Law on mutual agreement procedures enforced
Anastasia Mikhailova and Ilarion Lemetyuynen of KPMG analyse the impact of the new law enshrining the mutual agreement procedure into Russian Tax Code and whether this means the end of double taxation
The mutual agreement procedure (MAP) instrument was always available for settling double taxation cases with 84 countries that have effective double tax treaties (DTTs) in place with Russia. However, up until last year, only a few MAP cases were started in Russia mainly because of insufficient transparency and ineffective mechanisms being in place.
On September 29, Federal Law 325-FZ, which amends the Russian Tax Code (RTC), was published and it will come into force in 2020. The law for the first time enshrines the MAP concept in domestic legislation. The introduction of such a mechanism is mandatory for countries that have signed up to the OECD Action Plan on Base Erosion and Profit Shifting (BEPS), including Russia.
Unlike the draft versions of the new MAP-dedicated article, which contained detailed guidelines on the distribution of responsibilities, timelines, and potential outcomes, the final law limits itself to more general provisions, in particular:
MAP requests can be filed by either Russian residents or foreign residents entitled to do so under applicable DTTs or by the competent authorities of foreign states that are party to DTTs with Russia.
Russia’s competent authority in charge of MAP cases is the Russian Finance Ministry (MinFin), and the procedure and timeline for resolving MAP cases is to be determined by MinFin, with reference to the effective provisions of DTTs signed between Russia and other states.
A positive resolution to a MAP case qualifies a taxpayer for either a refund or to offset overpaid tax.
The detailed regulation is expected to be further enacted in the form of a MinFin Order that extends the non-normative guidance on MAP promoted by MinFin earlier this year. Yet it is already a big deal for Russian taxpayers.
The introduction of MAP into Russian tax law continues an overall trend in recent years towards tax internationalisation and the adoption of BEPS initiatives pursued by the Russian Government and the Federal Tax Service (FTS). On May 1 2019, Russia ratified a multilateral instrument (MLI) convention undertaking to comply with minimum standard requirements, which are mandatory for all signatories. On May 3 2018, guidance setting forth the process for entering into bilateral and multilateral advance pricing agreements (APAs) was officially published, which provided a practical framework on how to manage APAs with the involvement of one or more foreign tax authorities.
The adoption of detailed guidance on multilateral APA provoked interest among taxpayers. Since then a number of companies have begun negotiations regarding APAs, and more are set to jump on the bandwagon when positive outcomes are secured. No less can be expected from MAP.
That said, it is still possible that, notwithstanding the newly introduced legislative provisions, local impediments may hinder the establishment of MAP as an effective dispute resolution tool:
The OECD strongly advocates the independence and sufficient funding of competent authorities in order to allow them to carry out their mandates without becoming overly reliant on the audit function of a tax administration. Meanwhile, it is expected that MinFin will sufficiently involve the FTS to perform technical analyses of cases and to make conclusions on the appropriateness of MAP requests. This may in practice create conflicts of interest and complicate the process of obtaining an independent opinion on a case.
Given the specifics of the work style adopted by the Russian authorities, commencing a MAP procedure is likely to trigger a kind of informal tax audit requiring significant information disclosures. However, records, information, and details regarding a case may be difficult to come by – the information for example may be no longer available. This will be of particular relevance in the initial years after MAP is enacted. In the meantime, not abiding by disclosure requirements may lead to the MAP request being declined on formal grounds.
Although the FTS is certainly making progress to improve international cooperation with their foreign equivalents, current practice demonstrates that tax administration still involves a lot of red tape and that cases involving other jurisdictions (i.e. TP audits) can last for more than two years. Given that no time limits for MAP completion are stipulated by the amended RTC (the OECD recommended timeframe is 24 months), the process may end up being unreasonably lengthy and hence of little value for requestors.
Finally, in view of the wording used in the new legislation and recent developments in law enforcement, taxpayers may refrain from using MAP, simply out of fear that it may backfire. While the OECD advocates for not treating the mere assertion that a domestic anti-avoidance provision may apply to a particular case as sufficient justification for denying access to MAP, the detailed guidance on the Russian MAP process, which was initially present in the draft law and will likely soon be enacted in the MinFin order, takes an opposing view on the matter. The grounds for refusing to grant any relief or assistance include cases where a MAP request is perceived to have been filed for the sole purpose of reducing, avoiding, or deferring tax. As tax avoidance may entail a criminal prosecution, the wording conveys a very strong message to taxpayers. Both the deliberate and unintended abuse of this provision may be a gross impediment to the viability of MAP as a dispute resolution tool.
Despite the above, Russian taxpayers have already demonstrated significant interest in an instrument that protects their interests – around 24 MAP cases are currently under consideration. However, whether double taxation comes to end will depend on both further guidance from MinFin and the willingness of Russian authorities to successfully resolve MAP cases.