EY’s Russian Tax & Law practice was named a leading Tax firm in Russia in “World Tax 2015,” an annual guide published by the International Tax Review.

In the Issue:

Personalization of tax risks ....................................................................... 2

An appraiser’s report as a basis for determining the amount of an unjustified tax benefit received through non-controlled transactions, and the new concept of circumvention of tax law ........................................................... 4

Supporting the Deduction of Bonus Payments to Employees ....................... 7

VAT: New Declaration and New Requirements for Foreign Companies ......... 9

Timing of the Offset of VAT on Intangible Assets Which Are Created in Phases on a Contracted Basis.................................................................. 11

August - September 2016

Russian Tax Brief – August-September 2016

Russian Tax Brief 2 August - September 2016

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Personalization of tax risks

Authors: Dmitry Fomin, Alexei Nesterenko

The enforcement strategies of the tax authorities are continuing to evolve with new tax control instruments and methods. One of the latest trends is for liability for tax offences to be shifted from businesses themselves onto the persons controlling them.

Individuals who control a company that has failed to pay taxes and levies may face the following types of liability:

► criminal liability (Article 199 of the Criminal

Code1);

► material liability in the context of criminal proceedings (clause 3 of Article 42 of the Criminal Procedure Code);

► subsidiary liability in the context of bankruptcy proceedings (Article 10 of the Bankruptcy

Law2).

The range of potential bearers of personal risk is very wide. For instance, persons who may be charged with the crime provided for in Article 199 of the Criminal Code include the general director and chief accountant, who have responsibility for signing reports submitted to the tax authorities and ensuring the full and timely payment of taxes, and other persons where they have been specifically authorized by a company’s management body to carry out those functions. The crime may also be imputed to persons who actually performed the functions of general director or chief accountant and other company employees, such as those responsible for drawing up primary accounting documents, if they deliberately facilitated the commission of a tax crime.

An even broader definition of a controlling person is contained in bankruptcy legislation. According

1 The crime specified in Article 199 of the Criminal Code consists in evasion of the payment of taxes by means of the non-submission of a tax declaration or other documents or the inclusion of knowingly false information in a tax declaration or such documents, when committed on a large (clause 1) or especially large (clause 2) scale.

2 Federal Law No. 127-FZ of 26 October 2002 “Concerning Insolvency (Bankruptcy)”.

to Article 2 of the Bankruptcy Law, a controlling person is a person who has, or had within less than three years before a bankruptcy petition against a debtor was accepted by an arbitration court, the right to give the debtor binding instructions or the opportunity, whether by reason of being related to the debtor, by virtue of his professional position or in some other way, to determine the debtor’s actions, including by means of coercing or otherwise exerting a decisive influence on the general director or members of the management body of the debtor (in particular, persons who may be deemed to control a debtor include members of a liquidation commission, a person who controlled, by reason of authority arising from a power of attorney or from a normative legal act or a special authority, 50% or more of the voting shares in a joint stock company or more than half of the equity interests in a limited liability company, and the debtor’s general director). Case law confirms that it is possible for persons who have no formal relationship with a bankrupt entity to be held to

account3.

Below is a discussion of the main risks for individuals.

Criminal Liability

In order to increase the efficiency of tax control, the Federal Tax Service and its territorial bodies work together with other state authorities, including law enforcement authorities. For example, there are cases in which inspectors are required to involve internal affairs bodies in on-

site tax audits4. This “tandem” arrangement can lead not only to the imposition of additional tax charges but also to the opening of criminal cases for tax evasion.

