Proposals on Improvement of Tax Administration

Concomitant with the tax reform in the 2000s were cuts of tax rates, a growing efficiency and neutrality of the tax system, and abrogation of benefits. On the background of economic growth and a favorable situation in the area of foreign trade that allowed greater tax collection and secured growing revenues to the budget system.

In the present circumstances, organizations1 face a major challenge in the tax sphere not in the level of the tax burden (nominal rates and granted benefits). Rather the challenge is posed by the compliance costs and uncertainty of the actual tax burden with account of them. These costs are evoked due to an imperfect tax administration, imbalance of rights in favor of the tax administration, its excessive pressure, and, frequently, an actual presumption of taxpayers’ guilt in the judicial system. All these results in an additional burden for businesses, which generates a corruption pressure on the part of tax bodies, particularly in the course of inspections, and seriously discourages economic activity.
These problems cannot be healed overnight, and they require a consistent implementation of a series of measures on improvement of tax administration and on a gradual shift of the balance of rights between taxpayers and tax agencies in favor of the former. Taxpayers should have a possibility to defend their rights before tax agencies without costs for business, regardless of its size:
1. A substantial limitation of the sphere of application of estimative categories (such as “mala fide taxpayer”, unjustified tax benefit”, abuse of law”, etc.) that allow challenging the taxpayer’s actions that do not contradict the law and are aimed at diminishing tax payments. A certain impediment to implementation of this measure is the problem that introduction of some of these estimative categories in the legal practice is associated with the Constitutional Court’s rulings, which formally may not be abolished. Meanwhile, this impediment does not appear Chinese Wall, given that the Constitutional Court more than once passed rulings that de-facto disavow earlier ones. It is possible to suggest the following options of implementation of this measure, which vary by the degree of radicality.
The most radical option suggest limiting the tax agencies’ right to change the judicial qualification of transactions for the purposes of taxation with the following cases:
а) Under finding the taxpayer guilty in committing the tax crime as per Art. 122 of the Tax Code, that is, the failure to pay or to pay in full of a tax due to falsification of the actual circumstances of his operations that are significant for calculation of the tax obligation. In this case the tax agency recalculates the tax obligation proceeding fr om actual circumstances of his operations. Plus the taxpayer may face tax (and in the event of corpus delicti – even criminal) charges. Consideration of the taxpayer’s actions as an abuse of the law suggests assignment onto the tax agency the onus probandi on such cases.
b) Should the deal comprises directly and fully formulated in the law signs of “dubiousness”, under the presence of which tax agencies are granted with the right to recalculate the tax obligation with no proof of the commitment of the crime by the taxpayer, unless the latter proves that his actions have been economically justified. This de-facto means that under certain circumstances the presumption of tax dodging. Such “dubious” deals include for example transactions made between mutually dependent entities, those involving counterparts that reside in the lower-taxation zones, etc.; however, the list of such deals should be unambiguous and closed. Given that as far as the “dubious” deals are concerned tax agencies are relieved from the burden of proving the presence in the taxpayer’s actions of an abuse of the law, the taxpayer is condoned of offence, and the measures undertaken towards him are limited with accrual of an additional tax payment and, possibly, a fine.
The less radical option suggest that the tax agencies should retain the right to modify the legal qualification of any transactions, whose “principal or underlying purpose ”has been minimization of the tax (without introducing an absolute list of dubious deals by which such a reassessment is allowed); however, in this case application of tax sanctions to the taxpayer is excluded.
Should either of the above options be realized, or instead of them, as a minimal measure one must recognize null and void provisions of the Act “”On tax agencies”, which grant the tax agencies with the right to bring a case before the court on recognition a transaction invalid and vindication of the respective income in full in favor of the state. The existence of these provisions is associated with the danger of a double or even triple (in the frame of the tax, civil, and criminal law) liability for the same tax offence; while such a danger often fails to be realized, this maximizes corruption risks.
2. Lowering the permissible frequency of conduct of inspections, a more narrow and detailed regulation of the tax agencies’ rights in the course of conducting such inspections, introduction of a system of selection of taxpayers for conduct of inspections. Reducing the permissible frequency of conducting on-spot tax inspections to not more than 1 in 5 years, along with setting a possibility for conducting only comprehensive inspections across all the taxes and restricting the tax agencies’ rights in the course of the inspections constitutes a possible avenue for lifting the pressure on corporations on the part of the tax administration. It also appears appropriate to lim it both the number of desk inspections and the period of their conduct, while departures from the said limitations are suggested to be allowed only upon the respective ruling by the court of law, with the limitations being even yet milder for such taxpayers as medium- and small-sized companies, and newly created corporations.
Meanwhile one should design and put in effect procedures of analytical selection of taxpayers for the purpose of inspections. Such procedures should be built upon criteria of the risk of tax evasion, and they should be applied regardless of tax officers who conduct inspections.
3. Limiting the application of incarceration for punishment in conjunction of tax crimes. In order to lower pressure on business by tax agencies and competing organizations, it is suggested to abrogate (set moratorium) on application of incarceration for punishment for tax crimes, at least, for organizations that have operated for a long period of time (over 5 years).
4. Transition towards the procedure of compensation of VAT based on the respective declaration, without conducting a desk inspection on each case of compensation. This measure may be applied at least to businesses that conduct regular export operations.

In the absence of other institutional measures closely associated with the problem in question the list of proposed measures naturally appears a short one. Other measures comprise such critical tasks as enhancement of qualification of, and pay rise for tax officers and personnel, introduction of competition-based principles for filling in executive positions, holding regular attestations of staff, increasing liability for offending taxpayers, etc. As concerns other measures, those worthwhile noting are a radical reform of the judicial system, the one of the prosecutor’s office and law enforcement agencies, combating corruption on all levels of government, chiefly by means of deregulation of the economy, which deprives bureaucrats of the possibility for making discretionary decisions in favor or against a given economic agent, etc. But the aforementioned measures may constitute the first step towards tackling these more general challenges.

A. Zolotareva – Head, Department for Legal Research

1 The IET Survey held in December 2007 on impediments to businesses showed that the tax agencies’ control (in contrast to the level of tax burden) is ranked 4th amid 13 institutional barriers on which the question was asked, and it followed the situation in the law enforcement and judicial bodies, and uncompetitive behavior.