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. Last Updated: 07/27/2016

New Rules of Tax Administration: Practice of Implementation

UnknownBy Alexei Yakovlev<br>Senior manager, FBK-Legal
Most of the new Tax Code provisions concerning tax administration and tax control issued by federal law No. 137-FZ and dated June 27, 2006, have been valid since Jan. 1 of this year. Implementation of these new provisions has already highlighted some principal contradictions in interpretation.

One of the most important disputable matters is the procedure of tax penalty collection from taxpayer-organizations and from individual entrepreneurs after Jan. 1. The core of the problem is the following: The relevant provisions concerning the indisputable collection of negligible penalties were excluded from the Tax Code Part 1 by law No. 137-FZ. Herewith, Article 46 of the Tax Code, which specifies the compulsive procedure of collecting tax and penalty fees, still refers to the possibility of implementing this article in the collection of penalties. As a result there are two interpretations concerning the collection of penalties from taxpayer-organizations and from individual entrepreneurs after Jan. 1. All penalties regardless of the amount can be indisputably collected from taxpayer-organizations and from individual entrepreneurs by the tax authorities. All penalties regardless of the amount can be collected from taxpayer-organizations and from individual entrepreneurs by the tax authorities only in a judicial procedure.

It is interesting to note that some followers of the first interpretation agree that the tax authorities' right to indisputably collect penalties is actually contradictory and ambiguous. Such qualifications can be motivated by the fact that this right of the tax authorities is mentioned in the Tax Code Part 1 implicitly or in the reference rules as amended by No. 137-FZ. (It is defined in the same article of the Tax Code -- Article 46 -- that it shall expand its force to collection of the penalties in cases specified by the Tax Code .) But if so, how can we accept such a strange "right" based on the reference rules?

After consultations with representatives of the tax authorities during the first few months of this year, I verified that the right to indisputably collect penalty fees does not seem, even to the tax administration, to be uncontested. In one of the inspections of a large taxpayer, doubts concerning the procedure of collecting tax penalties existed until recently. In order not to miss its deadline, the inspection appealed to an arbitration court with claims to collect the penalties. However according to the latest information, the first interpretation has been accepted. We can assume that many taxpayers will not agree with this interpretation, so judicial contests concerning this matter are expected. But it is not clear how this problem will be solved. Taking into account the importance of this problem it can be supposed that only the Constitutional Court can resolve it. On Dec. 17, 1996, the Constitution Court issued the following relevant decision: "Recovery of different penalty fees in its origin is beyond the scope of tax liabilities. Tax liabilities are not reconstructive, they are punitive, and they are the punishment for tax violation. When judicial proceeding the measure of the taxpayer's guilt shall be the matter of proving as well as the fact of committing such tax violation. Thus the indisputable procedure of the tax penalty fees' collection shall be considered to be the exceeding of the right to limit somebody's right (Article 55, part 3, Article 57) settled in Article 35, Part 3 of the Constitution, which defines that nobody shall be expropriated rather than under the court decision."

Another matter of dispute is the empowerment of the tax authorities to claim documents during tax inspections. Although the rules of inspections have significantly changed, the tax authorities still act according to the old law: additional documents are required every time tax bodies consider it necessary. However the new edition of Article 88 of the Tax Code defines the specific cases when tax bodies have the right to require additional documents and when the taxpayer is liable to submit such papers.

One such case is specified in p. 8 Article 88 of the Tax Code: during a VAT inspection, if the taxpayer declared in his return that he is entitled to a refund the authorities have the right to documents confirming the rebate (Article 172 of the Tax Code).

Article 88 defines that additional documents may be required during tax inspections that concern only VAT returns and which specify that the tax rebate exceeds the amount of tax for the relevant tax period. Such an approach is rational, adequate and reasonable.

Tax authorities' requirements to submit documents during VAT inspections concerning VAT returns, which don't specify the tax reimbursement are not based on Article 88 of the Tax Code. Moreover, requirements to submit additional documents during tax inspections of every tax return can hardly be considered rational. It is quite important to note that the tax inspections of tax returns don't cause difficulties to field tax inspections for the same period. During field tax inspections the tax authorities have more rights. Work with the documents submitted by taxpayers during the tax inspections can hardly be considered as serious analytic work. It seems the problem lies with the goals and means necessary to succeed and which of the criteria of the control work is more important for the staff of the tax bodies when preparing reports for their leadership.