Tax Amnesty – Is It Worth Coming Out of Shadow?
People and mass media named this law “tax amnesty” long before it was executed and even before the bill was introduced to the State Duma. This law was anticipated, logical and, what’s more important, it was mentioned by the President in his Address to the Federal Assembly. In fact, it would be more correct to use another common name – “capital amnesty”, first of all due to the fact that amnesty 2015 releases not only from the tax liability but also from the criminal and administrative responsibility.
For the man in the street any amnesty implies “remission of sins” and relief from punishment. The legal meaning of the amnesty lies in the fact that the law cancels prosecution for certain types of law violation and releases those already enduring the punishment from further execution of sentence.
There were a great number of amnesties both in our country’s history and in the history of humanity, they differed in scope and form but had one common feature – although any amnesty betters the lot of the pardoned it was never a real goal of the amnesty. Release of those granted amnesty from the liability/responsibility is just a side effect and in case of a voluntary amnesty, it is also a bait.
For example, the best known amnesty of “the cold summer of 1953” did not pursue the aim of easing the prisoners’ lot but was intended for compensation of loss of the labor pool caused by the war losses as well elimination of demographic imbalance and even “dynastic amnesty” effects, and “dynastic amnesty” has been widely known since feudal times when the sovereign who took the throne released from punishment all the people sentenced by the previous ruler.
Capital Amnesty of 2015 is, probably, a rare exception and it is aimed at releasing those people who apply for the amnesty from the responsibility and legalizing their capitals. Perhaps it is due to the fact that interests of the legislature and interests of those granted amnesty coincide.
Amnesty was introduced by the Federal Law No. 140-FZ “On Voluntary Declaration of Property and Bank Accounts (Deposits) by Individuals and on Amendments to a Number of Legislative Acts of the Russian Federation” dd June 08, 2015; it became effective on July 01, 2015.
Who it is designed for and who will benefit from the amnesty? Answers to these questions become clear once we clearly realize consequences of participation in the amnesty. We will tell you the truth!
The Way It Works
Amnesty is a voluntary procedure: a person who seeks release from responsibility/liability shall submit to a tax authority a special declaration. It shall be filed before December 31, 2015. This term is preclusive which means that if you failed to comply with it you won’t get release! The declaration shall be filled in by the declarant himself/herself in accordance with the form established by the Supplement to the Federal Law No.140-FZ (hereinafter – Amnesty Law).
What may be specified in the declaration? The declaration may contain data on the following:
- Property (land lots, other immovable property, means of transport, securities including shares as well as participatory interest and equity units in the charter (contributed) capitals of the Russian and/or foreign companies) owned or beneficially held by the declarant at the date of filing the declaration.
- Controlled foreign companies (CFC) controlled by the declarant at the date of filing the declaration.
- Accounts (deposits) with the banks outside the Russian Federation opened by an individual at the date of filing the declaration if an individual has to inform a tax authority at the place of his/her registration on opening and changing details of such accounts (deposits) in accordance with the Federal Law No.173-FZ dd “On Currency Regulation and Currency Control” December 10, 2003.
- Accounts (deposits) with the banks if at the date of filing the declaration the relevant individual is recognized a beneficial owner in relation to the holder of such accounts (deposits) as well as description of the grounds for recognizing such individual a beneficiary owner.
The second condition of granting release from the responsibility/liability: connection between the violation of law and:
- Acquisition, use or disposal of the declared property;
- And/or CFC data on which is disclosed in the declaration;
- And/or opening and/or crediting funds to the accounts (deposits) information on which is disclosed in the declaration.
The third condition: the violation of law should take place before January 01, 2015, and no criminal, administrative or tax proceedings shall be commenced against the declarant in relation to the relevant law violation at the date of filing the declaration.
Amnesty covers only individuals, and in case if the declaration contains data on a legal entity’s participation in acquisition (generating sources for acquisition), use or disposal of property and/or CFC, the amnesty shall also cover the management and other officials who performed organizational/management or business and administrative functions in accordance with the regulations of the specified entity.
Give me freedom!
