Global Tax Alert | 12 July 2013

Russia enacts measures to combat illegal financial operations

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On 28 June 2013, the Russian Duma passed Federal Law No. 134-FZ On the Introduction of Amendments to Certain Legislative Acts of the Russian Federation with a View to Countering Illegal Financial Operations (the Law). The Law is aimed at strengthening measures to combat money laundering. Many provisions came into force on the official publication date of the Law on 30 June 2013 (following the President’s signature). The remainder will come into force between 30 July 2013 and 1 January 2015. This law is consistent with global trends of increasing government control over financial flows, in general, as well as the tightening of measures aimed at improving the transparency of financial transactions and increasing fiscal control.

Some measures will also affect businesses not engaged in the targeted illegal activities, for example, exporters and others claiming VAT refunds will be subject to additional control measures.

This Alert covers the most significant changes introduced by the Law.

Taxation

The amendments likely to have the greatest impact in practice on companies acting in good faith are those to the Tax Code.

The Law extends the tax authorities’ powers in relation to in-house tax audits covering VAT returns.

  • They may conduct site inspections whenever a VAT refund is claimed (e.g., by exporters or other sellers of zero-rated goods and services).
  • They also may conduct site inspections and request primary documents and VAT invoices if inconsistencies are found between data in the VAT return and journals of VAT invoices, or data reflected in a counterparty’s VAT return.
  • They may request documents including analytical tax ledgers in relation to the amendments made in an amended tax return submitted over two years after the filing deadline.
  • From 1 January 2014 they can order a taxpayer reporting a loss in a profits tax return to submit explanations justifying the loss within five days.
  • The tax authorities may collect tax arrears from a company’s shareholders or subsidiaries in certain narrow circumstances involving the receipt of proceeds from the company’s sales by its parent or subsidiary or transfers of resources to the parent or subsidiary after a tax audit of the company has been ordered.

Agents not recognized as VAT payers are required to keep registers of issued and received VAT invoices in relation to their agency activities and to submit them to the tax authorities.

The requirement to submit VAT returns through electronic means of communications is introduced with effect from 1 January 2014.

Failure of a taxpayer to confirm the receipt of the official correspondence forwarded electronically by the tax authorities may serve as grounds for the freezing of the taxpayer’s bank accounts.

The tax authorities must send official correspondence to the taxpayer’s address indicated in the Unified State Register of Legal Entities. The absence of the addressee from the registered address may delay or prevent the receipt of such correspondence.

Anyone acting in good faith is now specifically entitled (under the Civil Code) to assume that data concerning a counterparty contained in the Unified State Register of Legal Entities is accurate. This should reduce the risk of the tax authorities challenging reliance on the data contained in this register as insufficient to show a taxpayer has exercised “due care” in the selection of counterparties.

No amendments to the Tax Code to introduce the beneficial ownership concept have been made.

Anti-money Laundering

  • Operations related to the legitimization of proceeds received as a result of tax crimes and crimes related to illegal foreign exchange operations are now subject to the Federal Law “On the Countering of the Legitimization (Laundering) of Proceeds of Crime and the Financing of Terrorism” (anti-money laundering legislation).
  • Insurance brokers, fund associations, non-state pension funds, and telecom operators providing mobile radio/telephone communications services have been added to the list of legal entities subject to anti-money laundering legislation.
  • Banks and other organizations subject to the requirements of the law must undertake measures to identify the beneficial owners of legal entities prior to accepting them as clients. For this purpose a “beneficial owner” is defined as an individual who ultimately, directly or indirectly owns more than 25 per cent of the capital of the legal entity (which may also need to be the largest individual interest) or has the ability to control the actions of the prospective client.
  • Definitions of business purpose, financial position and business reputation of clients are introduced.
  • The government body authorized to counter money laundering has been given the right to forward information received to the tax authorities.
  • The Law has introduced other amendments relating to countering terrorist and extremist activities.

The Civil Code

Amendments have been made to bring the Civil Code into line with the amended money laundering legislation.

Banks are given the right to refuse to execute a bank account agreement in cases of failure to comply with the requirements of the Law.

The principle of the priority of the information contained in the Unified State Register of Legal Entities over information from other documents of a legal entity is introduced. The Civil Code Law also makes a legal entity liable to provide compensation for losses caused to other persons arising from its late reporting or misreporting to this register.

State Registration of Legal Entities and Private Entrepreneurs

A duty of the registration authority to verify the data of a legal entity included in the Unified State Register of Legal Entities is introduced.

The registration authority is entitled to reject an application for state registration on the following grounds:

  • Inconsistency between information contained in the identification document of a Russian citizen indicated in the application and information received from the bodies responsible for the issuance or replacement of such documents;
  • Receipt of an individual’s objections to the proposed entry of his or her data in the register; and
  • Possession of confirmed information on the unreliability of the data contained in the documents submitted.

Customs

The range of special customs simplifications available to economic operators engaged in import activities is reduced if either the freight forwarder or the seller is a person registered in a jurisdiction included in the blacklist of offshore jurisdictions approved by the Ministry of Finance.

Banking Law

  • The tax authorities are now entitled to receive information on the possession of bank accounts and deposits, the balances on accounts and deposits, and transactions involving accounts and deposits of legal entities and individuals without court approval;
  • The bodies responsible for investigating criminal activity are entitled to access information containing bank secrets in the course of conducting an investigation, based on a court ruling; and
  • The following information must be provided to the tax authorities: on the opening/closing of accounts and deposits of individuals and legal entities; on granting/terminating the right to use corporate electronic means of payment, on amendments to the details of corporate electronic means of payment, as well as information on the availability of accounts, deposits and/or balances of the accounts, deposits of individuals and legal entities.

Insolvency (Bankruptcy)

A list of grounds upon which persons who influenced the activities of an insolvent entity may be held jointly liable has been established.

The Criminal Code

The Law specifies grounds for criminal liability for the legalization (laundering) of proceeds from crime, cross-border forwarding of currency based on counterfeit documents, and failure to repatriate proceeds in foreign currency from abroad. Criminal liability is also established for the illegal transfer of money, travelers’ checks, promissory notes, and certain other securities across the customs border of the Eurasian Economic Community.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Moscow
  • Alexei Kuznetsov
    +7 495 755 9687
    alexei.kuznetsov@ru.ey.com
  • Vladimir Gidirim
    +7 495 755 9716
    vladimir.gidirim@ru.ey.com
  • Irina Bykhovskaya
    +7 495 755 9886
    irina.bykhovskaya@ru.ey.com
  • Michael Makhotin
    +7 495 648 9627
    michael.makhotin@ru.ey.com
  • Georgy Kovalenko
    +7 495 287 6511
    georgy.kovalenko@ru.ey.com
Ernst & Young LLP, Russia Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088
    julia.samoletova@ey.com

EYG no. CM3641