Litigation- Russia

There is an increasing tendency in Russia for the authorities to treat tax violations as crimes, rather than merely administrative offences. Questions about the distinction between tax evasion as an administrative violation and a criminal offence have arisen frequently in recent Russian tax litigation, particularly in connection with the application of Articles 198 and 199 of the Criminal Code, which deal with tax violations as criminal offences and the penalties for such offences.

Resolutions and explanatory rulings issued by the plenum of the Supreme Court play an important part in Russian litigation. Their purpose is to ensure the unified interpretation and application of the law by Russian courts. A recent resolution of the plenum concerns criminal liability for tax offences and is expected to have a significant impact on litigation. It clarifies:

• the concepts of 'taxes' and 'duties';
• the individuals and officials who may be held criminally liable for tax evasion;
• the moment at which tax evasion is deemed to take place; and
• the meaning of the term 'other documents' in Articles 198 and 199.

The code defines 'tax evasion' as failure to pay taxes and duties "on a large or especially large scale". Where a company has more than one subsidiary or affiliate, the chief accountant, chief executive officer (CEO) or manager commonly has responsibility for the entire group. The ruling establishes that, for the purpose of bringing criminal charges in respect of tax offences under Article 199, where a person performs multiple roles for several companies, all such roles must be considered in calculating the total amount of unpaid tax. Thus, even if no single company in the group has committed a tax offence because no company is liable for unpaid tax on a large or especially large scale, an individual may be held to have committed a tax offence if the aggregate tax liability of all the companies in the group exceeds the threshold. In determining whether a company's failure to pay tax meets the threshold, the courts must consider any changes in tax legislation (eg, an abolition of or reduction in taxes or duties) which have retroactive effect.

The ruling also states that criminal liability may exist not only in cases where a company's tax declaration contains incorrect information, but also where there are errors in the information presented in the other documents which must be submitted for review by the tax authorities. Criminal liability for a tax offence may arise from the incorrect drafting of:

• primary documents, including annual reports;
• documents confirming eligibility for tax exemptions;
• general ledgers;
• sales and purchase ledgers used for value added tax purposes; and
• any other documents which lead to an incorrect calculation of taxes on a large scale.

Although the CEO or chief accountant of a company is often held liable for tax offences, the ruling specifically states that an accountant or "any other authorized person" may face criminal charges in connection with a company's tax violations, thereby potentially extending liability to a chief financial officer, office manager or other employee who fulfils the duties of the CEO or chief accountant and drafts primary documents.

Furthermore, the ruling states that external consultants and advisers may also be liable for tax offences. Individuals or companies found to have assisted a taxpayer in committing an offence by giving advice or instructions may face criminal liability as an organizer, instigator or accessory, depending on their actions. Shareholders may be criminally liable if they play an active part in tax evasion.

One defence available to a company is that it acted on the instructions of a state authority (which need not necessarily be a financial or fiscal authority). The ruling emphasizes that criminal liability arises only in connection with deliberate acts undertaken with the intention of avoiding payment of taxes or duties.

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