Release From Criminal prosecution
As against confession, amnesty does not “forgive” all the sins – it only covers particular ones. Let’s see from what liability does amnesty release from. First of all, it is criminal liability.
The amnesty is very specific in such case: the release from criminal liability shall be granted only in relation to the criminal acts described in Article 193, Parts 1 and 2 of Article 194, Articles 198, 199, 199.1, 199.2 of the Criminal Code of the Russian Federation.
These are so-called “currency”, “customs” and “tax” articles of the RF Criminal Code.
Article 193 of the RF Criminal Code provides for the liability for failure to carry our repatriation of currency in the Russian Federation. In accordance with Article 19 of the Currency Regulation Law the residents shall ensure that the foreign currency or Russian Federation currency payable for goods (works, services) transferred to the non-residents is credited to their bank accounts with the authorized banks within the term provided for by the foreign trade contracts (agreements) as well as ensure that the funds paid to the non-residents for the goods (works, services) not imported to the Russian Federation (not received in the territory of the Russian Federation) shall be returned to the Russian Federation. This is called repatriation of currency.
If the specified monetary funds were not received/returned to the accounts opened within the Russian Federation within the specified term and the amount of the non-received funds exceeds RUB 6 mln., then a person shall be criminally liable in accordance with Article 193 of the RF Criminal Code.
There is no clear understanding of what exactly should a person declare to be released from the liability described in this Article. The Amnesty Law does not provide for declaring monetary funds unless they are represented by the deposits of the beneficiary owner. There is an idea that a person should declare an account to which the payments shall be transferred under an international contract. But Article 19 of the Currency Regulation Law states that the resident must ensure that the currency is credited not to any account but to the account opened with an authorized bank. And the Amnesty Law provides for declaring the accounts opened with the banks outside the Russian Federation, i.e. excludes accounts with the authorized banks.
Article 194 of the RF Criminal Code describes the liability for failure to pay customs charges. There is nothing to declare in this case. In case a person declares the property, which was imported to/exported from the customs territory of the Russian Federation in violation of the requirements to pay customs charges (customs duties, levies, VAT), the relevant person who failed to pay the customs duties due before January 01, 2015 shall be released from the criminal liability for such failure.
Articles 198 -199, 199.1, 199.2. cover all the variety of crimes related to tax default. In fact, this is the main bonus of the amnesty. In accordance with the specified Articles, evasion of taxes and levies by an individual, entity or tax agent as well as concealment of large amounts of funds from collection of taxes and levies shall be subject to punishment under criminal law. In case if tax default is related to acquisition, use or disposal of the property and/or CFC information on which is disclosed in the declaration, then one can avoid being held criminally liable by declaring the property and CFC provided that the obligation to pay taxes fell due before January 01,2015.
The release from the administrative responsibility may be granted under the same terms: administrative infraction shall take place before January 01, 2015 and no administrative proceedings shall be commenced before the same date. The Law offers those willing to get release from the responsibility for the following administrative infractions:
- Carrying out business activities without state registration as a legal entity or without relevant license (permit) (Article 14.1 of the Code of Administrative Offences of the Russian Federation).
- Violation of the procedure for dealing with cash and carrying out cash transactions as well as violation of the requirements to use special bank accounts (Article 15.1. of the Code of Administrative Offences of the Russian Federation).
- Violation of the term established for filing an application for registration with a tax authority (Article 15.3. of the Code of Administrative Offences of the Russian Federation).
- Violation of the term established for submitting information about opening and closing an account with a bank or other credit organization (Article 15.4. of the Code of Administrative Offences of the Russian Federation).
- Violation of the term established for filing a tax return (Article 15.5. of the Code of Administrative Offences of the Russian Federation).
- Failure (refusal) to submit data required for carrying out tax control (Article 15.6. of the Code of Administrative Offences of the Russian Federation).
- Gross violation of rules for maintaining accounting records and filing accounts (Article 15.11. of the Code of Administrative Offences of the Russian Federation).
- Violation of the currency legislation of the Russian Federation and acts of the currency regulating agencies (Article 15.25. of the Code of Administrative Offences of the Russian Federation).
