Russian Cooperative compliance
program – Tax monitoring
Ivan Rodionov
Head of Tax Performance Advisory, Russia and the CIS
28 September 2015
Overview of the Tax Monitoring Regime
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Tax Control in Russia - Traditional Approach and Recent Developments
► Antagonistic way of interaction between tax authorities and taxpayers
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More than 20 thousand tax disputes annually,
Additional tax assessments are unofficially regarded as key KPI for tax authorities,
Service approach is not a key priority for the tax inspectors.
► Form over substance approach:
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“No/insufficient documentation – no tax deduction/benefit” approach,
Tons of documents requested by the tax authorities in the course of audits,
Thousands of man-hours spent by both parties.
► Insufficiently developed tax audit methodologies:
► Unsystematic use of analytical procedures in the course of tax audits,
► Limited use of sampling, materiality concepts and technology
► Recent developments:
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Development of alternative dispute resolution methods
Risk-based approach in selection of the tax audit targets
Extensive use of technology: VAT invoices, Transfer pricing etc.
Tax Monitoring initiative – Russian cooperative compliance regime.
Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring
DRAFT FOR DISCUSSION PURPOSES
The Development of a Tax Monitoring Regime in Russia
25 December 2012
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The Russian Federal Tax Service (FTS) signed the first agreements on “Horizontal Monitoring” – enhanced
information exchange” with four taxpayers (RusHydro, INTER RAO UES, Mobile TeleSystems and the Moscow
branch of Ernst & Young (CIS) B.V.) and the initial pilot project commenced.
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Initially the 2012 and 2013 tax periods were covered (in August 2014 the terms of the agreements were
extended)
26 March 2013
The FTS signed an agreement with “Severstal”.
10 February 2014
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The Government approved a tax administration development plan (“roadmap”), which includes the
development of a “Horizontal Monitoring” regime.
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The main goals of the roadmap are:
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Reduction of time spent on tax reporting preparing and filing;
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Enhancement of cooperation between taxpayers and tax authorities;
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Further convergence between tax and accounting rules;
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Documents flow improvement, including electronic document flow between companies.
4 November 2014
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The Tax monitoring (“TM”) Law, Federal Law No. 348-FZ, was signed by the President. It came into force on 1
January 2015. Certain provisions will not apply to consolidated groups of taxpayers until 1 January 2016.
Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring
DRAFT FOR DISCUSSION PURPOSES
Overview of Russian Tax monitoring regime
► Applicable to Large/Medium taxpayers, meeting the following PY financial
criteria:
► Income exceeds 3 bn. RUR (approx. 40MEUR)
► Assets exceed 3 bn. RUR (approx. 40MEUR)
► Taxes paid in PY exceed 300 MRUR (approx. 4 MEUR)
► Voluntary regime – by application, subject to approval by Tax authorities
(starting 2016 tax year)
► Period -1 calendar year
► Covers all taxes
► Formalized in a separate Law and regulations
► Taxpayers administered by the largest industry tax inspectorates under
supervision of FNS
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Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring
Key benefits, constraints and challenges
Key Benefits
►No field and in-house tax audits
+
►Early discussions and opportunity to clear UTPs
through “Motivated opinion” mechanism
Key Constraints/Concerns
►“Motivated opinion” applies only to positions
already taken (not a tax ruling)
►No “Clean Slate”
►Conducting tax audit procedures on the tax
authority’s site (rather than the taxpayer’s site);
►Tax audits can still take place
►Ability to demonstrate reliance on tax internal
controls, that allows to to reduce the volume of
procedures and documents for inspection
►No clear methodology and basis for TCF
assessment and control reliance
►Direct supervision by FTS
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►Transfer pricing out of scope
►Level of qualification of client teams at Tax
authorities
►Lack of business awareness and audit experience
at Tax authorities
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Regulations on information exchange
Section 1. Procedures for the provision of documents (information) to tax authority:
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Selected form of information provision: in electronic form and (or) access to the taxpayer’s IT systems
List of information/documents to be provided to the tax authorities.
Taxpayers providing information about their tax internal control systems can determine the scope, quantity and principles for
the selection of primary documents and other supporting documentation provided to the tax authorities at their own
discretion.
Section 2. Information on tax reporting system:
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Information on the forms and methods of statutory accounting
Procedures for the disclosure of income, expenses and taxable items in statutory and tax accounts, as well as information
on analytical tax ledgers (as it would be reported in a tax return)
Procedures for the disclosure of other information relevant to the correct calculation (withholding) and the complete and
timely payment (remittance) of taxes and levies.
Section 3. Information on the internal control system (Tax Control Framework):
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Approaches to identification and assessment of tax risks
Main control procedures aimed at eliminating (reducing) those risks
Information on the system for documentation and confirmation of the performance of internal control procedures, and on
supporting documentation to the tax authority
Description of the process by which and timeframe within which the taxpayer is to obtain (prepare) results generated by the
them to the tax authority
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Lessons for other emerging economies from Russian experience
1. Even in immature environment and in absence of certain pillars
cooperative compliance program can be launched
2. It does make sense to “run ahead of the train” and launch the pilot
cooperative compliance program in emerging markets as this provides
an opportunity to actively shape and customize the program to the
country environment
3. In the environments with inherent lack of trust cooperative compliance
tends to get very formalized and regulated
4. Key risks for the cooperative compliance in the emerging markets are:
► Lack of impartiality and independent public oversight of the program
► The risk of abuse of the participants’ transparency by tax authorities
► Inability to formulate reliable methodology for Tax Control Framework
assessment by tax authorities
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Cooperative Compliance program for large taxpayers in Russia – Tax Monitoring