This is also facilitated by amendments made to

criminal procedure legislation in 20145. In particular, the procedure for the opening and

3 For example, Determination No. 05-ES14-3814 of the Supreme Court of 29 January 2016 on Case No. А40-119763/10.

4 Letter No. AS-4-2/14007@ of the Federal Tax Service of 24 August 2012.

5 Federal Law No. 308-FZ of 22 October 2014.

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investigation of criminal cases relating to tax crimes underwent the following changes:

► a decision based on a tax audit is no longer essential for a criminal case to be opened;

► responsibility for investigating crimes under Articles 198 to 199.1 of the Criminal Code was transferred from the police to the Russian Investigative Committee;

► investigators have the right to open criminal cases themselves, including on the basis of investigative materials;

► the amount of arrears, penalties and fines is calculated by an investigator in accordance with the rules of the Tax Code, taking into account the tax authority’s opinion.

Following the enactment of these amendments, the number of criminal cases under Article 199 of the Criminal Code that ended with convictions went up almost 1.5 times in 2015 (from 176 to

233)6.

It is the severity as well as the unavoidability of punishment under criminal law that is a cause for concern: the maximum punishment for corporate tax evasion on an especially large scale is six years of imprisonment coupled with deprivation for three years of the right to hold executive posts.

A person who has committed such a crime may, however, be exempt from criminal liability if the

following conditions are met7:

► it is the first time the person has committed the crime;

► arrears, penalties and fines were paid in full before the court hearing.

There is no cause at present to talk of a soaring number of criminal cases relating to tax crimes,

6 According to statistics published by the Supreme Court Judicial Department http://www.cdep.ru/index.php?id=79&item=3418.

7 See Note No. 2 to Articles 198-199 of the Criminal Code and Article 28.1 of the Criminal Procedure Code, and Ruling No. 19 of the Plenum of the Supreme Court of 27 June 2013.

8 See, for example, Case No. 1-11/2016 (1-471/2015) of the Moscow District Court against the general director of SunriseTour, Dmitry Mazurov,

but the number of cases attracting extensive

media coverage8 is evidence of a trend towards increased use of this instrument by the supervisory authorities.

Material Liability in the Context of Criminal Proceedings

When criminal proceedings are brought against company managers under Article 199 of the Criminal Code, there is also a risk of the application of the concept of the personal material liability of a director for a company’s debts to the Russian budget, as supported by a growing body

of Supreme Court case law9.

That concept essentially consists in the notion that a company’s tax indebtedness may be recovered from an individual who has been found guilty of committing the crime specified in Article 199 as part of the mechanism of obtaining compensation for damage caused by the crime.

In its Determination on the Ivkin case (No. 81-KG14-19), the Supreme Court formulated the criteria subject to which damage caused to the budget by the non-payment of taxes may be recovered from a company director at the request of the tax authority:

► the company has failed to fulfil the obligation to pay taxes and levies owed;

► the amounts owed cannot be recovered from the company (owing to deliberate actions of the director);

► a court has issued a verdict establishing that the director is guilty of unlawful actions aimed at tax evasion.

The current trajectory of case law indicates a significant increase in the level of personal risk faced by company directors in tax disputes, exposing them not only to the possibility of

http://www.tourprom.ru/news/33630/б, https://goo.gl/FwH8fv

9 See, for example, Ruling No. 81-KG14-19 of the Supreme Court of 27 January 2015, Appellate Determination of the Volgograd Provincial Court of 26 February 2015 on Case No. 33-2447/2015, Appellate Determination of the Judicial Panel for Civil Cases of the Sverdlovsk Provincial Court of 15 September 2015 on Case No. 33-13118/2015).

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criminal prosecution but also to the prospect of bearing personal material liability.

Subsidiary Liability in the Context of Bankruptcy Proceedings

The Federal Tax Service, which has from the moment of its creation been the authorized body responsible for protecting Russia’s interests in

bankruptcy cases10, previously took a very passive position owing to the fact that it had no real instruments for influencing bankruptcy procedures.

However, the worsening economic climate and the increased number of bankruptcies, including some that are deliberately initiated for tax evasion purposes, have led to increased activity of the tax authorities in this field and to a broadening of their powers.

