Agreement on the taxation of Savings Income between the United Kingdom and Montserrat … (http://www.hmrc.gov.uk/international/montserrat.pdf) pose, among others, is that of diminishing their tax burden. The memorandum deals only with those structures to which licenses are issued by the CB of Cyprus, namely investment funds, banks and the Cyprian affiliations of foreign banks. However, since an active exchange of information had been under way between these structures before the signing of the memorandum, and they could obtain registration in Cyprus only after submitting detailed information concerning their beneficiaries, which was available, on a compulsory basis, from public sources, it can be said that this new agreement resulted in no additional informational control over Russian businesses in Cyprus being granted to the Central Bank of Russia – it simply regulated the already existing practice.
It is necessary to adjust the agreements of the RF concerning tax information exchange between countries in order to achieve their harmonization on the basis of international agreements. Accordingly, it is necessary not only to bring the provisions of the agreements concerning the elimination of double taxation concluded by the RF with other countries in conformity with the norms of international law (with regard to the unification of terminology, mechanisms and methods applied in the process of exchanging tax information), but also to expant the list of offshore territories with which agreements should be concluded concerning cooperation and exchange of information on compliance with tax legislation, in order to “legalize” capital and ensure that appropriate taxes are paid.
In finding solutions to these issues, the RF should be oriented not only towards the experience of foreign countries, but also to the provisions contained in the recommendations and conventions of the OECD – an international organization of high authority, whose activity produces the following results across the globe:
- banking secrets are becoming more tramsparent. By now, in many countries throughout the world, including nearly all the offshore zones, special laws have been adopted against money laundering in accordance with the recommendations of the FATF and the OECD, thus making the banking system more transparent for authorities and obliging banks to demand “transparency” from their clients, too;
- the transparency of corporate structures is increasing. The same laws on money laundering imply a broader access of authorities to information concerning the true owners of a company, even when they are “covered” by nominal shareholders or bearer shares;
- the international exchange of tax information is increasing. The majority of “tax refuges” have already placed their signatures under the requirements issued by the OECD.
An analysis of the standpoint of the RF Supreme Arbitration Court (RF SAC) with regard to the issue of recognizing as void the transactions concluded by a taxpayer A. Kireeva In May 2008 the Supreme Arbitration Court adopted Decree of the RF SAC’s Plenum “On some issues relating to the practice of considering disputes arising in connection with the application of Article 169 of the Civil Code of the Russian Federation”, of 10 April 2008, No 22, which has important consequences for the entire tax administration system. In fact, by this Decree the Plenum recommended that the courts should no more apply Article 169 of the RF CC to tax-related legal relations, or to apply in the tax sphere the consequences arising from transactions being recognized as void, which leads to seizure from the parties thereto of everything received under a transaction.
In May 2008 the Supreme Arbitration Court (SAC) adopted one of those Decrees that have profound and far-reaching consequences for the entire tax administration system, namely Decree of the RF SAC’s Plenum “On some issues relating to the practice of considering disputes arising in connection with the application of Article 169 of the Civil Code of the Russian Federation”, of 10 April 2008, No 22.
This Decree issued by the Court has rounded up the long discussion that has been going on between judges, legists, as well as taxpayers and tax officials with regard to the issue as to the right of tax agencies to appeal to courts of justice with petitions of recognizing as void the transactions of a given taxpayer, as well as the possibility of applying to taxpayers the consequences of the recognition of their transactions as void, as envisaged in civil legislation.
The problem of invalidity of the transactions concluded by a taxpayer with the purpose of tax evasion has a long history, and it has never lost its importance throughout the last seventeen years. As early as 1991, by item 11 of Article 7 of the Law “On the tax agencies in the Russian Federation”, the right of tax agencies to appeal to a court of justice with petitions for recognizing the transactions of a taxpayer as void was consolidated. This right has been periodically (not very often) exercised by tax agencies when identifying transac tions that were not contrary to legislation from the formally legal point of view, but whose main goal was to minimize the amount of tax payments.
When approving the RF Tax Code, the lawmakers evidently forgot to transfer this right of tax agencies to Article 31 of the RF TC and to adapt it for tax purposes. As a result, the suits for recognizing transactions to be void were not included in the list of types of suits (consolidated in the RF TC) with which tax agencies cannot appeal to an arbitration court (Subitem 16 of Item 1 of Article 31 of the RF TC). However, since the list of types of suits was an open-end one, the courts were interpreting the provisions stipulated in Article of the RF TC as granting permission to tax agencies to file suits concerning the recognition of the transactions of a taxpayer as void. This, in particular, resulted in a situation when the old law “On tax agencies in the Russian Federation” was not completely abolished: it was amended many times, and it is still regarded by courts as being in force29.
At the same time, out of the law’s entire text, in actual practice only one norm is effective – that concerning the right of tax agencies to bring suits of recognizing as void the transactions of a given taxpayer.
It should be noted that the norms of the RF TC addressing the issues of invalidity of transactions are poorly applicable to tax legal relations. First of all, in accordance with Item 3 of Article 2 of the RF TC, the norms of civil legislation, by a general rule, are not applied “to property relations based on administrative or other authority-related subordination of one party to another, including to tax-related or to other financial and administrative relations”. As a consequence, for these to be adequately applied it is necessary to provide direct references in tax laws (they are present in the law “On tax agencies”), as well as the norms of tax legislation addressing the specific features of and the procedure for applying the corresponding norms of the RF TC (presently there are no such norms, which is fraught with difficulties in law-enforcement practice).
