PENALTIES AND INTEREST
2. Under Russian tax legislation, when taxes are either not paid, or are paid only after a delay, the taxpayer generally faces the following penalties and interest:
AMNESTY UNDER THE DECREE
- 0.3% per day on arrears as at 20 May 1996 and arising thereafter (irrespective of the reason for late payment)
- Late filing charge of 10% of the underpaid amount of tax
- Concealment penalties of up to 200% of the non-declared amount if the tax authorities have identified concealed taxes during a tax audit
3. Presidential Decree No. 685 contains a number of provisions regarding tax arrears, penalties and late payment interest, relaxing the existing penalty and interest regime to a certain extent. The recent letter contains the following clarifications:
As of 20 May 1996, the State Tax Service will no longer charge late payment interest for tax debts to the federal budget outstanding as at 19 May 1996. In Presidential Decree No. 685, it is suggested that regional and local authorities take the same approach for tax debts to their budgets. So far, we have not been informed of the policy of the Moscow or St Petersburg authorities or of other regional executive or legislative bodies on this subject.
Late payment interest which was levied before Decree No. 685 came into effect, but which is still uncollected, will remain in force, but a credit for the outstanding interest amount is given against existing arrears or future tax payments. There is no change in the treatment of tax arrears, late filing penalties and concealment penalties.
Apparently, in all other cases late payment interest accruing up to 20 May 1996 will not be waived. All tax inspectors are instructed to calculate this interest separately, but the wording does not exclude the possibility that the tax authorities will actually seek to levy late payment interest.
According to Decree No. 685, taxes which have been incorrectly charged and collected by the tax authorities must be reimbursed to taxpayers not later than three days after the error has been recognised or a court decision on reimbursement has entered into force. The letter stipulates that not only taxes but also late payment interest and penalties which have been levied incorrectly as a result of a documentary tax audit must be reimbursed or credited against outstanding arrears or current payments.
According to Decree No. 685, "technical errors" which are reported to the tax authorities are not considered to be tax violations. Technical errors appear to include all errors as a result of which taxes are either not paid, or are paid only after a delay. The option to declare "errors" and avoid penalties already existed but would have resulted in charging of late payment interest. "Technical error" may be understood to have a more narrow scope than "error". The letter now confirms that late payment interest will not be levied if taxes have been underpaid as a result of a technical error. In order to qualify for this treatment, the following conditions must be observed:
- taxes underpaid as a result of technical errors need to be reported separately to the tax authorities, and the applicable entries in the accounting system must be corrected.
- there is no specific time limit for reporting of technical errors but it seems that reporting the error before the tax authorities audit the taxpayer and discover it for themselves is sufficient to steer clear of penalties and late payment interest.
- the tax must be paid.
CONCLUSION
4. The confirmation of the State Tax Service that no penalties and interest will be levied if taxpayers themselves report technical errors to the tax authorities is quite significant. This provision appears to introduce a true tax amnesty, since it allows all taxpayers to pay over taxes which were not paid as a consequence of mere oversight without facing penalties and interest. One should bear in mind, however, that the term "technical error" still remains undefined. Under the existing regime, "errors" may be declared but still lead to late payment interest. When a taxpayer declares an error and applies for the regime under Decree No. 685, the tax authorities may charge late payment interest on the basis that the reported error is not of a technical nature. Evasion on purpose will almost certainly not be regarded as a technical error, but whilst many mistakes which have been made as a consequence of unclear legislation, oversight or even negligence potentially qualify as a technical error, the tax authorities may be rather restrictive in granting the amnesty in practice.
5. Outstanding debts which have been identified by the tax authorities but for which incasso orders have not been issued yet may still lead to assessing a taxpayer for the full amount of penalties. If the late payment interest has been already charged but not yet paid over, however, the amount charged is de facto waived. It is difficult to think of a justification, other than an arithmetic one, for this different treatment: whether or not late payment interest may be waived now depends purely on the time the interest has been assessed. The tax authorities may have had specific taxpayers in mind to whom they wish to forgive late payment interest, whilst denying this privilege to others.
6. At the same time it is reported that the frequency of tax audits will drastically increase during the coming weeks: enforcement ministries have been instructed to assist the State Tax Service and the tax police in collecting revenues. If an error is found by the authorities during an audit, the full amount of concealment penalties will be levied, together with late payment interest. It may therefore be advisable to pay over taxes now, even in cases where it has been unclear whether taxes apply.
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