Amendments to the Bankruptcy Law11 granting the tax authorities additional creditor privileges entered into force from 1 September 2016. For example, the time limit set for a tax authority to submit claims during a receivership may be extended by six months if more time is needed to carry out a tax audit or there has not been time for a decision of a tax authority or a court to come into force.

Particularly noteworthy are the amendments to the concept of the subsidiary liability of controlling persons as laid down in Article 10 of the Bankruptcy Law.

In particular, as regards the application of subsidiary liability in relation to persons who are final beneficiaries rather than nominal directors, the period over which the status of a controlling person is to be determined has increased (from two years to three), and professional or kinship ties are directly indicated as a basis for defining that status.

The presumption of innocence for controlling persons of a company is abolished – if arrears arise as a result of tax offences, such persons will be considered culpable for the purpose of

10 Decree No. 257 of the Government of the Russian

Federation of 29 May 2004.

11 Federal Law No. 222-FZ of 23 June 2016.

applying subsidiary liability until proven otherwise.

The amendments extend the scope of application of the subsidiary liability concept in bankruptcy cases and increase its effectiveness.

This conclusion is supported by developments in case law. For instance, in the case involving NPO Antiviral ZAO, the risk of personal liability of beneficiaries and controlling persons for a bankrupt’s debts resulted in tax debts amounting to around 40 million roubles being settled by a Cypriot company affiliated with the

beneficiaries12.

Thus, changes in bankruptcy legislation and case law are causing the mechanism of the subsidiary liability of controlling persons to become a key lever in combating tax evasion through asset removal.

Conclusion

It follows from the above that there is a clear trend towards the personalization of liability for tax offences. What were previously seen as abstract risks of criminal, personal material and subsidiary liability for individuals who control companies are now becoming real. It is important to take this into account in planning and evaluating business activities.

An appraiser’s report as a basis for determining the amount of an unjustified tax benefit received through non-controlled transactions, and the new concept of circumvention of tax law13

Author: Vladimir Anosov

The Russian Supreme Court has published Determination No. 305-KG16-34920 of 22 July 2016 on Case No. A40-63374/15 involving Delovoy Tsentr Minayevsky OOO. The ruling is of major importance for the development of tax case law, given that, along with the Supreme Court’s Appellate Determination No. APL16-124 on 12

12 Ruling of the Tenth Arbitration Appeal Court of 6 September 2016 on Case No. А41-45286/2014.

13 Please also see our comments on this matter in the recent TP Alert of August 2016

Russian Tax Brief 5 August - September 2016

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May 2016 on the case involving Minvody-Krovlya OOO and Determination No. 308-KG15-16651 of 11 April 2016 on the case involving StavGazoborudivaniye, it deals with the manner in which the tax authorities should go about examining prices in non-controlled transactions (in particular, it points out that tax authorities may use not only TP methods14, but other approaches as well) and introduces a new concept of “circumvention of the law” into tax law.

It follows from the trial court decision on the case that the inspectorate established in the course of an audit that the taxpayer had rented out three buildings. In 2011-2012 the taxpayer sold the buildings for 9 million roubles, 1 million roubles and 0.7 million roubles to three interdependent companies that applied the simplified taxation system. The buyers continued to rent out the purchased property. According to the results of an expert appraisal carried out in the course of the audit in accordance with valuation law, the value of the first building, sold in 2011, was 274 million roubles. The information source used by the expert in determining that value was a publication entitled “Real Estate and Prices”. The market value of the second and third buildings, sold in 2012, was determined on the basis of their cadastral value with adjustments for inflation (222 million roubles and 83 million roubles respectively). In the course of additional tax control measures, an expert appraisal was carried out that put the value of the second and third buildings at 279 million roubles and 216 million roubles respectively.

