13.03.09

Who's Irritating Russia's Tax Collectors?
Original article by Maria Simonova, RBC
Translated Redaction by Ross Kaplan, Intern, Alinga Consulting Group

The Russian government needs money, and in times of crisis its Federal Tax Service (known as the "FNS" in Russian) will search particularly industriously for extra ways to fill their coffers. One of the most popular ways to collect is by adding extra tax burdens to businesses. Analysts say that due to ambiguities in Russia's tax legislation, the authorities can find just cause to investigate almost anyone. “If the Federal Tax Service finds cause to launch an investigation, they will find violations 98% of the time,” says Elvira Sagetdinova, executive director of the consulting group Mikhail and Partners. It is well known that businesses have the right to defend themselves in court. But these days the tax authorities are more ready to fight, the Ministry of Finance will be less understanding, and judges won't be as objective. In short, if the authorities become interested in a company, then this time around, more likely than not, they will be taken for every cent possible. Which businesses will be the next losers?

Snooping Becoming More Common

In November of last year the financial crisis began – just as Russia's federal budget for 2009 was being prepared. In October, 437 billion rubles were collected in taxes, but a month later, collections dropped to just 204 billion. From there, the number went down even more. “The liquidity crisis has brought noticeable losses to many businesses and inevitably lessened the amount of taxes paid by companies,” explains Tamara Kasyanova, the general director of the independent consulting group “2K Audit – Business Consultations."

Nonetheless, the government still has some time to spend. By the start of December 2008, Russia's tax collection goals were 97% fulfilled, while only 80% of the budget was spent. However, the scales will have to tip soon. Furthermore, “in these rough times, it is logical not only to expect more regular tax audits and checks by authorities, but also new methods for carrying out checks,” says Ivan Rodionov, a partner with Ernst & Young in the tax assessment department.

Of course, the tax authorities use different terms to justify the increased inspections. At one conference, Nadezhda Sinikova, the head of the Moscow Department of the FNS, said that she believes companies are more frequently trying to use "illegal optimization techniques" to avoid taxes. From January through September 2008, these techniques, she said, saved companies in Moscow alone 41 billion rubles. “We got that number from a good source. We had to take the realities of the crisis into account to come up with it,” said Mrs. Sinikova.

All The Same Old Tunes

2008 saw the FNS make moves against businesses, which were shocking in number and value. Electronics retailer Eldorado got a bill for 13.5 billion rubles, oil company TNK BP for 6 billion, gas company Moscow NPZ for 1.3 billion, and the real estate developer MIAN for a billion.

One company was audited after the authorities noticed that one company employee had signed two deals in one day in two different cities. By using these "red flags," the tax authorities can more effectively and justifiably find "perpetrator companies" from which to collect more tax revenue.

When "red flags" resulted in Eldorado’s tax bill, its competitors began taking precautionary measures to re-evaluate their own levels of legality and liquidity to avoid problems in case of an audit. This actually harmed their competitiveness by reducing their working capital.

Companies have employed complicated measures to save on taxes, and some courts even back their actions. This year, the courts determined that companies like Eldorado and MIAN, who used intermediary companies with names similar or the same as their own to sell them products at higher-than-market prices, were not actually related to those firms. This means that the sales did not constitute tax fraud, as the tax authorities had asserted.

The telecommunications sector has also been an FNS target. In July of last year, MTS, a major cell phone service provider, was sued for 1 billion rubles in back taxes from 2005-2006. It was accused of allowing alleged non-MTS traffic to be directed over its airwaves free of charge, thus shielding itself from paying taxes on call revenues. MTS has brought the matter to court.

Risk Zones

Offshore firms are next on the FNS agenda. The FNS has recently argued that if a company is legally based off-shore, but has all of its operations in Russia, they should pay Russian taxes.

Another “risk zone” are transactions above 100 million dollars that take place a year or less apart with attempts to obtain payments as fast as possible to avoid future complications.

“Companies do not spend enough time and money to make sure their processes are airtight. The FNS has a plan to fully investigate the industry and we need to be ready,’’ comments a manager at Tax Help, Sergei Shapovalov. Sometimes tax bills can even stem from political confrontations, like the time Rosneft had to pay 20 billion rubles for buying oil at a discount through commodity traders instead of paying full price directly from the well operators. “It seems that their only goal is to get more tax revenue at all costs --- meaning that they don’t care about the rules, they only care about how they can somehow use the rules to pull more money away from companies,” concluded Shapovalov.

Industries At Risk
In our view, the most effective way to sniff out bad tax practices is using two risk indicators figured from Rosstat data. The “Unprofitable” Index looks at the level of profit a company has based on the average Russian company (from January through September 2008 the benchmark was 27%) and where companies are less profitable than average. Then, a group of tax consultants were asked for their personal opinions of who might be most at risk. This is the "Tax Consultant Grade" Index.
Top 10 Tax Generating Industries	“Pay Risk” Index	“Unprofitable” Index	"Tax Consultant Grade"	Index Total
Food production	9	0	9	18
Hydrocarbon extraction	0	8	8.6	16.6
Metal ore extraction	0	8	8.3	16.3
Printing	8	0	8	16
Wholesale Trade	8	0	8	16
Lumber, Paper production	10	0	4.7	14.7
Production, Transmission, and Storage of Electrical Power	0	10	4.3	14.3
Textiles, clothing, shoes, and leather goods	10	0	0	10
Construction	0	0	8.6	8.6
Transportation & Communications	0	8	0	8

Source: compiled by RBK magazine

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