Effective Handling of Tax Disputes in Russia Seungjin Lee ALRUD Law Firm (Moscow)

Regulator’s approach to tax audits Russia’s tax authority is reshaping its approach from formalistic to professional one Substance over forms Analysis on substance and bona fide nature of a transaction Check actual participants, purpose and benefit of the transaction Digitalized inspectors Electronic data processing by analytics groups (VAT payment tracking systems, registers, etc.) Data exchange with banks / foreign tax services (BEPS ratified in May 2019) Criminalization Broad application of a fraud concept and cooperation with law enforcement officers Collection of tax arrears from company’s officers (CEO, chief accountant, etc.)

Regulator’s approach to tax audits Typical process of conducting a tax audit Internal Analysis DESK AUDIT (3 months) Informal contact with taxpayer FIELD ADUIT (2 – 6 months) Request for clarification of declared tax Payment of tax arrears (but no imposition of penalty) Additional events Request of documents or information to the taxpayer / taxpayer’s business partners Interview, interrogation, seizure of documents, inventory tracking, engagement of outside experts, etc. Payment of tax arrears and imposition of penalty Post-audit paperwork takes about 2-3 months for finalization of an audit decision to be delivered to the auditee.

Key areas of tax audits What is checked: Special attention to: Cross-border deals and payments Lawfulness of applying incentives comforted by international treaties Place of realization for the VAT purpose Related-party transactions Contracts with companies incorporated in tax havens Economic justification of expenses Economic rationale of a transaction Utility of a transaction Transaction price compared to that of similar one Related-party transactions Contracts entered with involvement of intermediaries whose good faith is not confirmed Split of businesses for unjustified tax benefit De-facto affiliated contract parties who enjoy tax incentives Intragroup restructuring of business Contracts with individual entrepreneurs with regular payments Single IP address, workers hired by multiple employers

Tax disputes resolution: process Pre-trial administrative procedure is prerequisite for filing a motion to court Administrative appeal* against Motion to court Audit decision by way of filing an appeal addressed to tax authority, which rendered the disputed decision, within 1 month from the date such decision is issued. Neither entry into force nor enforcement will take place But no effect on injunctive measures taken by tax authority Audit decision in full force by way of filing a petition addressed to tax authority superior than one, which rendered the disputed decision, within 1 year from the date such decision is issued. No effect on enforcement procedure and injunctive measures 3 months of limitation period from the date of acceptance of the administrative appeal / petition Commercial (Arbitrazh) courts except for tax disputes arising out of individual’s income tax, which are tried before the courts of general jurisdiction Fast-track procedure: 3 months - 1st instance / 1 year - final decision 4 instances (1st, 2nd, cassation, supervisory) *No more than 1 month of assessment (up to 2 months)

Behavioral strategy against a request for information, tax officers’ calls for interrogations, tax committee, etc. As per RfI, respond fast, but delay submitting requested documents During interrogation, do not say what is beyond the area of competence. It is ok to say “I do not own such information“ Claim the right of making corrections to drafted protocols/minutes to avoid dangerous wordings or distortions

Recommendations How to cope with a new tax environment? Choose a business model / sector which will attract less attention from tax authority Train employees to be capable of explaining business logics of controversial deals before tax authority Accumulate documentary evidence to prove economic feasibility of the transaction Implement a Compliance Policy for KYC checks Work on transfer pricing methods prior to intragroup transactions Apply for the benefit of DTT incentives only when documentarily ready Agriculture, forestry

Contact details: Seungjin Lee | Attorney seungjin.lee@alrud.com ALRUD Law Firm Skakovaya st., 17, bld. 2, 6th fl. Moscow, Russia, 125040 Т: +7 495 234 96 92 F: +7 495 956 37 18 E: info@alrud.com