The trial court concluded that the actual transaction prices had been dictated by the objective of enabling the buyers to continue applying the simplified taxation system (a company does not have the right to apply that system if the net book value of its fixed assets exceeds 100 million roubles), thus causing an unjustified tax benefit to be received as a result of the underpricing of the properties concerned. The court also asserted that the tax authorities may examine the prices of non-controlled transactions in the course of on-site and in-house

14 Chapter 14.3 of the Tax Code.

15 The taxpayer’s request for a court-ordered appraisal was rejected.

audits provided that the taxpayer is proven to have received an unjustified tax benefit. We should point out that one of the arguments put forward by the taxpayer during the hearing was that the expert had failed to take into account the technical condition of one of the buildings, i.e. the fact that it was tilting as a result of violations of building regulations.

The trial court’s decision was upheld by an appellate court ruling, but the cassation court rescinded the rulings and referred the case for re-examination by the trial court. The Supreme Court’s Judicial Panel for Economic Disputes in turn rescinded the cassation ruling and upheld the trial court and appellate court decisions, making the following points.

1) The taxpayer’s arguments about the need for a court-ordered appraisal15 to determine the price of the buildings with proper account taken of their structural defects are invalid owing to the fact that the defects did not render the buildings unfit for use. The exercise of the right to present evidence (including an expert report) is not unconditional and unlimited. The Judicial Panel observed that the law established a presumption of the reliability of a valuation report, and the taxpayer had not presented any alternative valuation report16 that might have cast doubt on the reliability of the inspectorate’s report. The taxpayer’s position essentially amounted to nothing more than a call for another, alternative appraisal of the market value to be obtained.

2) The taxpayer had presented no evidence that independent persons had concluded transactions on terms different from those specified by the appraiser.

3) At the same time, the court made the point that the fact that the actual price differs from the price ordinarily applied by other persons cannot serve as a basis for concluding that a taxpayer failed to pay due tax, as this would be tantamount to imposing sanctions for insufficiently rational conduct in carrying on financial and economic activities. Furthermore, tax inspectorates do not have the authority to determine income for tax

16 It follows from the ruling in question that the taxpayer presented to the court a report containing a provisional calculation of the market value of the building.

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purposes where an actual price differs from the market price, since transfer pricing inspections are carried out by the Federal Tax Service.

4) A material and pronounced deviation of the price applied by a taxpayer from the market price may have legal significance when coupled with other circumstances of the transactions in question if indications of the receipt of an unjustified tax benefit, such as those referred to in Article 3 of Ruling No. 53 of the Plenum of the Supreme Arbitration Court of 12 October 2006, are found in the course of an in-house or on-site tax audit.

5) The fact that the actual price was several times lower than the market price raises questions as to the very feasibility of high-value property being sold on such terms and, given the relatedness of the parties and the absence of reasonable economic grounds for setting the price at such a low level, justifies the conclusion that the taxpayer’s conduct in determining the transaction terms was dictated first and foremost by the goal of securing tax savings.

6) The court also asserted that actions aimed at circumventing the law should result in the application to the taxpayer of those provisions of tax law which the taxpayer was endeavouring to avoid. The judicial panel took the view that the taxpayer’s actions had resulted in the circumvention of clause 2 of Article 153 and clause 2 of Article 249 of the Tax Code, according to which all income must be taken into account in determining the tax bases for profits tax and VAT.

The concept of circumvention of the law exists in civil law (Article 10 of the Civil Code), but has not previously been applied in tax cases. It follows that the ruling may mark the appearance of a new concept aimed at combating tax abuse, alongside the notions of a good-faith taxpayer and an unjustified tax benefit.

7) The court pointed out that the scheme used by the taxpayer not only caused revenue to be understated, but also gave rise to VAT losses for the budget, since the buyers of the buildings were not VAT payers, and tax calculated by the

17 Subsection 7 of clause 1 of Article 31 of the Tax Code.

company on selling the buildings was not subsequently recoverable for those buyers.

