Tax Administration Development in Russia: Exchange of Information with Tax Authorities of Other Countries
In November 2014, the Russian Federation ratified the Joint Council of Europe/OECD Convention on Mutual Administrative Assistance in Tax Matters (hereinafter, the “Convention”).
The signatories to the Convention agree to provide each other with administrative assistance related to the exchange of tax information, conduct of simultaneous tax examinations, recovery of taxes payable abroad, and the implementation of measures of conservancy.
Today, 85 states are parties to the Convention, including some offshore jurisdictions with which Russia until now has not been able to exchange information due to the lack of relevant bilateral treaties. These jurisdictions include the Principality of Andorra, Belize, the British Virgin Islands, Gibraltar, Liechtenstein, the Principality of Monaco, and the Seychelles.
The Convention was ratified only six months ago, and therefore its provisions have not so far taken effect in Russia; however, Russian tax authorities have already begun to use new approaches to their relations with their foreign counterparts.
In the last few years, Russian tax authorities have been placing profits obtained from so-called “passive” activities (i.e., royalties, dividends, debenture interests) and profits obtained from the provision of information and marketing services paid to foreign entities under enhanced scrutiny.
On December 04, 2014, the Moscow Commercial Arbitration Court adjudged a lawsuit involving the Russian company Oriflame. The Russian tax inspectorate found, based on the information provided by tax authorities in the Netherlands and Luxemburg, that the royalties Oriflame paid to foreign companies under a sub-franchising agreement were, in fact, a means to avoid taxes.
Also in December 2014, the Saint Petersburg and Leningrad Regional Commercial Arbitration Court adjudged a claim by the Russian company Avtotor. The tax inspectorate found that the Avtotor group of companies accumulated property in a Russian company enjoying tax preferences, and then transferred funds abroad as dividends. The tax inspectorate also found, based on the information provided by public authorities in the Netherlands, that the ultimate beneficiary of the profits paid to the Dutch company was an individual affiliated with Avtotor.
The tax audits related to the aforementioned lawsuits were conducted before the ratification of the Convention; the necessary information was exchanged under the bilateral treaties with those states. Nevertheless, existing court practice already demonstrates that tax authorities try to expose actual relations between companies of the same group incorporated in different jurisdictions.
Profit shifting and tax-base erosion are a global problem. The OECD, together with the G20, is developing measures to implement the Base Erosion and Profit Shifting Project (BEPS). Russian tax authorities also participate in the work of the OECD task groups developing anti-BEPS measures.
The ability to exercise tax control over transactions carried out outside Russia is key to implementing the measures aimed at deoffshorizing the Russian economy.
On January 01, 2015, the laws regulating controlled foreign companies came into effect. As a party to the Convention, Russia will be able to request information from other member states, exchange information, and conduct tax audits abroad.
New tax administration possibilities will allow Russia obtain information about Russian beneficiaries using companies in offshore jurisdictions with which no bilateral treaties providing for information exchange were signed. Rules oblige such beneficiaries to include the profits made by their offshore entities in their Russian tax base.
Also, the Global Standard for the Exchange of Information on Financial Accounts developed by the OECD for the purposes of the Convention will allow tax authorities to exchange information with their counterparts from other jurisdictions.
Therefore, a number of steps aimed at implementing the measures developed by the global community to combat illegal tax schemes have been taken in Russia over the last years. These measures are being implemented by Russian tax authorities who, as recent court practice shows, are willing to cooperate with their foreign colleagues.
Elena Bogdanova, Tax Partner, Schekin & Partners