Tax Monitoring as a New Form of Control
Tax Monitoring as a New Form of Control
The Russian State Duma has approved in the final third reading a draft law on implementing a new form of a tax control in the Russian Federation – tax monitoring.
The draft law is a result of the successful implementation of an experiment by the Russian Federal Tax Service (FTS) that focused on the “targeted” integration of tax monitoring as a form of tax control in respect of certain major taxpayers in 2012-2013 years.
We provide below key information on the underlying principles of the new form of cooperation between taxpayers and the tax authorities within the framework of tax monitoring based on Draft Law No. 529630-6 (hereinafter the Draft Law).
Key ideas of tax monitoring:
- Taxpayers participate in tax monitoring on a voluntary basis and may independently assess the practical value and usefulness of this form of tax control;
- At the first stage (before deciding whether it is worth participating in tax monitoring) the taxpayer assesses all historical tax risks in aggregate and performs an internal audit of the tax control system from the perspective of its effectiveness;
- If the taxpayer decides to participate in tax monitoring, it submits an application to the tax authorities on participation in the tax monitoring regime. We would like to point out here that the updated version of the Draft Law contains a limited list of the grounds for refusing a tax monitoring application (in the initial version of the Draft Law this list was unlimited);
- At the same time as the submission of the application, the taxpayer drafts the key principles, forms and scope of the cooperation, which will be stated in the Protocol of Information Cooperation (hereinafter the PIC). For this purpose the taxpayer resolves its differences with the tax authorities in order to draft the internal tax control model. Subsequent tax monitoring should be conducted within the framework of the internal tax control model provided by the PIC, which includes the ability to make subsequent adjustments to the monitoring framework;
- During the period of extended cooperation the taxpayer should notify the tax authorities in advance of any uncertainties and risks related to its tax position and payments to the budget, while the tax authority should address the taxpayer`s uncertainties regarding its tax position both on the basis of the taxpayer’s inquiry and on its own initiative.
Criteria for taxpayers that want to participate in the tax monitoring
The Draft Law limits the number of tax monitoring participants to major taxpayers. For this purpose the list of criteria was proposed by the authors of the Draft Law to enable organizations to participate in tax monitoring. It is worth noting that initial requirements for the taxpayers have been adjusted significantly since the first reading of the Draft Law. For example, the Draft Law has reduced significantly the thresholds in the participation criteria:
1) Total federal taxes paid in the calendar year prior to the year of the submission of the application by the potential participant exceeded RUB 300 million;
2) Total income generated by the potential participant exceeded RUB 3 billion during the period indicated above;
3) According to accounting (financial) data, the total value of assets exceeded RUB 3 billion as at 31 December in the calendar year prior to the year of the submission of the application.
The Draft Law provides members of a Consolidated Group of Taxpayers with an opportunity to participate in tax monitoring, but only from 1 January 2016.
Advantages of tax monitoring
The following key factors that could have a significant impact on the work of Russian taxpayers, may be identified:
1. The predictability of communications between the tax authority and the amount of additional tax assessments:
- If contested tax-related issues are identified, the taxpayer may submit a request to the tax authority, describing the transactions that have been concluded, and the current tax position and treatment of such transactions, in order to receive a reasoned opinion of the tax authority;
- A taxpayer that has acted in full compliance with the official position of the tax authority is exempted from tax liability.
- The scope and frequency of desk and field tax audits are reduced.
- Participating taxpayers will save time, as only the results of the internal tax control system and tax expertise of the taxpayer are subject to tax monitoring and a tax audit. The extent, form and scope of internal tax monitoring are confirmed and/or adjusted in the PIC.
- Increasing appeal for Western investors: participation in the system attests to the willingness of the company to be transparent due to the use of instruments that are clear to Western investors.
How KPMG can help
KPMG’s extensive international and local experience means that we can help taxpayers implement and develop the tax monitoring system.
For the time being we would be delighted to discuss in detail the advantages and disadvantages of this procedure for companies and perform a diagnostic assessment of the company’s tax function from the perspective of tax effectiveness and the readiness of the taxpayer to participate in tax monitoring.
If you have any questions, please do not hesitate to contact us.
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