For this reason, the Supreme Court asserted that it was right for additional VAT to be charged if the tax base for profits tax was adjusted as a result of the application of non-market prices, and that it was appropriate in this situation to apply clause 1 of Article 154 of the Tax Code, according to which the tax base for VAT should be calculated on the basis of prices which would occur in comparable transactions concluded between parties that are independent of each other.

8) It is also stated in the Supreme Court’s determination that the imposition of additional charges is further supported by clause 7 of Article 31 of the Tax Code17, according to which tax authorities have the authority to determine arrears using a calculation method where the taxpayer does not have records of income, expenses or taxable items or records are improperly maintained, making it impossible to calculate taxes.

The court asserted that the Tax Code does not prevent the amount of arrears from being determined either using the TP methods which are prescribed for the determination of income for tax purposes in the case of transactions between interdependent parties, or on the basis of information on the market value of an appraised asset if, when all the facts of a case are considered, that information provides a basis for a conclusion not as to the exact amount, but as to the level of income that could actually have been received if the transactions had been concluded by similar taxpayers.

This essentially represents a development of the position of the Ministry of Finance which was set out, for example, in Letter No. 03-01-18/8-145 of 18 October 2012, according to which, where tax evasion is alleged to have occurred as a result of price manipulation by a taxpayer, the fact that the taxpayer received an unjustified tax benefit must be proved in the context of on-site and in-house audits, including through the use of the methods prescribed by Chapter 14.3 of the Tax Code. It will be recalled that the Supreme Court previously examined a petition for that provision to be

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declared inoperative (see Appellate Determination No. APL16-124 of 12 May 2016 on the case involving Minvody-Krovlya OOO).

The following conclusions may therefore be drawn from the Supreme Court’s determination:

- the amount of an unjustified tax benefit that is discovered in relation to non-controlled transactions may be determined by the tax authorities using a calculation process that may involve the application of TP methods, but for which other approaches are also possible (such as the use of information on a market value appraisal by a professional appraiser, or cadastral value);

- a new term – “circumvention of the law” – has entered into usage in tax cases: actions aimed at circumventing the law should result in the application to the taxpayer of those provisions of tax law that the taxpayer was endeavouring to avoid;

- a taxpayer that understates revenue from sales may be charged not only additional profits tax, but also VAT (if the interests of the Treasury are adversely impacted, e.g. if the buyer is not a VAT payer and does not claim an offset for it).

In our view, this case indicates that there is likely to be an increased incidence of tax authorities imposing additional charges on grounds of non-market pricing in relation to non-controlled transactions and a broader use in tax audits of experts who determine prices on the basis of valuation law.

Supporting the Deduction of Bonus Payments to Employees

Authors: Irina Volkova, Tatyana Butuzova

In July 2016 the Arbitration Court of the Moscow District18 ruled against the right of Upravlyayushchaya Kompaniya Kapital LLC (“the Company”, “the taxpayer”) to claim a profits tax deduction for expenses incurred in paying bonuses totalling 21,972,223 roubles to the deputy general director and the department head/deputy director for investments.

18 Ruling of the Arbitration Court of the Moscow District of 19 July 2016 on Case No. А40-118598/2015.

The Company operates on the asset management market and is part of the Kapital Asset Management Group (“the Group”).

In the court’s opinion, the taxpayer had failed to present convincing arguments that the size of the bonuses paid accurately reflected the contribution made by the employees concerned to the Company’s business.

It is important to note that the trial court had supported the Company’s position, taking the view that the bonus expenses were economically justified and properly documented. Furthermore, the court had stressed that the tax authorities were responsible for checking compliance with tax law, not scrutinizing expenses based on their own ideas about methods of achieving results.

The trial court also pointed out that current law does not establish minimum or maximum bonus amounts. The manner in which bonuses are awarded and paid is for employers themselves to decide, subject to compliance with labour law.

The main arguments put forward by the parties are presented below.

The Taxpayer’s Arguments

The Company’s high performance in the period reviewed

In the taxpayer’s view, it was the high degree of professionalism of the rewarded employees that enabled the Company to increase its overall assets, establish itself as a top-yielding manager of pension fund assets and win a tender for the right to manage army mortgage funds.

