Federal Law "On amendments to Part One and Part Two of the Tax Code of the Russian Federation " No. 302-FZ ("FZ No. 302") came into effect on 3 August 2018. This law amends the regulations covering tax administration, profit tax, VAT, property tax and TP. Below we summarized the most significant provisions of FZ No. 302:
Starting 3 September 2018 the following amendments came into effect:
- The duration of in-house tax audits of VAT returns has been reduced to two months. If a tax authority establishes any violations, the duration could be extended up to three months (Clause 2, Article 88 of the Russian Tax Code);
- The scope of a second field tax audit following a submission of a revised tax return has been defined: tax authorities are not allowed to audit tax return values which have not been amended or which amendment has not resulted in a reduction of tax liability (Sub-clause 2, Clause 10 of Article 89 of the Russian Tax Code). However, this rule does not apply to an audit performed by a superior tax authority;
- Tax authorities are required to release a copy of the protocol of an interview with a witness (Clause 6, Article 90 of the Russian Tax Code);
- Documents and information submitted earlier to a tax authority do not have to be submitted again provided that the tax authority is informed of the details of the previously submitted documents and the name of the tax authority which received them (Clause 5, Article 93 of the Russian Tax Code);
- Upon conclusion of additional tax control procedures, tax authorities must issue a detailed additional report to the original tax audit report within 15 days. The additional report must state conclusions and suggestions by auditors regarding the elimination of violations with references to the applicable tax law provisions (Clause 6.1, Article 101 of the Russian Tax Code).
Starting 1 October 2018, the following amendments came into force:
- When receiving advance payment for property rights, the tax base is defined as the difference between the received amount and the cost of property rights, proportionately to the share of advance payment in the total price (Clause 1, Article 154 of the Russian Tax Code);
- Export of goods from Russia to a Member State of the Eurasian Economic Union is subject to 0% VAT (Sub-clause 1.1, Clause 1, Article 164 of the Russian Tax Code). It is not required to submit transportation/ shipping or other documents confirming the export from Russia in addition to the VAT returns provided that taxpayer submitted a list of applications for import of goods and payment of VAT by an importer. At the same time, a tax authority performing a tax audit may request from taxpayer certain documents confirming the export and may deny 0% VAT rate if taxpayer had failed to provide the requested documents within 30 days (clause 1.3, Article 171 of the Russian Tax Code);
- A Russian company which received a prepayment for goods/ services to be supplied to foreign entities and paid applicable VAT may recover this VAT if the prepayment is returned (Paragraph 3, clause 5, Article 171 of the Russian Tax Code);
- If there are several supplies under an export contract, resubmission of the export contract to tax authorities is not required for application of 0% VAT rate (Clause 10, Article 165 of the Russian Tax Code);
- 0% VAT rate may be applied if goods are exported under a buy/sell contract with a Russian buyer (Paragraph 1, Subclause 1, Article 165 of the Russian Tax Code).
Starting 1 January 2019, reduced tax rates can be established by laws of the Russian regions only if expressly provided for by the Russian Tax Code. Reduced tax rates established by regional laws prior to 1 January 2018 will cease to apply after 1 January 2023.
Movable assets are fully excluded from tax base starting 1 January 2019 irrespective of whether or not the relevant law was adopted by the Russian region.
Starting 1 January 2019 domestic transactions with a value of up to RUB 1 billion are excluded from the definition of controlled transactions. A domestic transaction will be recognized as controlled, if the requirement of Clause 2, Article 105.14 of the Russian Tax Code is satisfied (for example, if contract parties apply different rates of profits tax, one party is exempt from the tax liability, or applies a special tax regime, etc.) and the threshold of 1 billion roubles for a calendar year is exceeded (Clause 3, Article 105.14 of the Russian Tax Code).
A cross-border transaction or a transaction involving an intermediary could be recognised as controlled if it exceeds RUB 60 mln. (Clause 3, Article 105.14 of the Russian Tax Code). In the previous version of the Russian Tax Code such transactions were recognised as controlled irrespective of the income amount.
At the same time, the exclusion of domestic transactions from transfer pricing control opens the possibility of their audit by local tax authorities for compliance with anti-abuse rules (Article 54.1 of the Russian Tax Code).
New recommendations regarding the inclusion of licence fees into the customs value of imported goods
Recommendation No. 15 of the Board of Eurasian Economic Commission which was signed on 28 August 2018 (the "Recommendation") amended the Regulation on including licence fees for using intellectual property items into the cost of imported goods (approved in the Recommendation of 15.11.16 No. 20).
