The following article is an excerpt from Awara Russian Tax Guide, the first comprehensive book offering a full overview of all Russian taxation laws and rules. Awara Russian Tax Guide provides insight into the general framework of the Russian tax laws, the Tax Code and its principles. It describes the general rules of the Tax Code Part I and each type of tax and tax regime of Tax Code Part II, among them: Profit Tax, VAT, Personal Income Tax, Property Tax, Employer’s Social Contributions. The book also covers the now so important case law and taxation principles set by court precedents.
Following the classifications of Russian law enforcement measures and sanctions for breach of tax law may be classified in three categories as follows:
(i) Securing measures;
(ii) Enforced tax collection, and;
(iii) Sanctions for tax offences
Among securing measures we may list the following:
• Penalty interest
• Pledge of assets
• Freezing of bank accounts
• Seizure of assets
• Establishing the tax due using the deemed method
In our view the ‘penalty interest’ and ‘recalculation of tax using the deemed method’ should be considered as ‘sanctions’ instead of ‘securing measures,’ but we have here chosen to follow the classification principles of Russian law as expressed in the Tax Code, which list them under securing measures. The idea in the law is that sanctions follow from offences, whereas penalty interest and recalculation of tax does not require that a tax offence is first identified.
The taxpayer must calculate and settle penalty interest on own initiative without any prompting from the side of the tax office in respect to all overdue taxes (art. 75). The penalty interest accrues for each calendar day at a rate equal to 1/300 of the refinancing rate of the Central Bank of Russia. The obligation to pay penalty interest is independent from any other possible sanctions.
Unpaid penalty interest may be collected from legal entities and individual entrepreneurs according to the means of enforced tax collection without court sanction. But enforced collection of penalties from an individual requires a court order.
In order to restrain the tax officials from excess and abusive practices, the law contains a provision prohibiting to levy penalty interest on amounts that remain unpaid as a consequence of the actions of the tax officials, for example, following a freezing of bank account, seizure of assets, or seizure of monetary funds.
Penalty interest is also applicable on tax debt which has been officially permitted in form of a tax credit granted (art.67).
Pledge of assets and guarantee
Pledge of assets as collateral for unpaid taxes and dues is established by an agreement between the taxpayer or a third person (pledger) and the tax authority (art. 73).
The law also foresees that a guarantee (personal or corporate) may be issued to secure tax debts (art. 74).
Freezing of bank accounts
The tax authority has the right to suspend debit transactions on taxpayer’s bank accounts by way of freezing of accounts so as to collect taxes due from the funds available (art. 76) in accordance with the rules of enforced tax collection (see below). Freezing of accounts may be ordered in case the taxpayer owes overdue tax debt and if relevant tax filings are overdue by 10 working days.
To note, that there is no such corresponding right to freeze bank accounts due to matters concerning employer’s social contributions, but such contributions can be the object of enforced collection (unilaterally withdrawn from bank accounts; Law on Social Contributions, No. 212-ФЗ of 24.07.09).
Seizure of assets
Seizure of assets may be undertaken for securing payment of taxes, penalties, and fines. There are two possible forms of seizure of assets, which both can be undertaken in relation to an organization (art. 77), these are
(i) Total seizure. In this case the taxpayer retains the possession and right to use the asset with special permission and under supervision of the tax (customs) authority, whereas the right to dispose of the asset is withheld.
(ii) Partial seizure. In this case the taxpayer retains the possession and right to use the asset and also dispose of it with special permission and under supervision of the tax (customs) authority.
The measure of seizure of assets may be undertaken only with consent of a public prosecutor and only to the extent necessary for the fulfillment of the overdue liability. In order to initiate a seizure of assets, the tax authorities must show sufficient reasoning to believe that the taxpayer would intend to hide the assets or to abscond.
Establishing the tax due using the deemed method
In certain cases the tax authority has a right to determine tax liability according to the deemed method (art. 31.1.7). According to the deemed method the tax authority may determine the revised tax liability based on other available information regarding the particular taxpayer or taxpayers within the same industry. This can be done in the following cases:
- non-submission (or refusal) for more than two months to submit necessary tax filings;
- sufficient accounting records or supporting documents are lacking;
- the quality of the accounting records does not allow for proper calculation of taxes due;
- refusal to allow the tax inspectors to perform an examination at the relevant premises;
- when a foreign entity performs auxiliary and preparatory services for no consideration for the benefit of third parties;
With respect to VAT payable at customs (and customs duties) the securing measures follow different regulations foreseen by the customs laws (art. 86, Customs Code of the Customs Union; chapter 16 of the Federal Law on Customs regulation in the Russian Federation of 27.11.2010 No. 311-FZ). These obligations can be secured by: a deposit; bank guarantees; (third party) guarantee; pledge of assets.
Enforced Tax Collection
The tax authority has the right to enforced collection (or involuntary execution) from taxpayer (and tax agent) of taxes due (also fines and penalty interests) by unilaterally withdrawing money from bank accounts or realizing the value of other seized assets by way of involuntary execution .