Furthermore, the Company had been achieving some of the highest yield levels for as long as it had been in business, and in July 2014 the National Rating Agency of Russia awarded the Company the highest reliability ranking – “AAA”.

Proper Documentation of Bonus Expenses

The disputed employee bonus expenses were supported by a bonus award order, employee compensation and incentive regulations, position descriptions, timesheets and appraisals setting

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out each employee’s performance results for the year.

The taxpayer pointed out that before awarding bonuses, the Company carries out employee appraisals to evaluate employees’ potential, their business qualities and the level and quality of performance of tasks assigned in the period concerned.

Determination of bonus amounts based on the results of employee appraisals

Where a decision is made to pay an annual performance bonus, the amount of each employee’s bonus is determined by the General Director taking into account the impact of the employee’s activities on the Company’s performance and with reference to the employee’s performance appraisal for the year.

Selective approach of the tax authorities to challenging bonus expenses

In the audited period the Company also deducted bonus payments made to other employees on the basis of their performance appraisals. However, the tax authority only challenged the validity of bonus payments to two employees.

The tax authority therefore seemed to have taken a selective approach, whereby an appraisal constitutes adequate proof of the achievement of performance results for some employees, but not for others.

The Tax Authority’s Arguments

Intra-group cost shifting

In the tax authority’s opinion, the taxpayer effectively bore costs on behalf of related Group companies, one of which was a higher-level employer of the rewarded employees.

Furthermore, after analysing the profits tax declarations of the Group companies the tax authority concluded that the taxpayer acted as a profit centre of the Group in the audited periods.

Inadequate documentation of the achievement of the stated results

The tax authority observed that the bonus statement (appraisal) did not contain the mandatory fields of primary documents that are established by clause 2 of Article 9 of Federal Law

No. 402-FZ of 6 December 2011 “Concerning Accounting”.

Furthermore, it did not set out the appraisal criteria or the particular duties specified in the employment agreement in respect of which the bonus was awarded, and did not contain a calculation of the bonus amount. The employment agreements contained no references to the employee compensation and incentive regulations.

Employees’ stated results not related to the Company’s actual activities

According to the testimonies given, the bonus awarded to the Deputy General Director was for the development of matrices of investment products for mutual investment funds, and the bonus awarded to the department head/deputy director for investments was for the management of “second-tier” shares.

However, the tax authority contended that the Company had not engaged in the management of mutual investment funds in the audited periods. Furthermore, industry legislation allows pension assets to be invested only in reliable, high-liquidity assets, which “second-tier” shares are not.

Other grounds connected with the activities of both the Company and the rewarded employees

The disputed bonuses were paid out of the resources of private pension funds, which, according to data from the Russian Pension Fund, had been managed at a loss for the ultimate beneficiaries (pensioners), since the yield did not exceed inflation, and the Company’s performance in managing private pension fund assets was low compared to other managers.

The tax authority also observed that the activities of the department head/deputy director for investments in the period reviewed had led to assets being lost through transactions with an offshore company.

In the trial court the tax authority also drew attention to the fact that the Company’s Deputy General Director was at the same time a member of the board of directors. It follows from clause 48.8 of Article 270 of the Tax Code that amounts of remunerations and other payments made to members of the board of directors are not tax-deductible However, the taxpayer succeeded in

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demonstrating that the bonus had been paid in respect of functions performed under the individual’s employment agreement, which were separate from his duties as a member of the board of directors.

The Court’s Conclusions and Practical Implications

The appellate and cassation courts did not confine themselves to examining whether the bonus payments were duly documented, and supported the arguments presented by the tax authority, including with regard to intra-group cost shifting and the lack of correspondence between the stated performance results of the employees concerned and their actual contributions to the Company’s activities.

