14.10.07

Note: the following was originally published on FinIz.ru. It has been translated by Alinga Consulting Group and republished here with permission.

Russian Supreme Court Publishes "Treatise" On Prosecuting Tax Evaders  

According to a detailed "treatise" recently published by the Russian Supreme Court, non-payment of taxes, failure to fulfill one's responsibilities as a tax agent, and concealment of assets will soon be treated as criminal offenses in Russia.

Action and Inaction

One of the tax crimes indicated in the Russia's criminal code is the failure to submit tax payments to the proper authorities (Articles 198, 199). However, how the various specific actions of company representatives should be interpreted in reference to instances of this crime being committed has caused debate. The Supreme Court has ruled that both action and inaction can be deemed criminal. This includes both the intentional distortion of data in tax declarations and other documents as well as failure to file the proper declarations and documents.

This includes all documents which are used in the calculation and payment of taxes. In particular, for businesses this means extracts from accounting books on purchases, expenditures, and salaries. It includes copies of accounting journals, outstanding and paid invoices, payroll records, annual reports, information about taxes paid, and any documents that pertain to a business's rights and privileges.

The court also declared the following actions to constitute "distortion of data:"

• failure to report income or taxable assets;
• underreporting income;
• overstating costs related to declaring and paying taxes;
• distorting the accounting period for income or expenses;
• distorting the physical indices for type of economic activity (for example, those pertaining to the unified tax on imputed income).

Who is Accountable?

The Court also determined who can be held accountable for these crimes. If a business fails to pay proper taxes, the director, chief accountant, or anyone else authorized to sign accounts can be prosecuted. Other employees of the firm can be tried as accomplices if they played a role in committing the crime. Furthermore, other individuals can also be tried as accomplices if they can be shown to have organized these actions, contributed to them through council or instruction, or to have induced the director or head accountant to the crime of nonpayment of taxes.

The court considers all individuals, including Russian and foreign citizens and stateless individuals to be accountable for these crimes if they are involved in entrepreneurial activity within the Russian Federation. These individuals are also obliged to calculate and pay taxes and duties, and to submit tax declarations and other documents concerning their commercial activities. The members of the Supreme Court also singled out notaries and lawyers who have founded law offices in Russia as being applicable to prosecution. Since these individuals run for-profit organizations, they too must strictly follow tax regulations.

There have also been frequent cases of individual entrepreneurs conducting transactions through "dummy" companies. In these cases, the business person as well as the company's formal owner, even though that owner is not actually considered the taxpayer. Indeed, anyone who knowingly participates and consciously assists in committing the crime of nonpayment of taxes can be held before the full power of the law as an accomplice to the crime (Article 198 and Paragraph 5 of Article 33 of the Criminal Code of the Russian Federation).

Calculating the Deviation

The court ruled that nonpayment of taxes can be considered a crime only under certain circumstances. First, the perpetrator must have purposefully committed the action. Nonpayment of taxes through error or inadvertence is not considered criminal. Therefore, in proving intent the tax authorities must consider the circumstances under which nonpayment was committed (Article 111 of the Tax Code).

Secondly, nonpayment of taxes must be in a large or "especially large" sum. This sum, thus, can be evaluated as a subjective ratio or in concrete terms. (Note: see the last part of this article for definitions of these terms.) For evaluating this sum, the totals that were to be paid in taxes for a particular accounting period should be taken into account. If tax periods within the current accounting period have elapsed, then whatever payments have been left unpaid are also taken into account in this calculation of the large or "especially large" qualification. However, if calculating a 10- or 20-percent nonpayment ratio, one should proceed from the sum of all taxes and collections due over a period of three fiscal years and compare these against the sum of all taxes and collections paid over that same period. It is also important to remember that, according to Paragraph 12 of the Budgetary Code of the Russian Federation, a fiscal year has been determined to correspond to a calendar year.

Previously, the specific statement within the criminal code that that calculations must be made "within the limits of three fiscal years" had caused disputes as it does not specify if a period of less than three years could also be used. The Supreme Court resolved these disputes, determining that the intentional nonpayment of taxes can be determined criminal if it is deemed large or especially large for even one tax period or calendar year.

If tax rates or duties are reduced or abolished by a legislative enactment with retroactive force, then taxes should be calculated according to the new legislation (Paragraph 4 of Article 5 of the Tax Code of the Russian Federation). One should also remember that normative acts which can be seen as worsening the position of the taxpayer (ie, introducing additional forms or increases in taxes or duties) cannot be enacted retroactively (Article 5 of the Tax Code of the Russian Federation). In short, the calculation of taxes due can only include those taxes, duties, and rates which are established by the legitimation specifically affecting each accounting period. 

Tax Agent 007

Companies are answerable not only for their responsibilities as taxpayers, but also as tax agents. Nonpayment of taxes and improper calculation of taxes (whether budgetary or non-budgetary taxes) are crimes also prosecutable under the criminal code (Article 199.1 of the Criminal Code of the Russian Federation). However, instances of these can only be considered criminal when:

• a tax agent did not pay taxes in a large or especially large sum and 
• nonpayment occurred with criminal intent out of personal interest.

When calculating large and especially large sums in this case, Articles 198 and 199 of the Criminal Code must also be taken into account.

Personal interest can be shown not only in the receipt of material gain, but also in non-material gain. For example, if the perpetrator acted because of expected career advancement, access to some service, improved position, help in any type of situation, etc. However, if nonpayment occurred without the motive of personal gain (for example, if it simply occurred by mistake), then the act is not considered criminal even when the amount of unpaid taxes amounts to a large or especially large sum.

The court also ruled that if nonpayment of taxes is committed by a commercial tax agent, it is necessary to investigate the person responsible for the payment of those taxes. The director might be this person, or the chief accountant, or another authorized employee.

Furthermore, if a tax agent acts with criminal intent with the motive of gaining monetary or other physical gain, then the crime can be prosecuted not only as nonpayment of taxes but also as embezzlement. This crime can be considered completed once the tax period for the affected payments has elapsed.

Neither Hide, Nor Reveal

Companies can also evade taxes by hiding financial and other assets. However, such organizations committing these crimes often hide from law enforcement agencies, and thus avoid prosecution. In this case, if the amount hidden can be considered "especially large," such actions will be considered criminal and prosecutable under the law.

Thus, the owner, director, or authorized employee who manages the property of the company, and who hid assets worth more than 250 000 rubles, will be held accountable before the law. However, the penalties for this should not be larger than the amount hidden.

Criminal Code Must Be Considered with the Tax Code

According to Article 199 of the Criminal Code of the Russian Federation, a large nonpayment of corporate taxes over a three year period will be considered as:

• a sum exceeding 500,000 rubles, if this sum exceeds 10% of all taxes owed;
• a sum of more than 1,500,000 rubles.

An "especially large" sum over the same period can be considered as:

• a sum of more than 2,500,000 rubles, if this sum exceeds 20% of all taxes owed; 
• a sum of more than 7,500,000 rubles.

Despite the fact that Article 199 of the Criminal Code does not specifically list documents and types of information that can be falsified, the court ruled on 20 December, 2005, (ruling N478-O) that the article cannot be freely interpreted and instead must be considered in context with the documents and information demanded by the Tax Code.

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Source: "Финансовые известия"