Following the classifications of Russian law enforcement measures and sanctions for breach of tax law may be classified in three categories as follows:
(i) Securing measures;
(ii) Enforced tax collection, and;
(iii) Sanctions for tax offences
Among securing measures we may list the following:
- Penalty interest
- Pledge of assets
- Freezing of bank accounts
- Seizure of assets
- Establishing the tax due using the deemed method
In our view the ‘penalty interest’ and ‘recalculation of tax using the deemed method’ should be considered as ‘sanctions’ instead of ‘securing measures,’ but we have here chosen to follow the classification principles of Russian law as expressed in the Tax Code, which list them under securing measures. The idea in the law is that sanctions follow from offences, whereas penalty interest and recalculation of tax does not require that a tax offence is first identified.
The taxpayer must calculate and settle penalty interest on own initiative without any prompting from the side of the tax office in respect to all overdue taxes (art. 75). The penalty interest accrues for each calendar day at a rate equal to 1/300 of the refinancing rate of the Central Bank of Russia. The obligation to pay penalty interest is independent from any other possible sanctions.
Unpaid penalty interest may be collected from legal entities and individual entrepreneurs according to the means of enforced tax collection without court sanction. But enforced collection of penalties from an individual requires a court order.
In order to restrain the tax officials from excess and abusive practices, the law contains a provision prohibiting to levy penalty interest on amounts that remain unpaid as a consequence of the actions of the tax officials, for example, following a freezing of bank account, seizure of assets, or seizure of monetary funds.
Penalty interest is also applicable on tax debt which has been officially permitted in form of a tax credit granted (art.67).
Pledge of assets and guarantee
Pledge of assets as collateral for unpaid taxes and dues is established by an agreement between the taxpayer or a third person (pledger) and the tax authority (art. 73). The law also foresees that a guarantee (personal or corporate) may be issued to secure tax debts (art. 74).
Freezing of bank accounts
The tax authority has the right to suspend debit transactions on taxpayer’s bank accounts by way of freezing of accounts so as to collect taxes due from the funds available (art. 76) in accordance with the rules of enforced tax collection (see below). Freezing of accounts may be ordered in case the taxpayer owes overdue tax debt and if relevant tax filings are overdue by 10 working days.
To note, that there is no such corresponding right to freeze bank accounts due to matters concerning employer’s social contributions, but such contributions can be the object of enforced collection (unilaterally withdrawn from bank accounts; Law on Social Contributions, No. 212-ФЗ of 24.07.09).
Seizure of assets
Seizure of assets may be undertaken for securing payment of taxes, penalties, and fines. There are two possible forms of seizure of assets, which both can be undertaken in relation to an organization (art. 77), these are
(i) Total seizure. In this case the taxpayer retains the possession and right to use the asset with special permission and under supervision of the tax (customs) authority, whereas the right to dispose of the asset is withheld.
(ii) Partial seizure. In this case the taxpayer retains the possession and right to use the asset and also dispose of it with special permission and under supervision of the tax (customs) authority.
The measure of seizure of assets may be undertaken only with consent of a public prosecutor and only to the extent necessary for the fulfillment of the overdue liability. In order to initiate a seizure of assets, the tax authorities must show sufficient reasoning to believe that the taxpayer would intend to hide the assets or to abscond.
Establishing the tax due using the deemed method
In certain cases the tax authority has a right to determine tax liability according to the deemed method (art. 31.1.7). According to the deemed method the tax authority may determine the revised tax liability based on other available information regarding the particular taxpayer or taxpayers within the same industry. This can be done in the following cases:
- non-submission (or refusal) for more than two months to submit necessary tax filings;
- sufficient accounting records or supporting documents are lacking;
- the quality of the accounting records does not allow for proper calculation of taxes due;
- refusal to allow the tax inspectors to perform an examination at the relevant premises;
- when a foreign entity performs auxiliary and preparatory services for no consideration for the benefit of third parties;
With respect to VAT payable at customs (and customs duties) the securing measures follow different regulations foreseen by the customs laws (art. 86, Customs Code of the Customs Union; chapter 16 of the Federal Law on Customs regulation in the Russian Federation of 27.11.2010 No. 311-FZ). These obligations can be secured by: a deposit; bank guarantees; (third party) guarantee; pledge of assets.
Jon Hellevig, Anton Kabakov, and Artem Usov.
This blog post represents an updated excerpt, for the complete article, click Tax offences and enforcement measures in Russia