Feb 22, 2007: The End of Tax Romanticism: Tax Violators Will Pay

By Ivan Smirnov

Senior Associate, Head of Litigation practice at DLA Piper in St. Petersburg

A mere two months after the official publication of the notorious Information letter of the Supreme Arbitration Court on unfair tax benefits (for more details please see the article published in St. Petersburg Times on December 26, 2007), another supreme court (this time, the RF Supreme court) has issued an Instructive Ruling on how to deal with tax crimes. The message behind the recommendations of both Supreme courts is quite evident. The state clearly wants to inform taxpayers that any tax scheming and even interactions with bad-faith taxpayers are prohibited and will result in serious sanctions.

Brief analysis of the RF Supreme Court’s instructions shows further strengthening of tax administration in Russia, this time in the area of criminal prosecution of tax offences.

Despite the formal reasonableness of the RF Supreme court’s instructions, their practical implications may be devastating for taxpayers, especially considering the current approach used by law enforcement authorities to initiate criminal investigations of tax crimes based solely on a material element of tax offences i.e. tax underpayments.

Based on the fact that the amount of unpaid tax or levy equals $20,000 for a period of three years, it is evident that any taxpayer may be a potential target of criminal investigation.

For reference purposes:

• There are three corpus delicti related exclusively to tax offences.

A. Tax evasion by a company by means of non-submission of tax returns or other mandatory documents, inclusion of false information into tax returns (mandatory documents) - article 199 of the RF Criminal Code.

B. Failure to fulfill obligations as a tax agent - article 199.1 of the RF Criminal Code

C. Concealment of monetary funds or property from enforcement authorities - article 199.2 of the RF Criminal Code.

• Material element of the tax offence under article 199 of the RF Criminal Code.

At present, the amount of unpaid tax or levy for a company is treated as a criminal offence if it exceeds:

- 500,000 rubles ($19, 000) for a period of three calendar years with the portion of underpaid taxes exceeding 20 percent of the amounts payable, or

- 1.5 million rubles ($56, 600) for the same period of three calendar years.

If the amount of unpaid tax or levy for a company exceeds:

- 2.5 million rubles ($94, 340) for a period of three calendar years with the portion of underpaid taxes exceeding 10 percent of the amounts payable, or

- 7.5 million rubles ($283, 019) for the same period of three calendar years, the violation is treated as a criminal offence on a particularly large scale.

• The most severe sanction for tax offences is imprisonment for a period of up to six years.

Unfortunately, the RF Supreme court did not emphasize the importance of the subjective element of tax offences — the intention of a taxpayer to underpay taxes as a pre-requisite for the initiation of any criminal charges. Such an approach might have been an effective barrier against a formal initiation of criminal investigations based solely on fact of underpayment of tax.

Moreover, the RF Supreme court has produced such an open list of possible motivations, to use as evidence of intentional underpayment of tax, that virtually anybody would fit into it. The list includes material or immaterial benefits, careerism, protectionism, family connections, desire to embellish factual circumstances or obtain a reciprocal service, support for resolving a certain issue, etc.

Up until now it was quite common that law enforcement authorities did not bother to establish the guilt of a particular person, incriminating CEOs and chief accountants simply because the tax authorities had established a certain amount of tax underpayment.

In practice, such a formal approach means that the initiation of criminal charges on tax underpayment, which has not been established by the court, may be based solely on incorrect information contained in tax returns or other mandatory documents filed with the tax authorities.

Another hot issue is a specific reminder by the RF Supreme court that not only the CEO or chief accountant of a taxpayer may be held liable and subjected to criminal prosecution but that any of a taxpayer’s officials (including accountants, tax and legal specialists) and even consultants, may be charged as accomplices, abettors, organizers or executioners of tax crimes.

In conclusion, we recommend taxpayers to pay special attention to all transactions and activities, which might result in significant tax deficiency charges on the part of tax authorities. If you have doubts about how to treat a particular transaction or expense, try to obtain official clarification to avoid accusations of intentional tax underpayment. In any event, avoid any dubious transactions or activities and remember that nothing is worth as much as personal freedom.