The list of the Articles covered by the amnesty is quite logical, it would be strange to release from the criminal liability for committed crime while not releasing from the responsibility for an offence, which may not be classified as a crime.
Don’t pay taxes – and don’t worry!
And, finally, amnesty related to tax offence. The Law does not specify under which articles of the Tax Code of the Russian Federation the taxpayer shall be released from liability – it is stated that a taxpayer may be released from liability for any tax offences provided that such offences are connected with acquisition (generation of sources for acquisition), use or disposal of the property and/or CFC information on which is contained in the declaration and/or opening of accounts and/or crediting funds to the accounts (deposits) data on which is represented in the said declaration.
And of course conditions which are mandatory in any case – tax offence shall take place before January 01, 2015 and no proceedings related to it shall be commenced at the date of filing the declaration, in particular, no field tax audit (audit of completeness of calculation and payments of taxes in connection with the transactions between the related parties).
The legislature decided to increase attractiveness of the tax amnesty by the fact that it not only releases from the liability, but also cancels obligation to return the declared property to the Russian Federation except when at the date of filing the declaration the relevant movable property is situated:
- Within the state (territory) included in the list issued by the Financial Action Task Force on Money Laundering (FATF);
- Within the state (territory) which does not exchange information with the Russian Federation for the tax purposes.
Moreover, the amendments to Article 45 of the Russian Federation Tax Code introduced by the Law are also a pleasant bonus. Clause 2.1. of Article 45 of the Russian Federation Tax Code formalizes non-collectability of the uncollected taxes if a taxpayer was released from the tax liability for such non-payment due to filing the relevant declaration.
What are the Real Bonuses of Amnesty?
The main bonus of the amnesty for those who will decide to apply for it will be their release from the criminal liability and opportunity not to pay taxes. But let’s see in such cases such bonus may really be applied.
Let’s consider taxes. We will consider opportunity to get release both from the tax and criminal liability as they are immediately interconnected and the lack of the first type of liability cancels the second.
The basic tax in which individuals are interested is a personal income tax (PIT) (for legal entities – corporate income tax). Let’s assume that in 2013 some individual gained profit from sale of a land lot, the assessed tax amounted to two million roubles, i.e. it may be classified as a large amount of money. The individual failed to pay tax when it fell due, i.e. before April 30, 2014.
It seems that the situation satisfies all the conditions of the amnesty: the offence was committed before January 01, 2015; no criminal proceedings were commenced; the offence is connected with disposal of immovable property; and the person has only one thing to do – file a declaration. But this individual is not entitled to do that because the land lot was sold long time ago and it is registered in the Unified State Register of Real Estate Rights and Related Transactions in the name of another person, and in accordance with the Amnesty Law the declarant is entitled to specify in the declaration only that property which is owned by him/her.
Then may the buyer of the land lot be released from the liability for failure to pay PIT? Even if the buyer has some uncollected PIT, it is very unlikely that the amnesty may help to write it off because connection between an offence and the declared data is a mandatory condition of granting release from the responsibility. But acquisition of the land lot is not considered an income for the purposes of PIT that’s why the buyer won’t get anything either.
What are other property related taxes? Tax on land or property tax.
Yes, it is possible to get release from liability in connection with these taxes. But, for instance, the 2015 rates of the individual property tax were so minimal that any criminal liability issues connected with failure to pay such tax were very rare.
The same logic shall apply to the movable property or securities.
There is no chance to escape liability for failure to pay taxes imposed on income gained from the sale of any property because at the date of filing the declaration the declarant shall not be the owner of such property.
But it is possible to escape liability for failure to pay PIT related, for instance, to the income gained from leasing out such lot and any other way of gaining income from such property. The main condition is that such way of gaining income shall not imply disposal (sale) of the property itself.
The second moment for which no one would like to be held liable is failure to pay customs charges. However one shall take into account two aspects: a person shall be held criminally liable for failure to pay customs charges only if the relevant debt represents a large amount of money. Evasion of customs charges payment is recognized to be committed on a large scale if the aggregate amount of the unpaid customs charges exceeds one million roubles.