The courts emphasised that it was a key condition of the recognition of costs as reasonable and economically justified that there must be a clear correlation between income and expenses and that the latter must be specifically relatable to the profit-generating activities of the company concerned. The courts accordingly took the view that the amount of the disputed bonuses was not reflective of the contribution made by the employees to the company’s profit-generating activities.

Previous court rulings on the profits tax treatment of bonus payments to employees have tended to favour the taxpayer. In particular, courts have taken the view that the tax authorities do not have the right to evaluate the economic expediency of expenses incurred by a taxpayer19 and that the fact that bonuses are awarded on the basis of an employer's decision does not prevent them from being relatable to performance results20.

Despite the fairly extensive reasoning presented by the tax authority, past experience indicates that the main argument about the lack of a clear relationship between the employees’ performance results and the Company’s profit-generating activities can be successfully challenged on the grounds that the Tax Code does not specifically

19 For example, Ruling No. F05-17554/2013 of the FAC of the Moscow District of 6 February 2014 on Case No. А40-33091/1, Ruling No. F08-931/2008-330A of the Federal Arbitration Court of the North-Caucasus District of 4 March 2008 on Case No. А53-9446/2007-S5-34.

require a taxpayer to present a bonus calculation as evidence that a bonus is economically justified. At the same time, it is interesting to note the court’s emphasis on the “substantial size of the bonus”, which may have been one of the key factors in the decision to disallow the disputed expenses.

Thus, the payment of large performance bonuses to employees, even when there is documented economic basis for awarding them, may come under close scrutiny from the tax authorities. We will continue to monitor developments in case law in this area.

VAT: New Declaration and New Requirements for Foreign Companies

Authors: Karina Arakelyan, Yulia Kolesnikova

Federal Law No. 244-FZ of 3 July 2016 (“the Law”), which establishes new VAT requirements for electronic services provided by foreign companies, enters into force from 1 January 2017. A detailed overview of the new provisions was presented in a previous alert on 10 June 2016. This article focuses on the VAT registration and filing requirements for foreign companies that provide electronic services to individuals in Russia and foreign companies that are recognised as tax agents by virtue of participation in settlements with individuals.

A draft Federal Tax Service order approving the form of a VAT declaration in respect of the provision of electronic services by foreign companies (“Declaration”), the procedure for completing it and the format for submitting it (“the Draft”) have been published for public discussion. The first Declaration, for the first quarter of 2017, will have to be submitted to the tax authorities no later than 25 April 2017. The text of the documents in question may be viewed on the Unified Portal. The current version of the Draft may undergo changes based on the results of the public discussion process and independent

20 For example, Ruling No. 17AP-8634/2014-AK of the Seventeenth Arbitration Appeal Court on Case No. А50-2698/2014.

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anti-corruption appraisal of this document in internet.

Procedure for the Registration of Foreign Companies Which Provide Electronic Services

In order to be registered, a foreign company (tax agent) must, no later than 30 calendar days after it begins to provide services, submit a registration application and a number of other documents included in a list to be approved by the Ministry of Finance. The application may be submitted to the tax authority through a representative, by registered mail or in electronic form via the official website of the Federal Tax Service. Given that the Law takes effect from 1 January 2017, foreign companies (tax agents) that provide electronic services at the time of its entry into force will have to submit an application no later than 30 January 2017.

Within 30 days of an application being received, the tax authority should register the foreign company and send it an appropriate notification using the email address contained in the application. From the date of its registration, the foreign company acquires access to a personal taxpayer account which is used for the subsequent exchange of information with the tax authorities in the context of the performance of their functions, as well as for the submission of a Declaration.

Procedure for Completing and Submitting a Declaration

Not later than the 25th of the month following a quarter which has ended, foreign companies that provide electronic services in Russia are obliged to submit a Declaration and pay tax. The Law does not in this case allow for tax to be paid in equal instalments by the 25th of each of the three months following a quarter that has ended.

