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. Last Updated: 07/27/2016

What Is To Be Done?: Tax Code Is Stalled And Faces Rollback




Editor's note: By the end of the month, Russia could well have a democratically elected president and be charting a new economic course. In recognition of those coming possibilities, this is the first in an occasional series intended to illuminate the problems experienced by businesses - and to suggest public policy solutions.


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"Treat duly and courteously taxpayers, their representatives and other participants ... respect their honor and dignity." - Tax Code I, Article 33.3.


It may not track with the popular mental image of the tax authorities as Kalashnikov-toting, ski-mask wearing toughs. But yes, that's the law: Under the Tax Code, which went into force Jan. 1, 1999, businesses are entitled to insist upon courtesy and respect.


The Tax Code lays down the foundation for the nation's tax system in 60-odd pages, with 142 articles spread out over 20 chapters. Yet it is still considered a mere work in progress - so much so that what has been adopted as law to date is more correctly known as Tax Code I.


When Tax Code I was passed by parliament in July 1998, it was hailed as a key step toward the creation of a smoothly working tax system.


"It basically lays out the general philosophy behind what the authorities want to do with the tax system," said Roland Nash, economist at Renaissance Capital. "It doesn't give a lot of concrete measures [on actual taxes]."


Part II, which is slowly making its way through parliament and could be passed this year, will set out guidelines for some specific federal taxes, such as value-added taxation, profit tax and individual income tax. Parts III and IV are to deal with regional and local taxes, respectively.


The government's stated intention is to consolidate a slew of existing taxes in parts II to IV, simplifying filings to save companies and individuals from doing loads of paperwork.


Until parts II through IV are passed, however, the specifics of each tax being collected are dictated by laws dating back to 1991. As such, many elements of part I - sometimes including, it must be admitted, the courtesy and respect - have yet to be implemented.


"Until part II is in place, part I is kind of handicapped," said Yevgeny Astakhov, senior tax associate at Baker & McKenzie.


You Have Rights


Caveats aside, many of the principles enshrined in Tax Code I are a businessperson's best friend. Some of these principles are even more business-friendly then the tax regimes policed by the U.S. Internal Revenue Services.


For example, Tax Code I puts the burden of proof of a taxpayer's guilt on the authorities. It is almost unique among national tax codes in this regard - the U.S. Constitution may stipulate that all are innocent until proven guilty, but a tax dispute with the IRS is treated differently.


"In many countries the burden of proof in tax disputes, unlike civil or criminal disputes, is on the taxpayer to prove his innocence," said Scott Antel, a tax partner at Arthur Andersen. "And while that may be suitable in ... countries with a well-established rule of law and administrative procedure system, Russia is far from a normal country in respect to enjoying such luxuries.


"In this country the burden shift makes good sense and corresponds to the original raison d'etre for the tax code: to provide some administrative and procedural rights to taxpayers."


The tax authorities, and also some of the Russian and foreign tax advisers to the government, don't like this point, "but they ignore the still well-entrenched authoritarian realities of this place," Antel said.


Tax Code I also gives taxpayers the benefit of the doubt in interpretations of the law. "All irreconcilable doubts, contradictions, and ambiguities of acts of legislation on taxes and fees shall be interpreted in favor of a taxpayer," states article 3.7 of the Tax Code.


As the law now stands, a court could easily find that both the taxpayer and the tax authorities have solid cases. So when that happens, Tax Code I instructs the court to rule in favor of the taxpayer. To use a baseball term, "the tie goes to the runner."


In a system that remains full of ambiguity - in no small part because Tax Codes II, III and IV are in limbo - article 3.7 can prove useful indeed, Antel said.


There are 14 additional specific rights listed for taxpayers in article 21, including the right to receive free information on current taxes; the right to defer taxes or to pay them in installments; the right to receive a timely credit or refund when appropriate; and even the right to demand that the authorities keep secret how much tax they pay.


Tax Codes I-IV would ultimately represent a far simpler system of tax legislation than the systems that have grown up organically in the United States or Europe. In a way it would be the Esperanto of tax systems - artificially created to be uniquely easy and simple, yet at the same time less deeply grounded in any kind of national or cultural tradition.


"U.S. legislation is the most sophisticated set of taxes in the world ... developed over a long period of time," said Astakhov of Baker & McKenzie. "It's complex and has many regulations that are far from understandable."


A Work in Progress


But everyone agrees Tax Code I is just a beginning, and until II-IV come on line, the tax system is marked by bardak, messy confusion. Many taxes are simply brought into existence on an ad hoc basis; some lofty instructions of Tax Code I are the Ten Commandments-like law of the land, but the exact details of what's what remain sketchy.


"Nobody knows how to apply many of the new procedures," said Tatyana Roumantseva, a senior tax manager at KPMG.


Yet if confusion is a problem, it is also a blessing. There are so many ad hoc taxes and regulations littered beyond the pale of Tax Code I that it is probably just as well that the entire body of law is not always fully implemented.


"If the tax system as it exists was followed completely, a large part of Russian industry would be taxed into oblivion," Nash said. "It is hardly surprising that it is not followed completely."


Rights Under Siege


So the next logical step would seem to be to start pushing Tax Codes II-IV. But that's not happening.


Instead, rumblings from parliament have legal experts worried that Tax Code I - the foundation for the tax system - could be headed for collapse.


Lawmakers are considering from 500 to 1,000 further amendments to Tax Code I. These would do everything from shift the burden of proof back to the taxpayer to strike out the provision telling courts to interpret ties in the taxpayer's favor.


"When you start removing this and many other of the fundamentals which were the very reasons for the Tax Code ... you do have to wonder whether they bought into the concepts in the first place," Antel said.


Since the code's approval in 1998, lawmakers have approved only three amendments. The most recent, passed into law on Jan. 2, 2000, broadens the powers of the tax police. The amendment gives tax police the right to carry out raids on their own initiative, rather than on the request of other tax bodies.


"You have to improve the efficiency of the tax police," Nash said. "I am not sure that increasing their authority will help."


An unrelated law signed Jan. 5 by acting President Vladimir Putin also ordered that the tax authorities, among others, be hooked up to Internet service providers so that they can access e-mails and other electronic correspondence. In all cases, they still need a warrant from a court first - but human rights activists worry that with all that information a mouseclick away, warrants will be a sporadically observed formality.


Which gets to the key question that always seems to come up: What does it matter what the law says if the state can simply ignore it with impunity?


Blatant disregard for the federal Tax Code remains common in the regions, which "have their own fiefdoms and do whatever they want," said one Moscow-based tax expert.


Tax Codes III and IV might someday change that, but then again they might not. One sign of the supremacy of the regional leaders came when parliament suspended article 5.1 of Tax Code I for one year.


That article stipulates that authorities wanting to impose new taxes must provide a grace period: Newly adopted taxes could only come into force the first day of the next calendar year. The logic of the article is that businesses need some predictability, so that they can plan accordingly.


Luckily, businesses here are used to expecting the unexpected, because article 5.1 has not been able to stand in the way of powerful regional leaders hungry for revenue, among them Moscow Mayor Yury Luzhkov. After parliament suspended the article 5.1, Moscow adopted a 2-percent sales tax. It went into effect immediately in July 1999 and was increased to 4 percent on Jan. 1, 2000.


It is events like these that leave many wondering at the efficacy of tax reform as a legislative concern.


"The Tax Code in many ways has been and remains the great false hope," Antel said. "You can economically tune and tailor-make the perfect tax system for a developing country such as Russia - and it won't mean a thing without proper administration of the system. And without further progress that is what has been and may remain the missing link."