If the amount is less than one million roubles, then such offence is not recognized to be a crime and such non-payment entails only administrative responsibility which may arise, for example, for non-declaration or inaccurate declaration of goods (Article 16.2. of the Code of Administrative Offences of the Russian Federation) or for failure to comply with the due dates of the customs charges (Article 16.22 of the Code of Administrative Offences of the Russian Federation). The amnesty does not grant release from the responsibility for administrative infractions in the sphere of customs.
Moreover, there is no provision that states that in addition to getting release from the responsibility a person is entitled not to pay the customs charges as in the case with the tax in arrears.
That’s why as regards customs charges a person may only be released from the criminal prosecution but he/she will have to pay the relevant customs and, probably, administrative charges.
The criminal liability for non-repatriation has two ambiguities. First of all, it’s not clear what is to be declared. The object of offence is represented by the monetary funds. The Amnesty Law does not provide for opportunity to declare any funds except for the deposits on the accounts of the beneficiary owners. It is useless to declare the account with a foreign bank as the Law provides for the liability for failure to credit the funds only to the accounts opened with the authorized bank. Do we have to declare the property, which was sold under an international contract and is related to the non-repatriated funds? The answer is not clear.
As in case with the customs charges we see that such situation implies only release from the liability, but the funds will have to be repatriated, otherwise starting from January 01, 2015 there will arise a liability for non-repatriation not covered by the amnesty.
Release from the liability related to opening and/or credit of the monetary funds to the accounts (deposits) information on which was disclosed in the declaration is the apparent advantage of the amnesty.
Recently the currency legislation tightened the rules of settlement using the accounts opened outside the Russian Federation, and the statutory regulation of such process remained extremely incomprehensible and inconsistent which caused a lot of violation in the sphere, most of which were unintentional. That’s why the opportunity to be released from the liability for such offences seems very attractive.
The release from liability of the persons willing to declare foreign companies in relation to which they act as a controlling person seems to be the main idea of the Law. Indeed the fact that the controlling persons were afraid that all the taxes and tax arrears for the periods preceding the disclosure would be collected served as a material hindrance for efficient operation of the CFC legislation provisions.
As regards release from the liability of the persons willing to declare foreign companies in relation to which they act as controlling persons, we believe that there is no liability from which the controlling person could be released.
However, the provisions of the Russian Federation Tax Code on controlling companies are applied by the taxpayers recognized as the controlling persons of the CFC in relation to the foreign companies’ income fixed starting from the periods, which commence in 2015.
Therefore, no liability for failure to pay taxes due to the existence of a controlled company could arise before January 01, 2015. The only exception is represented by the income gained from participation in a foreign company, such as dividends and interest. The obligation to impose PIT on such income existed before 2015, therefore there is an opportunity to be released from the liability for failure to pay such PIT.
The issue of specifying data on the account (deposit) in relation to which the declarant acts as a beneficial owner in the special declaration is even more fascinating. Clause 2.3 of Article 15.27 of the Code of Administrative Offences of the Russian Federation represents a single provision providing for the liability for failure to disclose information on a beneficiary owner. However, the Amnesty Law does not include this Article in the list of Articles of Code of Administrative Offences of the Russian Federation in relation to which a person may be granted release from the administrative responsibility.
Therefore, in fact, specification of an account (deposit) in relation to which the declarant acts as a beneficiary owner makes sense only for the purpose of obtaining release from liability for failure to submit information concerning opening of the relevant account to a tax authority as well as violation of currency legislation committed using such account. However, at present day the Russian legislation contains no provisions, which would impose relevant responsibility on a beneficiary owner.
Summarizing it should be noted that the whole procedure and content of the amnesty of capital give a thought that the main goal of this project is to collect as much information on the property, securities, accounts and foreign companies as possible
Of course some of the opportunities provided by the amnesty of capital may be used by the declarant for his/her own benefit. But if we take a closer look we shall see that to a considerable degree it looks like an attempt to receive information from the declarant on a voluntary basis, in most cases in exchange for release from the liability which was never or which may not be imposed on the declarant.
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