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This results in a self-suggesting conclusion that the proposal of the RF President deals with allowing citizens to be exempted from investigation and sanctions on these funds, provided that they submit to tax authorities tax returns on any income in the previous periods, funds deposited with Russian banks and payment of 13% personal income tax. In other words, the case in point is tax amnesty, i.e.

an opportunity not to be responsible for violation of no other than RF tax legislation subject to fulfillment of the amnesty conditions. It means that in applying the amnesty to the physical person, this person would be exempted from sanctions for violation of the RF tax legislation, provided that he/she has declared all his/her income generated in the previous periods. At the same time, where the physical person generated his/her income contrary to other law(s), the amnesty would not exempt him/her from corresponding investigations and sanctions to follow.

Another issue that deserves consideration is potential ways of increasing benefits of the amnesty ( if proclaimed ) for taxpayers. Analysis of the effective practice in other counties shows that high performance of tax amnesties was normally achieved when tax authorities stated that they would tighten fiscal administrative measures, conduct large-scale tax audits and impose sanctions on those taxpayers who had not taken the advantage of the benefits provided by the amnesty. It should be noted that the tax authorities did translate their statements into actions afterwards, which made taxpayers to think in favor of potential benefits rather than losses, thus declaring the previous undeclared incomes. At the same time, it is neither impossible nor reasonable to tighten the RF tax legislation and fiscal administering in the country, since it would inevitably aggravate the investment environment under the circumstances ( and, maybe, considering the state of the Russian tax authorities ).

In any case, the foregoing considerations show that there are various options to translate into action the annual message of the RF President. We believe that three main options should be focused on :

1) Literal implementation of the provision specified in the annual message, i.e. to introduce amendments to the applicable RF tax legislation with a view to affording opportunity for the physical bodies, which obtained income prior to the amnesty and know positively that the source of this income has not executed its fiscal agent obligations, to be entitled to simplified declaration of monetary funds and payment of a 13% personal income tax of the amount declared. In this case, the physical bodies are not obliged to disclose the source of their income, but must guarantee that this income was received legally. At the end of tax payment the physical bodies shall not be subject to sanctions that are normally imposed on taxpayers violating the law (for instance, in relation to submission of tax return ).

There is an option of exempting the corresponding fiscal agent from liability ( the entity which paid the declared income ), as well as exempting the taxpayer from payment of penalties, which seems not to be desirable though.

2) The previous option of tax amnesty deals with a simplified declaration of income obtained by a physical body. It should be noted, however, that tax avoidance was quite common of physical bodies, but it did not reach ( not even at present time ) the scale of minimization of tax liabilities by legal entities. Moreover, when a physical body receives his/her income at his/her place of work, it is the entity supposing to be a fiscal agent that is responsible for tax avoidance in most cases. A simplified declaration of incomes received by using legal and gray schemes ( the so-called "insurance" and "deposit" schemes, disguising labor relations as civil ones thus being entitled to special tax treatments provided for small businesses ) represents a more complex case, since the responsibility may be shared by the court between the taxpayer and his/her employer. Eventually, tax amnesty is actually a payment for not initiating investigation which knowingly could result in any kind of findings.

One can assume that tax amnesty could have a different effect if it was applicable some way or other to the income of legal entities along with physical bodies. There are lots of reasons, however, for which application of the amnesty to legal entities seems to be unreasonable. In the case of legal entity, it is the amnestied that is responsible for for tax avoidance, as opposed to the case of physical body, when responsibility for tax avoidance can be shared between the physical body and his/her employer ( and if the taxpayers wishes to be included in the amnesty, i.e. declare his/her previously undeclared tax base, it means that he/she acknowledges the fact of violation of the law prior to disclosure of such fact by a tax audit ). As a result, the incentive effect of amnesty on taxpayers, wishing to observe their law legislation, becomes extremely adverse and counterproductive in further improvement of the fiscal system in Russia. In some cases, tax amnesty may be accompanied by using methods of tightening specific components of tax administering in order to avoid such a phenomenon, but it is unlikely to be a remedy in the Russian environment.

The issue could be resolved by implementing a measure which is close to tax amnesty by nature but at the same time can help to cope with the currently relevant issue of differentiation of the practice of voluntary minimization of tax liabilities and illegal avoidance of taxation. It should be noted that even if the issue was resolved within the framework of the applicable legislation, no resolution would be achieved for the issue of making accountable taxpayers ( legal entities ) for such violations of law which were committed in the previous periods, since the schemes of minimization of tax liabilities, which are currently impracticable due to various amendments to the applicable law, gained wide ac ceptance in the country in the period between late in the 1990 and early in the 2000. The three-year term of limitation for tax crimes provides no resolution of this issue, since tax avoidance involving large amounts and very large amounts in arrears is considered a criminal offence which is subject to a ten-year term of limitation.Hence, according to the second option, the ax amnesty would include Russian taxpayers legal entities and physical bodies which minimized their liabilities for corporate income tax or personal income tax within the period specified by the law on amnesty by using various schemes which are not in direct contradiction to the law, but may be found illegal in some cases ( according to a list of schemes, including, maybe, "insurance" and "deposit" schemes as well as those involving unincorporated businesses )).