Enforced collection may be undertaken in relation to assets of legal entities and individual entrepreneurs without court order but in relation to private individuals that will be needed. The procedures respective to these two categories of taxpayers vary in other aspects also.
Tax Code article 46 sets the rules in regards to enforced collection of tax debt by way of withdrawing funds from bank accounts, whereas article 47 determines the rules for collecting the debt by way of realization of other assets. The corresponding rules concerning enforced collection of tax debt from private individuals are i article 48.
If an organization or an individual entrepreneur fails to pay taxes or dues, the appropriate amounts can be charged to the entity’s bank accounts (art. 46) without court order. The tax authority must make the decision on such enforced collection by way of withdrawal of funds from bank accounts within 2 months from the end of the time for voluntary execution. However, after this time frame has elapsed the tax authority may still, within 6 months from the due date of voluntary execution, solicit a court order for authorization of enforced execution. But the law explicitly states that this time frame may be further extended if the deadline was missed for honorable reasons.
In the event that competing claims are presented to the bank and there are not sufficient funds to satisfy them all, then the competing claims should be awarded the order of priority set by art. 855 of the Civil Code should apply.
In regards to involuntary execution of other assets (other than funds in bank) the tax authority is allowed one year within which the relevant decision of execution must be taken. Failing the deadline, the tax authority may, within 2 years from the due for voluntary execution, solicit the permission for involuntary collection through court. The court may further extend this period.
The law on Enforced Execution (No. 229-ФЗ of 02.10.2007, art. 69) establishes the order of priority for categories of assets of legal entities and individual entrepreneurs that can be the object of enforced collection as follows:
(i) Cash and bank
(ii) Assets which are not utilized in the production and sales of goods and services (such as securities, premises not utilized directly for work, objects of design and art, personal cars).
(iii) Finished goods, raw materials and other production materials, machinery and equipment, buildings, other fixed assets
(iv) Assets given for lease or possession to other parties, after cancellation of relevant contracts
(v) Other assets, except for those of everyday private use of individual entrepreneur or his family
Such enforced collection may also be undertaken by the customs authority for debt on taxes payable at customs. (concerning other assets than funds at bank the reference is to article 47 of Tax Code; concerning funds at bank the reference is to article 91 of the Customs Code of the Customs Union, and chapter 18 of the Customs Law of Russia).
The law on Enforced Execution (art. 69) establishes the order of priority for categories of assets of private individuals that can be the object of enforced collection.
Hereby individuals are protected so that some classes of assets are totally excluded from the scope of enforced collection, such assets are (Civil Procedure Code, art. 79):
(i) housing (and the underlying land) that serves as the sole possible living quarters for the taxpayer and his family, except for the case that the housing has been mortgaged; ordinary furniture, appliance and décor items of a home, and items for personal use (clothes, shoes, etc.), except for jewelry and other kinds of objects of luxury;
(ii) items necessary for professional activity (within limits);
(iii) food supplies;
(iv) other cases, among these certain assets connected with auxiliary husbandry for private needs
Sanctions for Tax Offences (Tax Violations)
Sanctions for tax offences are stipulated in three laws: Tax Code (tax sanctions or fines); Code of Administrative Offences (administrative sanctions); and Criminal Code (criminal sanctions). The liability for committing tax offences can be imposed both on legal entities and individuals. A tax offence can either be committed intentionally or by negligence (art. 110).
Holding a legal entity liable for a Tax Code or administrative tax offence is subject to proving guilt of the officials who acted on behalf of the entity. Punishment of the legal entity will not release its officials from further liability.
An individual is presumed innocent of committing a tax offence (under all the laws) until his or her guilt is determined by court. The burden of proof lies with the tax authority. When in doubt, there is a presumption of innocence (Tax Code art. 108(6); Criminal Code art. 14; Code of Administrative Offences 1.5.)
A taxpayer cannot be held responsible for a (Tax Code related) tax offence where the taxpayer has relied on written directives provided by the tax authorities at the request of the taxpayer (art. 111).
Based on the circumstances liability for a (Tax Code related) tax offence may be mitigated or, on the contrary, aggravated. Past tax offences will serve as aggravating circumstances during one year upon their commitment. The possible fines will be reduced at least by half if at least one mitigating factor is present. Correspondingly, in the presence of an aggravating factor the amount of the fine will be doubled (art. 112, 114).
The statute of limitations for liability for a Tax Code specified tax offence is three years from, depending on the type of offence, expiration of the day when the offence was committed or from the first day after the end of the tax period during which the offence was committed, depending on the type of offence (art. 113). However, in a decree of 14 July 2005 the Constitutional Court has permitted the tax authorities and courts to call taxpayers to account even upon the expiry of this 3-year term. The limitation is deemed waivable if the taxpayer strongly resisted the field tax audit, and the resistance led to the impossibility of the conducting the tax audit and reveal the outstanding tax obligations. Nevertheless, the tax authority is limited in bringing about a suit for tax offences to a period of 6 months from learning about the offence and issuing a corresponding resolution (art. 115). Hereby it is to be noted that a field tax inspection may only cover three years prior to the year of inspection (art. 89).
