Frequency of tax disputes continues to increase while taxpayer success in court remains high, says new Ernst & Young survey on taxation issues in Russia
Survey shows tax authorities continue to aggressively challenge companies’ tax compliance.
MOSCOW, 22 October 2009 — Tax reform continues to move forward in Russia, with a continued trend toward a decreasing number of onsite tax audits performed once per year, according to Ernst & Young’s 2009 survey of taxation issues in Russia. However, respondents this year noted a significant increase in tax disputes (72% of respondents vs. 56% last year) —indicating that the tax authorities continue to aggressively challenge companies’ compliance with tax law. This may reflect their efforts to maintain tax revenue in a period of falling corporate earnings. Nevertheless, a considerable majority (89%) of reported cases which went to court judgment were settled in favor of the taxpayer.
"The survey provides evidence of the challenging and unavoidable continual cycle facing businesses in Russia: a disruptive and overly document-intensive audit process, generally resulting in unreasonable positions by the tax authorities which must be resolved in court, most often in the taxpayer's favor," said Reece Jenkins, coordinator of the survey and Head of Transaction Tax in the CIS with Ernst & Young.
The 2009 survey shows that while most Russia-based respondents (52%) consider that the tax regime has a neutral impact on the investment environment in Russia, the same share of non-Russian multinational companies (52%) rated its impact as negative.
"These results illustrate one more time a need for a more thorough reform of tax administration, as we need to move to a situation where the Russian tax environment stimulates both domestic and foreign investments rather than impacts them neutrally at best," said Petr Medvedev, Head of Tax and Law in the CIS with Ernst & Young.
One of the most important changes noted through the survey is the improvement in the VAT refund process, both in tax legislation and its practical implementation. A significant share of respondents (63%) indicated that the VAT refund period decreased significantly to three or four months, while last year it took up to 12 months to receive a VAT reimbursement. This year 67% of respondents (down slightly from 70% last year) reported recovering 90% or more of their input VAT.
The survey was conducted by Ernst & Young among 55 Russian and international companies from a variety of industries operating in Russia, and polled respondents on such questions as tax audits and disputes in Russia, Russia’s tax legislation and administration, the impact of Russia’s tax regime on foreign investment, respondents’ views on how to improve Russia’s tax regime, and information on the tax functions of companies operating in Russia.
As in previous years, in the 2009 survey an ever-growing majority of respondents indicated neutral relationships with the tax authorities. Regarding the performance of the tax authorities and court system, a considerable majority of respondents (73% and 75%, respectively) indicated no improvement from last year. However, 17% of respondents said the court system’s performance had slightly improved, reflecting a more favorable disposition to taxpayers by the Russian court system compared to the tax authorities.
Other notable changes in the sphere of Russian taxation this year include an increase in the use of dedicated tax departments (55%, up from 40% last year) as well as external tax consultants (36%, up from 23% last year) for handling and monitoring taxation issues. This year’s survey results indicate that companies in Russia are spending much more time on routine and administrative tasks (such as tax accounting, reporting, audits and litigation), leaving less time for tax planning.
Asked for their views on the primary measures that should be undertaken by the state authorities to improve the Russian taxation system, 89% of respondents said they consider Russia’s tax laws to be ambiguous despite the multiple amendments and explanatory letters intended to clarify the rules. In addition, this year 72% of respondents (up from 65% last year) indicated that documentation requirements should be simplified.
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