The Recommendation added two sections into the Regulation:
- on licence fees for the right to use trade secrets (know-how); and
- on licence fees for the right to reproduce (replicate) imported goods.
The Recommendation addresses three options of using know-how under a licence agreement:
- if a trade secret (know-how) was used during the production process of the imported goods or is incorporated (contained) in these goods, licence fees for using the trade secret (know-how) are included in the customs value of the imported goods since in such cases the trade secret (know-how) is a part of the imported goods;
- if a trade secret (know-how) is connected with the application of organisational decisions in terms of the licensee's activity (for example with the instruction of the licensee's personnel about the production process of licensed products or the use of equipment or machines, or with technical support for management, administration, marketing, sales, audit, etc.), the decision on adding licence fees for using the trade secret (know-how) into the customs value of imported goods is made by analysing the question whether there are any restrictions and requirements for the imported goods set forth in a licence agreement.
Licence fees for the right to reproduce (replicate) imported goods should not be added to the price of goods; this provision is established in Sub-clause 7, Clause 1, Article 40 of the EUEA Customs Code. As a practical matter, it is sometimes difficult to understand the essence of licence fees and to confirm that these fees are paid specifically for the right of reproduction. The Recommendation has a list of "test questions", affirmative answers to which may indicate that payments made under the agreement are indeed licence fees for the right of reproduction. In particular, it is important to analyse whether the imported goods contain any idea or original work regarded as intellectual property, whether reproduction of the idea or original work is a protected right, whether the terms and conditions of the international contract provide the customer with the right to reproduce imported goods and whether the licensor demands payment of the fee for assigning the right of reproduction to the customer.
The Recommendation also gives examples describing situations concerning licence fees for the right to reproduce and the right to use trade secrets (know-how).
The Recommendation is not binding but in practice, due to the lack of the relevant statutory regulation, customs authorities observe the Recommendation when making decisions regarding the customs value of imported goods both during the customs entry procedure and for control purposes after the release of goods. This is also evidenced by the increased number of requests from the tax authorities for submission of documents confirming the customs value.
Taking into consideration the specific nature of customs disputes, we recommend assessing possible risks in advance and would be glad to assist you with this matter.
Judicial practice for re-characterisation of payments as passive income from Russian source in favour of foreign contractor
The Supreme Court of the Russian Federation (the "SC RF") in the case of OOO "GaloPolimer Kirovo-Chepetsk" supported the decision by the tax authority regarding a re-qualification of payments made by the Russian company to a foreign company under the services and works contract into "other income" subject to taxation at source in Russia (Sub-clause 10, Clause 1 of Article 309, the Russian Tax Code).
OOO GaloPolimer Kirovo-Chepetsk (Russia) (the "Taxpayer") paid income to Clean Development S.A. (Canada) based on services and works contracts. The tax authority considered that payments to the foreign contractor were actually "passive income" and charged additional withholding tax and penalties based on the following arguments:
- Contracts concluded had no economic reason and were concluded only to justify the transfer of funds to Clean Development S.A.;
- Services specified in the contracts with Clean Development S.A. were actually provided by other Russian and foreign companies;
- Taxpayer's recourse to the Supreme Court of Canada in the Province of Quebec and this court's decision were of merely formal nature, since the Taxpayer had no intention of actually enforcing the debt recovery;
- Canada's tax authorities confirmed that Clean Development S.A. had no assets or income, its location could not be identified, the company's address was a "mass registration" address and the company's director was a "nominal" one and denied having any involvement;
- Clean Development S.A. did not report income received from Taxpayer in the audited period in Canada and did not pay taxes.
Taxpayer tried to challenge the additional withholding tax assessment claiming that Clean Development S.A. had been obliged to provide services as confirmed by the decision of the Supreme Court of Canada in the Province of Quebec.
Notwithstanding Taxpayer having won in the courts of appeal and cassation, the SC RF supported the position of the first instance court and ruled in favour of the tax authority. The court agreed that information received by the tax authority through information exchange was sufficient to requalify the income and took into consideration reluctance of the Taxpayer to disclose the actual recipient of the income. The SC RF confirmed that the tax authority was entitled to requalify payments to the foreign company if income from active transactions actually represents "passive income".
The decision of the SC RF confirms the unfavourable trend of re-qualifying payments made by Russian companies into "other income" of foreign companies. This negative tendency may increase the risk of tax authorities raising claims in similar situations, hence attention should be paid not only to the form of service agreements, but also the execution of underlying obligations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.