On December 25 2012 the Russian Federal Tax Service (FTS) signed the first four pilot horizontal monitoring agreements with some of the largest Russian taxpayers.
These agreements mark the beginning of testing of the innovative enhanced relationship approach with the largest taxpayers in Russia.
Recent trends in tax administration in Russia
The Russian tax administration system has rapidly developed over the last three years. Key noticeable initiatives introduced in recent years concern the:
- Introduction of new electronic services for taxpayers;
- Introduction of electronic invoicing;
- E-filing of tax returns;
- Significant improvement in the efficiency of mandatory appeal procedure to higher tax authority; and
- Further development of service approach to taxpayers
These initiatives have been well received by taxpayers, which is evidenced by the results of various surveys. In particular, Russia moved from 102nd place in the World Bank’s “Doing Business” survey in 2012 to 64th place in 2013 on the attractiveness of its taxation system.
Last year’s introduction of new transfer pricing rules marked another milestone in the development of the Russian tax system. The new rules are based on OECD principles and allow companies to apply and conclude advance pricing agreements (APAs) with the tax authorities, effectively the first instrument that can be qualified as a true binding ruling in Russian tax legislation.
The tax administration reform is largely driven by the FTS, led since 2010 by commissioner Mikhail Mishustin, who has begun building a world-class tax administration system in Russia according to international standards.
Taxpayers welcome the positive changes and look forward to new developments in the Russian tax system and tax administration.
Horizontal monitoring – the new step forward
The Russian companies that signed the “Cooperation agreements on Horizontal Monitoring – Enhanced information exchange” with the FTS in December were InterRAO UES (leading Russian energy holding), Mobile TeleSystems (the largest telecommunications group in Russia, Eastern Europe and Central Asia), RusHydro (one of the largest Russian power-generating companies) and Ernst & Young Russia.
The pilot aims to establish a new format of interaction between the tax authorities and companies based on transparency, trust and cooperation. The key benefits of cooperation, as declared by the FTS, are similar to those available under most of the international enhanced relationship regimes and include:
Benefits for taxpayers
- The opportunity to discuss complex tax matters with tax authorities online and get official clarifications on uncertain tax positions;
- An expected reduction in the frequency of tax audits, the volume of documentation inspected and audit procedures performed; and
- Minimisation of the number of issues to be resolved in court and associated costs.
Benefits for tax authorities
- Get a better understanding of companies’ business processes and internal controls through increased transparency and cooperation
- Ability to apply a risk-based approach to the selection of taxpayers for audit, focusing the available resources of tax authorities on tax evaders rather than bona fide taxpayers
- Reduce the scope of control procedures and optimise internal costs (from a resources and financial perspective)
- Minimise the number of tax issues resolved through litigation
Obviously, both parties would benefit from improved communication and the ability to discuss tax issues on a regular basis, which would build a platform for mutual trust and cooperation.
The procedure to be followed by the parties under the pilot provides for the organisation of working groups involving respective tax inspectorates and taxpayers to determine the protocols for exchanging information (including IT aspects, regularity and volume of exchanged information) and coordinating their efforts during the pilots.
The FTS has not made any plans for the future extension of the pilot programme as of yet. Indeed, after only two months, it is too early to evaluate results of the first pilot. However, both the tax authorities and taxpayers are optimistic that the horizontal monitoring pilot will prove to be a fundamental step towards forging better relationships and building a world-class tax administration system in Russia.
This FTS initiative is timely in light of the upcoming OECD Forum on Tax Administration (FTA) meeting, which brings together the heads of the national tax service (commissioners) in 43 countries (including all of the G20), and which Russia will host in May 2013.
|Sergei Arakelov, FTS Deputy Commissioner: |
“The pilot projects on Horizontal Monitoring evidence the fact that the tax authorities are ready for constructive cooperation with taxpayers. Such cooperation will contribute to the improvement of Russia’s attractiveness for international investors. Application of the Horizontal Monitoring approach will lead to the development of a culture of paying taxes and lead to a reduction of tax disputes. The tax authorities will be able to react promptly to uncertain issues in tax legislation and make the procedure of tax calculation and payment more convenient for taxpayers.
"The pre-litigation methods of tax dispute resolution have proven their effectiveness: since 2009 the total amount of tax litigation cases has declined annually by 15-20%, while the number of cases won by the tax authorities has increased. The Russian tax authorities are ready to apply, in practice, enhanced relationship mechanisms that are used in many OECD countries.”
|Dmitry Kornev, Mobile TeleSystems, Head of Tax: |
“We believe that the application of a risk-based approach to tax audits would help to improve the investment attractiveness of Russia. Such an approach would allow for a shift in the burden of tax control from prudent taxpayers towards “high risk” taxpayers, including tax evaders. By participating in the pilot, we expect to confirm the ability to apply a risk-based approach to tax audits of the largest taxpayers, develop a model for further interaction with the tax authorities and make suggestions for required amendments to the tax legislation.”
|Alexander Pakhomov, InterRAO UES, Member of the Board and Head of the Legal Department: |
“European jurisdictions follow principles of interaction between tax authorities and taxpayers that are based on transparency, advanced regulation and the consistency of decisions made. The new format of interaction with taxpayers, proposed by the FTS, is aimed at introducing similar principles in Russia, and the Horizontal Monitoring pilot is the first step in this direction.
"The cooperation agreements that were signed will not change the situation in the short-term. Nevertheless, if the Horizontal Monitoring concept gets further developed, and, what is most important, gets positive feedback from business and pilot companies, taxpayers may hope for the introduction of a conceptually new format of fiscal function and a significant increase in the consistency and predictability of the activities of the Russian tax authorities.”
Alexandra Lobova (email@example.com), Ernst & Young Partner, Director of Ernst & Young (CIS), Moscow