Tax Offences as per the Tax Code
The Tax Code establishes a number of different tax offences along with examples of fines applicable to the offences (Tax Code Chapter 16). Below we give a list of some of these offences and the sanctions they carry:
- Violation of registration obligations, fine RUB 10 000, in case of failing due registration; if activity carried out without due registration, fine 10 percent of the income derived (minimum fine RUB 40 000); Failure to timely report on opening and closure of bank accounts;
- Failure to submit a tax return in due time, fine 5 percent of the amount due for each calendar month during which breach occurs (maximum 30 percent of tax due, minimum RUB 1 000);
- Improper submission of tax returns;
- Gross violation of tax accounting rules, fine RUB 10 000, if same offence occurs during several tax periods, then the fine is RUB 30 000. If offence resulted in understatement of the tax base, then fine equal to 20 percent of amount of tax due (minimum RUB 40 000);
- Non-payment or partial payment of taxes (dues) fine 20 percent of the tax due, 40 percent of the tax in case the understatement of the tax was deliberate;
- Violation connected with reporting within a consolidated group of tax payers
- Failure to comply with responsibilities of tax agent, fine 20 percent of tax due;
- Failure to comply with regulations of registration of objects of gambling;
- Failure to submit necessary data requested by tax authority required for tax compliance control;
- Violations connected with transfer pricing rules;
- Breach of rules imposed on holding, use and disposal of seized assets or pledged assets;
- Failure to appear or evasion of appearance without good reason by person called in as a witness on case of tax offence as a witness;
- Unlawful refusal to testify, or giving false testimony;
- Refusal of expert, interpreter or specialist to participate in a tax audit, or submission of knowingly false opinion or knowingly translating wrongly Failure to properly report to tax office
In the case when taxpayer rectifies the error on its own initiative no fines are due.
In addition to fines a penalty interest is charged in the amount of 1/300 of the refinancing rate of Russian Central Bank (8.25 percent as of 22 November 2012) for each day of delay.
Chapter 18 of the Tax Code lists a number of offences which concern the liability of banks in matters of taxation (art. 132-135.2).
Tax Offences per Code of Administrative Offences
Some of the provisions of the Code of Administrative Offences relating to taxation (articles 15.3-15.9, 15.11) resemble the tax offences envisaged by the Tax Code. The principal difference is that for administrative tax offences only an official of a legal entity can be held liable and not the legal entity itself.
Below we list some of the administrative tax offences and the sanctions they entail:
- Violation of registration obligations, fine RUB 500 to 1,000 in case of failing due registration; RUB 2,000 to 3,000, if activity carried out without due registration, fine
- Failure to submit a tax return in due time, fine RUB 300 to 500
- Improper submission of essential information for tax control purposes: for individuals, RUB 100 – 300; for company officials, RUB 300 – 500
Criminal Tax Offences
The Criminal Code foresees criminal liability for tax offences for individuals and representatives of legal entities (art. 198, 199 and 199.2). Representatives of a legal entity may assume criminal liability for the tax offences committed by the entity they act for. Criminal liability for tax evasion arises if the taxpayer (i.e. its representative) is found guilty of tax evasion by not duly filing tax returns or filing deliberately false data. Thus criminal liability cannot arise if the taxpayer filed tax returns but merely failed to pay taxes due to economic woes.
The possible punishments are: prison for up to 3 years for crimes committed by an individual; and prison for a period of up to six years for officials of legal entities; prohibition of being engaged in certain activities for three years ; fines in the amount of RUB 200,000 to 500,000 , or an amount equal to the salary or similar income of the offender for one to three years.
Criminal liability for tax evasion may arise for a private individual or individual entrepreneur if during 3 consequent financial years the amount of unpaid taxes exceeds RUB 600,000 provided that this amounts to not less than 10% of the whole amount of taxes due, or exceeds RUB 1,800,000. But, if the amount of unpaid taxes for the same period exceeds RUB 9,000,000, criminal liability would arise regardless of the total amount of taxes due (art. 198, Criminal Code). To note, that here and in all cases of application of criminal and administrative sanctions, it is naturally a condition for punishment that the accused offender is found to be guilty for the offence.
With regard to officials of a legal entity, the thresholds for criminal liability are higher, namely exceed RUB 10,000,000 in case this represents no less than 20 % of total amount of taxes due, or exceeds RUB 30,000,000.
Criminal liability for owner or representative of legal entity or individual entrepreneur may also arise for the concealment of money or other assets subject to enforced collection of tax arrears if the value of the concealed assets is more than RUB 1,500,000 (art. 169 and 199.2, Criminal Code).
In year 2004, the sanction of confiscation of property was abolished as one of the possible sanctions for criminal offences. But in 2006 confiscation was reintroduced into the Russian Criminal Code (chapter 15.1).
There is a separate provision for criminal liability of tax agents (art. 199.1, Criminal Code). The threshold of severity is the same as the one provided for officials of legal entities as per above. No criminal punishment ensues when the tax evasion was committed for the first time and all taxes due (incl. penalty interests and fines) were paid in full.