Russian Taxes for Foreigners

Mikhail Uspensky
Tax lawyer
Sameta

A 2009 study performed by a Big 4 accounting firm and the World Bank placed Russia 103rd in the world ranking for ease of paying taxes. The other study showed that more than half of expat top-managers working in Russia believe that the current tax regime is considerably damaging to the Russian investment climate.

Russian tax legislation, after almost two decades of formation, remains ambiguous and provides numerous loopholes. Such circumstances allow local tax authorities to exercise to some extent the budget-creativity approach that basically means exhaustive forced collection of taxes on dubious grounds. The latest most outrageous tax claims are detailed below.

A Siberian tax authority made an additional tax assessment to the tune of about $4 million claiming that a metallurgical plant is subject to tax on the vaporization of a nearby lake. In the south of Russia, a kolkhoz received an order to pay property tax on graves as well as on the most sacred symbol of Soviet times: Lenin’s monument. In the Russian Far East, tax inspectors have applied the mineral extraction tax — primarily introduced to tax windfall profits from the oil and gas industry — to a paleontology institution that “extracted” mammoth remains in the course of archaeological diggings.

However, one may say that a bigger problem is tax administration, especially the administration of VAT, which is the front-runner of the budget tax revenues. It takes a while for many expat executives to realize that payment of VAT in Russia is actually crediting the budget, i.e. VAT refunds in the statutory 3 month time frame are quite uncommon: if the amount of a refund is close to $200,000 it usually takes about 1 1/2 years of judicial examination until the VAT refund is transferred to a taxpayer’s bank account.

Speaking of tax litigation in courts, it should be noted that the litigation skills of tax authorities’ lawyers have improved so dramatically that many taxpayers lose court battles, in particular on the “substance over form” grounds with a reference to Resolution #53 of the Supreme Arbitration Court. Until now, this resolution was regarded by many as a safeguard from the tax authorities, not vice versa. Besides that, witness testimonies along with expert opinions have been used against taxpayers over the last year. Furthermore, the factual circumstances of a tax dispute are nowadays supported not only by unfounded accusations and guesswork but also by careful evidence gathering. One of the latest examples may show the detection of a tax evasion scheme a.k.a. “VAT merry-go-round” by tracking down the IP addresses of the companies carrying out fake supplies without even initiating a police investigation.

As a result, the majority of foreign companies operating in Russia tend to fall into two categories: the companies that make considerable tax overpayments to stay on good terms with the tax authorities; and the ones that constantly battle with the tax authorities in courts. One of the solutions to the problem might be to put all possible efforts into settling tax disputes during the final stage of a tax audit. For this extrajudicial event to be successful, it also makes sense to substantiate a legal position not only by direct references to the Tax Code but also to take into consideration letters from the Finance Ministry and the Federal Tax Service as well as an extensive network of Supreme arbitration court “precedents” collectively referred to as the law-enforcement practice. Such an approach along with being deferential to the average tax inspector may be one way toward peaceful coexistence of foreign investors and tax authorities in Russia.