Overview of Tax Audits in Russia
2005 - Russia presents many difficulties for foreign businesses.
Nevertheless, Russia is attractive for entrepreneurs. Many
market niches are unoccupied; organizing a new business
is relatively inexpensive; and foreign investment is encouraged.
with tax audits is a particular problem for businesses in
Russia. The most profitable companies often become targets
of tax-control measures, which are the government’s
best sources for additional taxes. In practice, foreign
companies suffer from the arbitrariness of Russian tax authorities
more than domestic companies do. The injustice exists in
both the selection criteria and the procedure for tax audits
(also called tax checks). Sometimes tax inspectors and courts
base their decision on formal criteria only. The recent
case of Yukos shows that any company, however respectable
and stable, might be under the threat of punishment for
a tax violation.
ABCs of Audit in the Russian Federation
main legislative act regulating the mechanics of tax audits
is the Tax Code of the Russian Federation. It sets forth
the two main types of tax audits.
audits (article 88 of the Tax Code) are conducted in the
office of a tax authority. The essence of the audit is the
examination of documents that a taxpayer has filed. If the
audit reveals mistakes, the taxpayer is notified and requested
to make corrections. The tax authority is entitled to request
additional data and to receive explanations and documents
that confirm the correctness of the actions. In practice,
tax auditors often require multiple copies of groups of
documents at one time, creating problems for a taxpayer.
on-site tax audit (article 89 of the Tax Code), held on
the taxpayer’s premises, is one of the most problematic
business issues in present-day Russia and a headache for
all entrepreneurs. During on-site audits, tax authorities
often seem to forget about the law.
‘Deepness’ of a Tax Audit
look for signs of tax violations in a taxpayer’s documents
and account reports. According to article 87 of the Tax
Code, a tax audit may cover only three years of a taxpayer’s
activity preceding the year of the tax audit. This term
corresponds with the three-year statute of limitation set
by article 196 of the Civil Code of the Russian Federation.
Russian court practice corrected this legislative provision.
address whether a tax audit may cover not only the three
prior years, the Supreme Arbitration Court of the Russian
Federation examined article 87 of the Tax Code and decided
that “there is no prohibition for tax authorities
to check the activity of the current year while holding
of the tax audit.” This decision, Decree 5 of the
Supreme Arbitration Court, February 28, 2001, is disputable,
however. Pursuant to article 55 of the Tax Code, the tax
period on the majority of taxes is one year. Therefore,
the court allowed tax authorities to check unfinished periods.
Moreover, if the tax auditor requests quarterly reports,
that creates additional difficulties and problems for the
another case, in 2003 the Supreme Arbitration Court heard
a typical case regarding an on-site audit begun in 2001.
While examining the company’s activity for 1998, the
tax inspector found signs of tax violation and imposed penalties.
The taxpayer applied to the court and claimed that the tax
authority infringed the three-year limitation rule because
the audit was finished in 2002; therefore the inspector
could not examine the 1998 records. The Presidium of the
Supreme Arbitration Court said that when the tax authorities
began the audit made no difference; because the report on
the on-site audit was made in 2002, it could examine only
the three previous years, 2001, 2000, and 1999 (Decree number
2203/03 of the Supreme Arbitration Court of the RF, October
year marked the reviewing of tax rules about the limitations
of tax audits. In the case of Russian oil company Yukos,
the courts delivered another interpretation of the Tax Code,
and all previous practice was ignored. The tax authority
conducted an on-site tax audit of Yukos’ activity
in 2000 and 2001, and completed the audit in 2004. Tax authorities
learned that during 1997–2000, 22 companies in the
Russian offshore zone were created and registered, 21 of
them connected with Yukos. Offshore zones—territories
with favorable tax regimes—are intended to support
the development of that region, but many companies register
in an offshore zone for the sole purpose of obtaining tax
privileges. Examining Yukos, the court decided that the
Russian oil company was a dishonest taxpayer because the
aggregate sum of the tax privileges that Yukos received
did not correspond with the size of its economic investment
in the offshore region. Yukos was required to pay almost
100 billion rubles (US$3.5 billion) (Decision A40-17669/04-109-241
of the Arbitrage Court of the Moscow region, May 26, 2004).
The decision proved that the rules about the statute of
limitation of tax audits are unstable.
decision shocked the country. It implied that every company
might be designated as a “dishonest” taxpayer.
This term first appeared in Decision 138-O of the Constitutional
Court of the RF, July 25, 2001. The court did not define
dishonesty. Since then, however, Russian courts have freely
interpreted this rule.
Length of Tax Audits
88 and 89 of the Tax Code concern the length of tax audits.
Although they set forth the definite terms of auditing actions,
their wording effectively means that tax audits may last
duration of the chamber audit may be no more than three
months; however, this provision was corrected by the Supreme
Arbitration Court. In point 9 of Decree number 71, March
17, 2003, it decided that even if the chamber audit was
longer than required, courts are not obligated to refuse
to satisfy the tax inspector’s demands that the taxpayer
pay taxes and penalties.
tax audits can be even worse. Despite the general rule in
Article 89 of the Tax Code that an on-site tax audit may
last no more than two months, the higher tax authority can
increase the length of the audit by up to three months.
In addition, if a company has branch offices, the tax audit
becomes one month longer for every office.
provisions govern production-sharing agreements. Extraction
of mineral resources and other relevant activities are regulated
by particular special agreements between a company (the
investor) and the state. When tax authorities audit the
activity of companies that participate in production-sharing
agreements, an on-site tax audit may last up to six months.
The one-month branch office extension also applies. Significantly,
the term of the on-site tax audit includes only the time
when tax auditors are physically present at the taxpayer’s
premises. Therefore, an audit may last as long as tax authorities
wish, because the inspectors can check documents requested
from a taxpayer at their office. In practice, an on-site
tax audit may last for a year and still be within the law.
situation became worse after Decision number 14-P of the
Constitutional Court (July 16, 2004). Before this decision,
whether tax authorities may pause a tax audit for some period
of time was disputable because the subject is not covered
by the Tax Code, and article 3 of the Tax Code provides
that all doubts, contradictions, and ambiguities of legislative
acts about taxes and fees should be interpreted in favor
of taxpayers. The Constitutional Court, however, decided
that tax audits can be paused, because the rules about the
duration of tax audits do not correspond to calendar terms.
Only the time when tax authorities are in the taxpayer’s
premises is calculated.
of Controlling Measures
article 87 of the Tax Code, a taxpayer can be the subject
to an on-site audit of a particular tax for a specific period
only once. However, if an audit covers different taxes or
a particular tax within different periods, inspectors may
be present at the taxpayer’s office for an indefinite
the general rules on frequency of tax audits do not apply
if an on-site tax audit is conducted in connection with
a taxpayer’s liquidation or reorganization. All companies
are obligated to inform the tax authority about their reorganization
or liquidation within three days of issuing such a decision,
after which point they may be subject to a tax audit.
Larina is an independent tax lawyer and tax analyst