Secondly, the RF CC envisages several grounds for recognizing transactions as void, some of which assume that the consequences resulting from void transactions should be much worse that it is envisaged by the norms stipulated in the RF TC. (We refer here primarily to Article 169 of the RF CC, which envisages a possibility of recovery of everything received by the parties that have concluded a transaction recognized as void). The RF CC envisages, among other things, the following grounds for recognizing transactions as void:
– non-conformity of a transaction to the requirements of a law or other legal acts (Article 168 of the RF CC);
–when a transaction is concluded for a purpose “knowingly contrary to the fundamental principles of legal order or morality” (Article 169);
– the conclusion of a transaction “only for form, without the intention to create legal consequences corresponding to it” (a fictitious transactionà) (Article 170);
– the conclusion of a transaction for the purpose of concealing another transaction (a sham transaction) (Article 170).
The aforesaid norms of the RF CC are close in their content to the methods applied by tax agencies in Western countries in order to prevent tax evasion. Thus, Article 170 reflects the doctrine of priority of a transaction’s content over its form30. Article 169 may be viewed as a counterpart of the concept of “misuse of law”, because the purpose of minimizing tax obligations can be recognized as “contrary to the fundamental principles of legal order or morality”. Thus, existing Russian legislation provides broadest opportunities for struggling against tax evasion.
However, as is said earlier, the issue as to the correctness of applying Article 169 of the RF CC to tax legal relations has for a long time been subject to dispute, among other reasons because the consequences of the invalidity of transactions as recognized under Article 169 of the RF CC are not adjusted to the purposes of tax legislation. Thus, if a transaction is recognized as void under Article 169 of the RF CC, in place of a fine habitually applied in tax relations, everything received by a party (or parties) to a transaction, if the party or parties have intent, should be recovered to the revenue of the Russian Federation. Besides, resulting from the application of the consequences of invalidity of a transaction under Article 169 of the RF CC, the grounds for additional charging of a tax liability disappear, because when everything received by a party under a transaction is recovered to the revenue of the State, there is no tax base.
See, in particular, Decree of the RF SAC’s of 11 May 2005, No 16221/04, and Decree of the RF SAC’s of 15 March 2005, No 13885/ In this connection, if a transaction is recognized as void under Article 170 of the RF CC as fictitious or sham, and tax arrears are in excess of the limit established by Articles 198 - 199.2 of the RF Criminal Code, a taxpayer, in addition to the payment of tax fines, must be brought to criminal responsibility under Article 198 of the RF Criminal Code.
Nevertheless, until May 2008 all arbitration courts, including the RF SAC, had been assuming that the application of all the norms of civil legislation concerning invalidity of transactions was equally admissible in tax legal relations. This is demonstrated, in particular, by Decree of the RF SAC of 11 May 2005, No 16221/04; by Decree of the RF SAC of 15 March 2005, No 13885/04; and by other resolutions of courts. It is noteworthy that while in the 1990s Article 169 of the RF TC was nearly never applied against taxpayers, in the 2000s both tax agencies and courts began to apply it with increasing frequency. Thus, while in Article 169 of the RF TC was mentioned in only forty decisions of arbitration courts concerning tax-related disputes, in 2006 their number grew to 14031. In particular, tax agencies were referring to this article when applying to courts with petitions disputing the lawfulness of the auditing results presented by Closed-end Joint-Stock Company “PricewaterhouseCoopers Audit” in respect of the oil company “Yukos”32.
However, in 2006 - 2008 the RF SAC began to gradually shape a different approach to the issue of estimating a taxpayer’s transactions. The first step in this direction was further, more detailed elaboration of the recommendations of the RF SAC’s Presidium to the courts of lower tiers with regard to the issue of estimating such transactions. These recommendations were presented in Decree of the RF SAC’s Plenum “On the estimation by arbitration courts of the substantiation for the tax advantages obtained by a taxpayer” of October 2006, No 53. This Decree offered to courts the approach (similar down to certain precise wordings), applied to re-qualifying of transactions in foreign countries on the basis of their economic content33.
In particular, Decree of the RF SAC of 12 October 2006, No 53, contained a definition of tax advantageand specified that a tax advantage can be recognized as unjustified, including in “cases when for purposes of taxation operations are recorded not in accordance with their real economic sense; or when operations are recorded that are not justified by reasonable economic or other causes (or purposes of a business character)”.
Thus, the RF SAC consolidated the principle of priority of economic substance of a transaction over its juridical form.
In its Decree issued as of 12 October 2006, No 53, the RF SAC also pointed to the necessity to conform to the principle of “business purposes of a transaction”, by including in the Decreeå a clause to the effect that “tax advantage cannot be recognized as justified if it is obtained by a taxpayer “outside of any relation to the effectuation of any real entrepreneurial or other economic activity”. Besides, the RF SAC specified that tax advantage cannot be regarded as an independent business purpose. Therefore if a court determined that the main goal pursued by a taxpayer was that of obtaining income exclusively or predominantly through gaining tax advantage, in absence of an intent to pursue real economic activity, the recognition of justifications for its obtaining, in the opinion of the RF SAC’s Plenum, may be denied.
Thus, in 2006 the Court offered a general outline of its approach to reevaluating the tax consequences of a transaction concluded by a taxpayer. However, it never adopted any final recommendations concerning the applying to tax relations of the norms of civil legislation addressing invalidity of transactions. This was done only in May of this year.
In Decree of the RF SAC’s Plenum “On some issues relating to the practice of considering disputes arising in connection with the application of Article 169 of the Civil Code of the Russian Federation”, of April 2008, No 22, it was explained that Article 196 of the RF TC cannot be applied to tax relations, whereas the application of the norms stipulated in Article 170 of the RF TC is quite compatible both with the norms of tax legislation and with the goals of tax regulation.
In particvular, the RF SAC’s Plenum specified that: