Akhmadeeva"). 

In particular, representatives of the Tax Service stressed that claims for damages can be brought against individuals and as a result of termination of criminal prosecution on non-rehabilitative grounds (for example, due to the expiration of the statute of limitations of prosecution, in connection with the death of the suspect / defendant or the adoption of an act of amnesty). For this purpose, the tax authorities must prove both the involvement of an individual in the business activities of the organization and his influence on its actions, and the existence of the corpus delicti of such an individual.

Significance of the event:

The key points set out in this Letter regarding the procedure for collecting tax debts of the organization from individuals summarize the judicial practice formed over the past few years (in the Decisions of the Supreme Court of the Russian Federation of 31. 03.03.2016 No. 309-ES15-16713, 21.04.2016 No. 302-ES14-1472, 20.07.2017 No. 309-ES17-1801, Decision of the Constitutional Court of the Russian Federation of 08.12.2017 No. 39-P), in which the tax authority applied to the court with a civil claim against the director or chief accountant of the company.

By explaining such a mechanism for satisfying tax claims, the Federal Tax Service of Russia ensures compliance with the principles of objectivity of the results of tax control and consistency in the activities of the tax authority in order to avoid contradictory conclusions regarding the tax consequences of the actions of audited persons. 

New formats for reports on the movement of funds and transfers of electronic means of payment

Significance of the event:

On the one hand, since 2022, residents have significantly increased the volume of funds transferred to foreign banks and brokers, on the other hand, it is also worth remembering the currency flow restrictions that are currently in place. Thus, in the Letter of the end of 2023, the Federal Tax Service of Russia instructed tax authorities to check all reports sent by residents on foreign accounts, and in February 2024 (Letter of the Federal Tax Service of Russia No. SHU-4-17/1835@ dated 19.02.2024) - changed the formats of such reports.