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. Last Updated: 07/27/2016

Tax Service Seeks Right to Revisit More Cases

The Constitutional Court has been asked to water down a three-year statute of limitations on prosecuting tax offenses, which would open the door to back tax investigations against almost any company.

The Federal Tax Service has asked the court to lift the protection from firms and individuals who continue to evade taxes. Those recently caught in tax disputes should be fair game for audits stretching back beyond three years, the tax service says in its appeal, a copy of which was obtained by The Moscow Times.

The Constitutional Court is to review the appeal on May 26.

Vedomosti first reported the case in Wednesday's issue.

The case is sending chills through a business community already on edge over a series of back tax claims filed against Yukos and other companies.

Thousands of companies could not pay taxes in the 1990s because tax laws at the time were too complex and often contradictory, tax experts said.

So a ruling in favor of the tax service "would leave virtually all major companies vulnerable to possible back tax charges," Rory MacFarquhar, an economist at Goldman Sachs, said in a research note Wednesday.

The court decided to take the case on April 6, just two weeks after President Vladimir Putin promised during a meeting with business leaders to rein in the tax authorities, which have grown increasingly aggressive. According to the World Bank, the tax service raked in some 470 billion rubles ($17 billion) in back taxes last year, well over three times more than the some 150 billion rubles collected in 2003.

At the March 24 meeting, Putin also promised to shorten the statute of limitations on reviewing privatization deals from 10 years to three -- a change based explicitly on the current statute for taxes.

Although the judicial system is nominally independent, the Kremlin effectively has the last say in the hiring and firing of judges, and few believe the Constitutional Court could rule on a decision of this kind without the Kremlin's input.

"This case will be an important indicator of the extent to which the Kremlin is willing to rein in the tax service's appetite," MacFarquhar said.

The appeal is a direct result of the Yukos affair. Last year, tax authorities demanded that Yukos pay back 19.2 billion rubles ($690 million) in taxes and fines that they said were owed for 2000. In March, however, a three-judge panel ruled that the claim breached the statute of limitations provision.

That prompted the Federal Tax Service to appeal on constitutional grounds to the Moscow region's Federal Arbitration Court, which will argue the case before the Constitutional Court.

The Federal Tax Service says the statute of limitations clause in the Tax Code contradicts two articles in the Russian Constitution: a requirement that everyone to pay their taxes in full and a guarantee of equality before the law.

Allowing malicious -- or, in legal terms, "non-bona fide" -- offenders to escape justice while others continue to pay their taxes in full would be tantamount to giving them special treatment, the tax service says.

Alexei Bogomolov, senior tax manager at Grant Thornton in Moscow, warned that allowing tax authorities to review tax payments from before 2002 would play havoc with the investment environment, undermining everything from mergers and acquisitions to decisions regarding business ventures.

"Any tax due diligence would just not work because it would not be clear how far back the tax service could dip," he said.

Moreover, a change could clash with current rules that require companies to preserve accounting paperwork only for up to five years, Bogomolov said.

"I would agree with reinterpreting the statute of limitations, but only if the Constitutional Court hands down a specific and full explanation of what a 'bona fide' taxpayer is," he said, noting that otherwise, the field would be open for arbitrary investigations.

"It's just wrong to have some kind of leeway [for tax authorities] in the statute of limitations. Either you have it or you don't have it," said Mattias Westman, CEO of Prosperity Capital Management, an investment fund with shares in Yukos and TNK-BP.

"This would create a lot of ambiguity in the Tax Code," Westman said by telephone from London.

Asked to comment on whether a suspension of the statute of limitations on some offenders could open the way for arbitrary prosecutions, a Federal Tax Service spokeswoman said, "We do not discuss these issues in the press."

Any selective application of the statute of limitations would particularly affect large oil companies, which widely used tax minimization schemes before the Yukos affair began in 2003, Troika Dialog said.

But a source at an oil major said the court's decision -- no matter which way it goes -- will not matter in practice.

"Whether they change the statute or not, I don't think it really changes anything for anybody," he said. "You follow the law the best you can and hope that will be enough to avoid the kind of problems that Yukos has encountered."

In one instance, tax authorities opened a back tax investigation against TNK-BP for 2001 before the statute of limitations expired -- only to ramp up the claim earlier this month.