01.06.07

The Constitutional court received a letter of inquiry prepared by State Duma deputies regarding significant changes for the Tax Code (TC) determining what expenses can be deducted from taxable income. Authors of the inquiry insist that today these regulations are “too abstract”.

Article 252 of TC, referred to above, is traditionally considered one of the most controversial. In concept the main idea of the Chapter 25 added into TC in 2002 was fairly progressive. It abandoned a limited list of expenses recognized as tax-deductible and introduced a new principle: “Recognized as outlays shall be any kind of expenditures, under the condition that they are made for the performance of an activity aimed at deriving an income”. This principle is formulated in the Article 252. Such a norm would be sufficient to exclude from the category of outlays the expenses not related to the commercial activity. However, another provision was added to the article which became a reason for many disputes: “Seen as justified outlays shall be the expenditures justified from an economic viewpoint”.

In other words, if tax inspection decides that company’s expenditures are not “justified from an economic viewpoint”, it has a right to charge the business with additional income tax. However the deputies feel that “relevancy,” a subjective term, simply cannot be defined with the subjective term “justified from an economic viewpoint”.

Experts are certain that provisions of part 1 of Article 252 of the TC are indeed estimative and cause numerous disagreements. Tax legislation does not contain criteria for relevance and economic justifiability. Arbitration practice also does not offer an unequivocal answer to this question. Uncertainty creates loopholes for tax authorities, as well as for dishonest taxpayers.

Often tax inspectors refuse to consider as tax-deductible expenditures for consultation, marketing and information services, and expenses of management companies. There are also cases of charging additional taxes on the basis of rejecting royalty payments on copyrights, miscellaneous office and business-trips and other related expenses, etc.

Experts notice that the Ministry of Finances in its letters also often tries to limit companies’ expenses, though it rarely creates disputes since it clearly defines “extra” expenditures. For example, it can include visa cost for a business trip which did not take place, the cost for company-owned apartment that is not being used, etc.

Legal procedures in Constitutional Court are never fast. The letter of inquiry prepared by Duma deputies passed the CC Secretariat’s review whether it complies to the necessary formal criteria and was sent to a judge for preliminary examination in record time of one day. The law allows two months for a preliminary examination after which the judge will present it before colleges at a plenary meeting. It will either result in a negative ruling or, more likely, the inquiry will placed in line for hearing.

Specialists consider it very likely that CC will recognize this norm of the TC as not consistent with the Constitution. At the same time, if this takes place, it will create a gap in the legislation which deputies will have to fill.

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