Efficiency of such option for proclaiming tax amnesty depends on further development of legal practice in Russia. On the one hand, if the used schemes of minimization of tax liabilities were not in contradiction to the lax law at the moment of their application, the use of such scheme of tax amnesty ( i.e. recognition that a number of schemes are in contradiction with the tax law ) would actually give a retroactive effect of the amendments made to the law, whereby aggravating taxpayers situation. On the other hand, such solution, if implemented with efficacy, can be considered as a significant informal signal to the business society that taxpayers would no longer be prosecuted on these grounds. Such a signal can have a more significant effect on the investment environment in Russia than any other solutions in this field.

3) The third option of amnesty has no direct relationship with the tax law, but is focused on attracting the funds that were transferred from Russia to other countries in the previous periods. According to this option, the amnesty is supposed to include Russian taxpayers physical bodies and legal entities which transferred monetary funds from the country in violation of the applicable law ( nontransfer of export earnings to Russia, transfer of funds in payment of fictitious import contracts, etc. ).

For instance, availability of reasonable suspicions of illegal export of capital by such bodies and entities can be an additional ground ( a legal proceeding ). Such bodies and entities can be exempted from tax liability in arrears provided that they deposit the previously exported funds with Russian credit organizations and pay the 13% income tax.

However, as already discussed above, in case that the state power authorities are ready to make a decision on tax amnesty by using this option, a special emphasis should be paid to development of amnesty mechanisms which would allow the bodies and entities included into this amnesty to enjoy a softer tax treatment than those in use. Should a legal proceeding relating to illegal export of capital have to available as an additional condition of implementing the amnesty, this may give rise to a risk of creating negative stimulus for law enforcement agencies to step up such cases with the view to including more bodies and entities into the amnesty.

With regard to the third option, it should be noted that if the state power authorities intend to allow specific categories of entities that violated the law on capital transactions to be discharged from liability, this measure should be proclaimed as a discharge from liability for the listed violations of the cur With regard to physical bodies ( see Article 198 of the RF Criminal Code ), taxes and /or dues to the amount of more than one hundred thousand rubles within a period of three successive fiscal years shall be deemed a large amount in arrears, provided that a share of tax and /or dues in arrears exceeds 10 percents of payable taxes and /or dues in arrears, or exceeds three hundred thousand rubles, while taxes and /or dues to the amount of more than five hundred thousand rubles within a period of three successive fiscal years shall be deemed a very large amount in arrears, provided that a share of tax and /or dues in arrears exceeds 20 percents of payable taxes and /or dues in arrears, or is over one million five hundred thousand rubles.

With regard to organizations and fiscal agents ( see Article 199, 199.1 of the RF Criminal Code ), taxes and /or dues to the amount of more than five hundred thousand rubles within a period of three successive fiscal years shall be deemed a large amount in arrears, provided that a share of tax and /or dues in arrears exceeds 10 percents of payable taxes and /or dues in arrears, or exceeds one million five hundred thousand rubles, while taxes and /or dues to the amount of more than two million five hundred thousand rubles within a period of three successive fiscal years shall be deemed a very large amount in arrears, provided that a share of tax and /or dues in arrears exceeds 20 percents of payable taxes and /or dues in arrears, or is over seven millions five hundred thousand rubles. ) rency law rather than a tax amnesty. At the same time, if violations of the currency law were accompanied by violations of the tax law, the taxpayer must incur liability for the latter.

Conditions for Legalization of Capital The issue of the extent to which the condition of depositing the declared funds with Russian credit organizations should be binding deserves a special attention. It is obvious that declaration of the income amount specified by the amnesty should be accompanied by depositing this amount with a bank account, so that an audit can be performed for the purpose of checking to see whether the income was generated on a legal basis or is not subject to amnesty ( theft, illegal sales of narcotic drugs, etc. ).

Such check, however, may result in two different options :

1) The taxpayer can freely dispose of the funds after 13% income tax.

2) The taxpayer must, besides payment of the 13% income tax and upon completion of the check, meet one of the conditions such as to deposit the funds with a special bank, or purchase government or other types of securities, or participate in an investment project.

It should be noted that the second option seems to be unreasonable, because it would involve mechanisms of selection of special banks, determination of the value and yield of securities, as well as selection of investment projects whose efficiency and corruption resistance is unclear a priori. The second option, if adopted, should provide for additional incentives so that the taxpayer, which had an opportunity to deposit the funds with a bank account, purchase securities or participate in an investment project without paying the 13% income tax, have more advantages to do this subject to payment of an additional 13% tax. In other words, the advantages of taxpayers participation and the costs of non-participation in the amnesty ( i.e. his/her chances to be able to escape from punishment ) should be weighted up. Allowing for the fact that it is not assumed to date that the amnesty would be supported by additional measures aimed at tightening tax administering, the advantages would not overweight the costs.

Technical Issues of Legalization The mechanism providing for the following amnesty elements is most reasonable and corresponding to the mission set by the RF President in terms of amnesty technology :

- taxpayers have an opportunity to provide within the specified terms new or corrected tax returns in relation to the periods which are specified for the amnesty of the taxpayers;

- with regard to the tax base growth over the tax base in the specified amnesty period, the taxpayer shall pay the amount of corresponding tax as well as the interest for utilization of the monetary funds ( according to the refinance rate ) ;

- though tax returns submitted by taxpayers shall not be subject to checking, it shall not mean that the entire taxpayers business activity is not subject to tax audit for the specified amnesty period ;

- denial of prosecution of taxpayers for violation of the tax law as part of the tax amnesty must not be accompanied by denial of prosecution for violation of any other law(s).

There are several questions that should be answered if such mechanism is to be implemented :

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