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Tax law

One of the main reasons why tax conflicts occur is the imperfection of tax legislation. The tax legal relationship in Russia is far from being perfect. However, further market development and building civil society require their regularity, extra systematization and stability.

The problem of interrelation and delimitation of scopes of regulation of civil and tax legislation has been and is one of the key problems of the Russian tax legislation. This fact proves the problem of artificial exclusivity of tax regulations based on some their own specific purposes that allow them being applied in isolation from the whole Russian legal system.

One of the defects of the Tax Code of the Russian Federation is using common phrases and terms without defining and specifying them. Thus, it is unclear how “taxpayer’s actual ability to pay a tax” (Part 1 Article 3 of the Tax Code of the Russian Federation) can be taken into account.

Who will take into account that “actual ability” and by which criteria? Considering the ability of certain executors of law to interpret laws, we need to prepare for the worst. Here we can see an open loop-hole for officials’ arbitrary behaviour and corrupt practices.

None the less questions are raised by sub-clause 9 clause 1 Article 6 of the Tax Code of the Russian Federation that establishes that a regulatory legal act is deemed to be inconsistent with the Tax Code of the Russian Federation if it “is inconsistent with general fundamentals and/or literal sense of the specific provisions of this Code.” Actually, it is unclear what “general fundamentals” mean. Article 1 of the Tax Code of the Russian Federation mentions “general principles” and Article 3 of the Tax Code of the Russian Federation is devoted to “fundamental principles.” In such a situation, a “general fundamental” can be whatever is desired by a commentator of law, who, subsequently relying upon “literal sense,” would either challenge or apply any rule for his benefit in such manner as.

Literal interpretation of the Tax Code of the Russian Federation provides infinite possibilities to misrepresent the essence of the tax concept, its economic foundation and subjective interpretation of the legislation.

One of the objectives of introducing the Tax Code of the Russian Federation was to form an act with direct effect in order to annul all subordinate acts. Indeed, departmental acts have always drawn negative attitude. Pursuant to the current concept of the Tax Code of the Russian Federation, departmental regulations can neither impose nor change taxpayers’ tax liability, as they are designated for governing most advanced and, as reasonably required, uniform practices of regulatory bodies as related to proper and timely collection of taxes.

Therefore, it is quite logical to conclude that tax legislation improvement should not keep the path of developing creation of subordinate acts but the path of improving tax laws themselves, establishing such mechanisms of filling gaps in legislation which would allow, without giving instructions, to identify a right behaviour pattern based on law itself.

However, the reality is that the Tax Code of the Russian Federation by its publication did not so much solve the problems existing within the tax system as designated new ones. The Tax Code of the Russian Federation remains inflexible to the varying economic environment in the country.

The key reasons of such a situation in the tax system of the Russian Federation may include the following:

  • distinct fiscal interest, significant diminution of the role of regulating function of a tax;
  • predominance of strictly professional, institutional approach to discussion of the issues of tax reform;
  • non-systematic amendment of tax laws, which made the tax system of the Russian Federation instable and unpredictable; and
  • a vast number of taxes and duties, which, in the context of decreasing volume of production and increasing consumer prices, day after day increased the tax burden borne by both a manufacturer and a consumer of material benefits.

The tax policy implemented by the Government of the Russian Federation contributed to continuing displacement of capital from manufacturing sector, impeded normal investment process development (e.g., value-added tax became a driver of price and inflation rate increase).

This ineffective tax policy resulted in such consequences as misinvestment of capital in domestic production; continuing outflow of national capital abroad; insignificant volume of foreign capital investment in the Russian economy.

Therefore, this raises a logical question: Is the tax reform close to its completion? It is safe to insist that the reform is still far from its completion. The key arguments for this are as follows:

First, the tax legislation continues being unstable. Every year, numerous, and often radical, amendments are made to the Tax Code of the Russian Federation. Taxes are introduced and, one or more years later, cancelled.

Second, a set of effective measures has not been formed yet to prevent tax evasion and implementation of various tax mitigation (optimization) schemes.

Third, there is still an uncertainty in relation to some taxes. The imposition of real estate tax is still far from being clear. Uncertainty also exists as to the status of a customs duty that is still regulated by the Customs Code and administered by customs authorities.

As we can see from the number of proposed amendments, the tax legislation of the Russian Federation is yet far from being perfect. Thus, the simplified taxation system needs to be improved. A particular concern is aroused by the influence of pricing on taxation system. It is primarily a question of transfer pricing. Taxpayers make use of the defect of Article 40 of the Tax Code of the Russian Federation.

Such problems may be listed endlessly. Almost every tax and any significant provision of the Tax Code of the Russian Federation contain discrepancies and weaknesses; therefore, let us list the key problems of the current Russian tax system:

1. Instability of the taxation regulatory and legal framework. This refers not only to continuing amendments to the Tax Code as a principle documents regulating the taxation system; it is characteristic that a great number of other regulatory acts relating to different issues of taxation is adopted.
2. Existence of a large number of conflicts between different legislative acts relating to the same issues. Currently, there are still “gaps” (“bottlenecks”) in legislation which prevent from obtaining unambiguous answers to questions of principle and allow a taxpayer to interpret them for his benefit in whatever circumstances.
3. A wide variety of tax types. Initially, the government taxation policy was based on the principle of maximizing tax budget receipts through the imposition of a great number of various taxes.
4. A complicated procedure for identifying a tax base, individual approach in relation to every tax. When analysing the current Russian taxes, one can see that each of them has its own taxation object, its own benefits, rates, and individual assessment procedure. All of these impede the functioning of the tax system difficult and overload the tax control process.

In light of the existing problems, ease of fiscal accounting and application of legal regulations, equality of subjects of taxation, and a reasonable level of taxes should be the key principles of tax policy of the Russian Federation. A connection is needed between in-court resolution of tax disputes and subsequent analysis thereof to identify reasons of the tax disputes, with further resolutions adopted (amendments to the tax legislation proposed, departmental recommendations drawn up, specific personnel-related decision made, etc.).