According to the Draft, a Declaration must include the following information:

► Details of the foreign company (title sheet) according to the registration notification;

► The amount of tax payable to the budget (Section 1), together with the codes needed to pay the tax;

► A computation of the amount of tax due (Section 2), which is to be provided separately for each type of service provided and each currency code.

► This section should show the tax base, which is determined as the value of electronic services provided in Russia, inclusive of VAT, and the amount of tax calculated at the tax-inclusive rate of 15.25%. Since the timing of the determination of the tax base is the last day of the tax period in which payment was received, the official rouble exchange rate for each currency code as at the last day of the quarter must also be stated.

It should be noted that the Declaration form does not provide for the entry of information on amounts of tax deductions, since foreign suppliers of electronic services will not be able to claim offsets for VAT which they were charged on acquiring goods (work and services) in Russia.

Tax Control Measures in Relation to the Declaration

The Law establishes special provisions relating to the conduct of tax audits of a Declaration:

► The time limit for the conduct of a tax audit is six months. Normally, an in-house audit may last no longer than three months;

► Documents requested from a foreign company (tax agent) in the course of an audit must be provided within 30 days; the time limit for this is normally 5-10 days.

If a Declaration is not submitted within six months, the tax authority has the right to deregister the foreign company without a deregistration application from the company concerned. Deregistration without an application may also occur in certain other cases: when inaccurate information is given, when requested documents are not presented and when amounts of arrears, fines and penalties are not paid. Deregistration would occur after steps to recover amounts owed have been completed.

Practical Implications

Foreign companies that provide or are involved in the provision of electronic services to individuals in Russia need to prepare for the new requirements due to take effect on 1 January

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2017. Such companies should analyse their activities to determine whether they fall within the scope of the Law and, if necessary, register with the Russian tax authorities at the beginning of 2017 and make arrangements to submit a Declaration via a personal taxpayer account. Companies should also consider the need for changes to existing documentation processes, including document formats.

Timing of the Offset of VAT on Intangible Assets Which Are Created in Phases on a Contracted Basis

Authors: Maria Odintsova, Pavel Artamonov

The Ninth Arbitration Appeal Court has issued a decision21 supporting the position of the tax authorities with regard to the timing of the offset of VAT on intangible assets which are created in phases using outside contractors.

A company concluded a contract for software development and implementation. In 2010 the parties signed a supplemental agreement under which the software would be modified to expand its capabilities. That work was carried out in phases over a period of three years. The company did not claim an offset of input VAT until the equipment for which the software was designed had been entered in accounts as a fixed asset. An offset of VAT for 2010 was claimed in a revised tax declaration in the second quarter of 2014 after the equipment had been entered in the accounts.

The tax authorities challenged the VAT offset on the grounds of the expiry of the statutory three-year period. The taxpayer argued in its defence that it had refrained from offsetting VAT until after the intangible asset had been brought into operation on the basis that, while it was being developed (a process that lasted more than three years), it was impossible to determine whether or not the asset would be used in VATable activities. In view of that uncertainty, the taxpayer felt that it might have been judged to be acting improperly if it had claimed a VAT offset after the end of each phase of the development work.

21 Ninth Arbitration Appeal Court on Case No. A40-7472/16 of 26 August 2016.

The court disagreed with the taxpayer’s arguments, making the following points:

► The right to offset VAT is not dependent on the account on which goods (work, services) and property rights are recorded;

► It follows from the general principles of taxpayer equality that VAT on work may be offset irrespective of whether an intangible asset is created;

► The fact that an intangible asset is to be used in VATable activities in the future does not prevent a VAT offset from being applied in the tax period in which the right to apply it arose.

The ruling therefore confirms the position that VAT may be offset after the completion of each phase of software development work, irrespective of whether the intangible asset created as a result of that work has been brought into operation. Also this ruling indicates that taxpayers should monitor ageing of VAT and take it to offset before expiration of the three years limitation period.

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