RS Brief news Taxes? Investments need not be scared

Taxes? Investments need not be scared

March 2013

investory

How much does tax legislation hinder the flow of new investments into the Russian economy? The annual research conducted by Ernst & Young showed that 2012 was relatively calm for Russian business. 72 Russian (55%) and foreign companies (45%) working on the Russian market and representing Russia’s main industries took part in the survey. More than a half of those surveyed (54%) are public companies.

Tax audits, disagreements and court proceedings

According to survey participants, relative to 2011 tax authorities burdened business with less audits. In 2011 respondents stated that tax authorities audited their companies once every two years, but in 2012 the majority of them indicated that audits became less regular (once every three years). Moreover, according to 2012 research results showed that insufficient economic justification and expense confirmation (in document form) were the main reason for claims from tax authorities.

VAT deductions paid by suppliers which were subsequently accused of unfair business practices remain a big problem for Russian taxpayers. The war on ‘one-day’ firms has been waged for years now. However, overall according to respondents, the fraction of tax proceedings related to disputing expenses due to unfair counter-agent business practices has significantly decreased. ‘We believe that this can be attributed in part to the fact that tax payers are more wary when selecting counter-agents. The situation with appealing tax authority court verdicts remains positive. In the majority of cases (82%) verdicts are made in the favor of tax payers taking part in our survey’ – noted the authors of this research project.

Additionally, respondents noted growing efficiency in terms of pre-court regulation procedures for tax disputes. So it turns out that based on last year 67% of survey participants managed to work out disputes with tax authorities before taking the case to court, including 27% in a tax authority of a higher rank. ‘These specified changes demonstrate that a stable tendency towards developing ‘non-court’ regulating methods for tax disputes has taken shape which is positively construed by the majority of survey participants, it lowers their expenses on tax administration, promotes the business climate in the country and corresponds to the trends observed in economically developed countries’ – states Ernst & Young research.

Legislative changes

For the majority of respondents of the key issues remains how transfer pricing is applied. We’d like to remind our readers that Russian tax payers will be obligated to report (for the first time) in accordance with transfer pricing (ссылканастраницуfrom problem to ) regulations this spring. According to respondents, the transactions which will be studied by tax authorities will mostly be internal group funding (41%) and commodity buy-sell contracts (32%). Only 14% of respondents are planning on implementing transfer pricing regulations on their own (without hiring consultants). Despite the fact that the law on transfer pricing and numerous other new tax rules have taken effect, the majority of respondents evaluate the influence of Russia’s tax policies on investment inflow as being neutral. With that being said, foreign investors consider the Russian tax system to be more ‘friendly’ for foreign investments than other BRICS countries.

Let’s outsource our taxes!

The trend of outsourcing part of a company’s tax functions has continued to gain popularity and this impacts the number of tax personnel working in organizations. Also, employees handling tax functions in the head office now focus on optimizing the company’s tax position and internal tax processes more so than in the past. Like before the main indices used for evaluating companies’ tax function are the size of additional charges based on tax audits (86%) and the outcome of court proceedings (64%). Meanwhile, 57% of surveyed companies use an effective rate for profit tax as a key performance indicator for evaluating their tax function.

As for the main ‘internal’ problems, respondents mentioned a lack of resources in tax departments (73%), insufficient tax automation (60%) and insufficient tax expert involvement in evaluating tax consequences for key operations (73%). RS