The further development of the Russian anti-abuse tax practice
Dmitry Garaev of KPMG Russia discusses how the understanding around tax anti-abuse provisions continues to evolve through contrasting approaches from the judiciary and the legislators.
Tax anti-abuse provisions initially appeared in Russian practice during October 2006 and were introduced by a ruling – rather than through a law - from the Supreme Arbitration Court (Ruling No. 53). Ruling No. 53 introduced the concept of unjustified tax benefit, which meant that if transactions and deals are driven merely by the intention to receive a tax benefit (e.g. tax deduction, reduced rate), then such a tax benefit should be ignored and the tax consequences should be assessed based on the parties’ true intentions.
In 2017, a legislator decided to introduce tax anti-abuse provisions into the Russian tax legislation. Thus, the Tax Code saw Article 54.1 “Limits on the exercise of rights relating to calculation of the tax base and (or) the amount of tax, a levy or insurance contributions” added to it. Quite surprisingly (in contrast to Ruling No. 53), Article 54.1 was silent on whether transactions aimed primarily at avoiding tax payments should be accounted for in light of the parties’ true intentions and their real economic substance. In other words, there were no provisions in Article 54.1 requiring the authorities to reconstruct the transactions’ real substance and tax consequences.
At first glance this may appear excessive, since it is reasonable to expect that the tax effect of any transaction should be evaluated based on its real economic substance. In practice, this has allowed the authorities to take a somewhat odd approach: they have started to deny the deduction (an offset) of all costs (related input VAT), if one of the steps in a transaction chain was undertaken merely to avoid (or minimise) taxation. For instance, if instead of buying inventory directly from a supplier, the parties agreed to squeeze into the supply chain an intermediate company which: inflated the cost of the inventory; collects money from the buyer; and then disappears without paying taxes – then the authorities can deny deduction of the entire cost of the inventory, and not just the part artificially inflated by the intermediate reseller.
In one of its clarifying letters (No. 01-03-11/97904 of December 13 2019), the Finance Ministry supported its fiscal subdivision in this interpretation of the law. The arbitration court practice is very limited at the moment and cannot be viewed as consistent, as some courts have supported denying the deduction of only artificial costs, which seems reasonable, whereas others have supported the authorities’ approach. This is clearly an area of uncertainty requiring either amendments to the law or clarifications from the Supreme Court.
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