Criminal Liability for Tax Evasion: Expected Changes

Alexey Abramov
Beiten Burkhardt

Taxation is undoubtedly one of the most intense and conflict-ridden areas of relations, and even collision, between the state and business. Reluctance to pay taxes, which has existed throughout all human history, is escalated in Russia because the tax legislation is young and constantly changing. This combination of youth and the tendency to change leads to uncertain wording of law provisions and ambiguity of the lawmaker’s intentions.

Under such conditions, taxpayers often make accidental mistakes and understate tax liabilities. As a consequence, company executives constantly face the risk of possible liability, especially criminal liability.

In order to ensure a secure environment there should be both reasonable grounds for criminal prosecution and a clear procedure for initiating and ceasing it. Our laws unfortunately have apparent gaps and ambiguities that enable fiscal authorities to use the Criminal Code as an instrument for putting pressure on business.

Under the current provisions of the Criminal Code, the minimum amount of tax arrears sufficient for initiating a criminal case is 500,000 rubles within three consecutive fiscal years (provided that this amount exceeds 10 percent of the total amount of taxes payable for the said period), i.e. slightly more than 11,000 euros.

Presently tax authorities must forward tax audit materials to internal affairs agencies for their consideration if the abovementioned amount in arrears has been achieved and the taxpayer has not fulfilled the tax authority’s written request for payment of the tax within two months after it is issued. Pursuant to law, payment of the respective tax amounts precludes the tax authority from transferring the tax audit materials to the internal affairs agencies, but does not preclude criminal prosecution. Legislation does not directly prohibit investigative authorities from independently initiating a criminal case against company officers. Unfortunately, this is what happens quite often in practice.

To eliminate the said problems, the Russian parliament is now considering a draft bill on amending a number of laws, including the Tax Code, the Criminal Code and the Criminal Procedure Code. The authors of the draft bill assert that it should stop the so-called “tax terror.”

So, what are the principal changes to be expected? First, the minimum threshold for arrears sufficient for initiating a criminal case would be increased up to 1.5 million rubles. Second, there is a significant addendum to Article 108 of the Tax Code stipulating that a person may be held liable for a tax law violation (including criminally liable) only if the fact of the violation is established in a resolution of the tax authority. If this provision is adopted, it will be impossible for investigative authorities to initiate a criminal case at their own discretion without a tax audit being conducted. This will relieve businesses from risks of “no-audit” criminal tax cases.

However, the most important change to the Criminal Code appears to be the one enabling a person first criminally prosecuted for a tax crime to be released from such prosecution if the person or the company involved fully compensates for the damages caused to the state before the investigation is finished. Compensation for damages means payment of the full amount of taxes, penalties and fines specified in the tax authority’s resolution. This appears to be a very important and necessary change, as it is primarily aimed at the main state objective in taxation: receiving tax income to the budget instead of newly accused persons in court.

It seems that all contemplated amendments are indeed improvements for taxpayers. In conjunction with a number of other changes this law can increase the protection of companies and their executives.