Tax Messenger. Changes in the Regulation of Tax Audits, Transfer Pricing and the Conditions for Applying the 0% VAT Rate.

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1 29 August 2017 Tax Messenger Tax Edition Changes in the Regulation of Tax Audits, Transfer Pricing and the Conditions for Applying the 0% VAT Rate EY s Russian Tax & Law practice was named a leading Tax firm in Russia in World Tax 2017, an annual guide published by the International Tax Review. What has happened? On 15 August a draft federal law Concerning the Introduction of Amendments to Part Two of the Tax Code of the Russian Federation (Draft Law No ) was submitted to the State Duma. The initiator of the bill is the chairman of the State Duma s Budget and Tax Committee, Andrey Mikhailovich Makarov. The draft law makes substantial changes to the regulation of tax audits, additional tax control measures, transfer pricing and the conditions for applying the 0% VAT rate.

2 What does it mean? The draft law proposes that the time allowed to carry out an in-house audit should be cut from three months to one month (clause 1 of Article 1 of the draft law). It also proposes to limit the scope of a repeat onsite tax audit prompted by the submission by a taxpayer of a revised tax declaration in which the amount of tax is lower than the amount previously declared. Under the draft law, the repeat audit would be able to review only the calculation of tax with reference to the amended information in the revised declaration which caused the previously calculated amount of tax to be reduced (or losses to be increased). In other words, in carrying out this type of on-site audit the tax authority would be limited to checking the validity of the claimed reduction in the amount of tax. The draft law also modifies procedures for carrying out additional tax control measures. After carrying out such measures, tax authorities would be required to prepare a statement of additional tax control measures carried out, indicating the start and end dates of the measures and the substance of any tax offence that has been confirmed by the measures and is specified in the tax audit report. As far as transfer pricing regulations are concerned, the draft law reduces the range of domestic controlled transactions by raising from one to three billion roubles the amount of income that must be generated from such transactions over the course of a calendar year in order for them to be classed as controlled. The draft law also proposes an additional condition that must be met in order for transactions with foreign related entities to be treated as controlled: namely, that the amount of income from such transactions over the course of a calendar year must exceed 60 million roubles. The draft law proposes amendments that would make it easier for taxpayers to support their right to apply the 0% VAT rate in relation to export operations: Removal of the provision whereby the 0% rate applies only if the purchaser of exported goods is a foreign entity Exclusion of consignment documents from the list of documents needed to support the right to apply the 0% rate for exported goods. The revised wording proposed by the draft law states only that copies of transport, consignment or other documents confirming the removal of stores from the customs territory of the Customs Union and (or) from Russian territory by aircraft and by sea-going and combined navigation vessels must be presented in the case of the removal of stores for which declaration for customs purposes is not required under the customs law of the Customs Union An amendment to Article 165 of the Tax Code under which agreements that have previously been submitted to a tax authority would not have to be submitted again for the purpose of applying a 0% rate. According to the explanatory note to the draft law, this would eliminate the need to re-submit copies of long-term contracts that have already been submitted to the tax authorities together with tax declarations for prior tax periods What might happen? The draft law represents the first attempt for a long time to reduce the administrative burden that tax control measures impose on taxpayers. The fact that the bill was tabled by the chairman of the Budget and Tax Committee means that it stands a high chance of eventually being passed by the State Duma. If the draft law is passed, it should lead to a reduction in tax risks arising from repeat tax audits occasioned by the submission of a revised tax declaration and risks associated with proving a taxpayer s right to apply the 0% VAT rate in relation to export operations. The draft law also takes a fairly wide range of transactions (both domestic and international) out of the scope of transfer pricing control exercised by the tax authorities. It is important to note that the draft law has only been presented to the legislature for discussion and is likely to undergo much modification in the process of the review of this legislative initiative. 2

3 Authors: Arseny Arakelyan Dmitri Babiner For additional information please contact the authors of this publication: Dmitri Babiner +7 (812)

4 Inquiries may be directed to one of the following executives: Moscow CIS Tax & Law Leader Peter Reinhardt +7 (495) Oil & Gas, Power & Utilities Alexei Ryabov +7 (495) Victor Borodin +7 (495) Financial Services Irina Bykhovskaya +7 (495) Maria Frolova +7 (495) Ivan Sychev +7 (495) Industrial Products Alexei Kuznetsov +7 (495) Vadim Ilyin +7 (495) Consumer Products & Retail, Life Sciences & Healthcare Dmitry Khalilov +7 (495) Real Estate, Hospitality & Construction, Infrastructure, Transportation Anna Strelnichenko +7 (495) Svetlana Zobnina +7 (495) Technology, Telecommunications, Media & Entertainment; Tax Performance Advisory Ivan Rodionov +7 (495) Tax Technology Sergey Saraev +7 (495) People Advisory Services Zhanna Dobritskaya +7 (495) Gueladjo Dicko +7 (495) Sergei Makeev +7 (495) Ekaterina Ukhova +7 (495) Cross Border Tax Advisory Vladimir Zheltonogov +7 (495) Marina Belyakova +7 (495) Transfer Pricing and Operating Model Effectiveness Evgenia Veter +7 (495) Maxim Maximov +7 (495) Tax Policy & Controversy Alexandra Lobova +7 (495) Alexei Nesterenko +7 (495) Global Compliance and Reporting Yulia Timonina +7 (495) Alexei Malenkin +7 (495) Sergei Pushkin +7 (495) Law Georgy Kovalenko +7 (495) Alexey Markov +7 (495) St. Petersburg Dmitri Babiner +7 (812) Anna Kostyra +7 (812) Vladivostok Alexey Erokhin +7 (914) Ekaterinburg Irina Borodina +7 (343) For information about Foreign Countries Business centers in EY Moscow office please follow the link. Private Client Services Anton Ionov +7 (495) Customs & Indirect Tax Vitaly Yanovskiy +7 (495) Transaction Tax Yuri Nechuyatov +7 (495) This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor Ernst &Young (CIS) B.V.

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