Russia Joining the Convention of the Council of Europe and the OECD on Mutual Administrative Aid in Tax Matters

At the G20 Summit in Cannes in November 2011, Russia signed the multilateral Convention of the Council of Europe and the Organization for Economic Cooperation and Development (OECD) on Mutual Administrative Aid in Tax Matters. The day is not far away when Russian and foreign tax authorities may joint effort not only in search for taxpayers, but also for their assets and impose attachments on those assets for recovery of unpaid tax debts and sell them at auctions.

Russia's joining the above Convention means actual recognition of its tax claims abroad and establishment of Russia's mutual obligations as regards rendering of assistance to tax authorities of other countries. Thus, Russia may ask for assistance in search for tax debtors and, in its turn, other countries may apply for Russia's aid in such matters.


The OECD Convention on Mutual Administrative Aid in Resolution of Tax Issues adopted together with the Council of Europe in 1988 was developed to prevent evasion of all the types of taxes, except for customs duties. The Convention was signed in Strasbourg on January 25, 1988, but came into legal force on April 1, 1995. Prior to November G20 collective signing of the above Convention, it was binding only to Azerbaijan, Belgium, Denmark, Finland, France, Iceland Italy, the Netherlands, Norway, Poland, Sweden, the UK, the USA, Ukraine and Georgia. Though Canada, Germany and Spain signed the Convention earlier, they have not ratified it yet.


The exchange of information with other countries is not included in the general competence either of the Russian tax authorities, or tax authorities of most G20 states. Cooperation between tax authorities within the frameworks of the above Convention takes place normally in accordance with such tax obligations of a specific taxpayer as have already been determined by the national legislation. As the scope of the international cooperation in that area is limited by the mutual interest of tax authorities of different countries, it has concreter frameworks. Though the Convention provides for a formal opportunity of virtually unlimited exchange of information between any two countries which signed the treaty, in reality, no automatic exchange of the complete information on the taxpayer is possible.


For provisions of the Convention to be applied, the states have to amend their internal tax legislations in order to ensure smooth international tax administration through granting of both relevant powers to its national tax authorities and rights and obligations to representatives of foreign tax authorities. Without those powers, all their activities may be found illegitimate and rejected by court.


The Russian Federation had an opportunity to carry out some international exchange of tax information before. By now, Russia has concluded over 100 bilateral international agreements in the tax area; some of the above agreements are already based on the OECD standard double taxation treaty. Proceeding from the provisions of the above treaty, most international tax agreements signed by Russia already provide for an exchange of information between the competent authorities of the countries which signed the treaty. Such provisions comply with Article 26 of the OECD standard double taxation treaty which article provides for an opportunity to send queries by tax authorities of one contracting state to the other. In particular, such a query may concern the information specified by the taxpayer in the tax returns submitted in other countries. Normally, provisions regarding the exchange of information apply to any taxes and in some cases are not limited to taxes specified in the treaty provided that such an exchange of information does not contradict the main objectives of the treaty (Article 26 (1) of the OECD standard treaty).


The main keynote of all the agreements which provide for the exchange of the tax information consists in compliance of the claims made with the legislation of the respective state. It is to be noted that such tax claims may not comply with the tax norms of the state which the query is made to, and such a situation may happen anytime. So, the question arises who and at what expense will check the compliance of the tax claims with the national legislation of the country which asks for assistance?


Most G20 states haves got lists of foreign debtors, and the opening up opportunities as regards cooperation within the frameworks of the OECD Convention on Mutual Administrative Aid in Tax Matters permit to suggest that in the near future those debts may be recovered. However, it cannot be said that signing of the multilateral Convention alone will ensure promptly all the procedures for organization of the exchange of the information. All the states will have to develop and sign between themselves additional protocols which specify not only the procedures for rendering mutual assistance, but also those for observing tax confidentiality as such procedures are formulated differently in each contracting state.


Application of the Convention for taxpayers will result in the situation that if a company has got tax debts in one state, while its assets are situated in other states which are member-states of the Convention the tax authorities will have a real opportunity to use enforcement measures, for example, imposition of attachment on the property which is situated in the territory of another country. Interestingly, the Convention permits to recover tax debts not only from resident-companies of the contracting states, but also from tax debtors of the third countries if such tax debtors have got tax debts and assets in countries which are member-states of the Convention.


The Russian tax legislation may participate in the Convention only within the frameworks of the institutions and notions which have their definitions in it. Many aspects of the international taxation, such as a detailed and expanded definition of the tax resident as regards companies and individuals (not only in the previous, but also in future periods), controlling foreign companies and other have failed so far to have their adequate definitions in the Tax Code of the Russian Federation. Undoubtedly, a lack of such definitions will diminish efficiency of Russia's participation in the international tax exchange. Under some circumstances, such problems may cause damage to Russian taxpayers which do business abroad and, vice versa, due to a legal vacuum create a favorable regime for foreigners in Russia. However, even in such conditions Russian companies which have branches abroad will be able to adjust the distribution of income and expenditure within the frameworks of mirror adjustments when examined by tax authorities. It means that the Russian tax authorities will have to take into account the already paid taxes abroad or their foreign counterparts will have to adjust reduction of the tax liabilities, accordingly. However, all the opportunities the Convention provides may remain only on paper unless Russia's internal procedures for application thereof have been developed.

N.Yu. Kornienko, PhD (Law), Head of the Tax System Development Department