Most Multinationals Dissatisfied With Russian Tax System

by Tatiana Smolenskaya, Tax-News.com, Moscow

20 October 2005

A survey by accounting firm Ernst & Young has found that the majority of multinational companies operating in Russia are dissatisfied with the conduct of Russia’s tax authorities.

Respondents to E&Y’s survey, 57% of which were domestic firms and 43% foreign multinationals, all from a variety of industries, continued to complain about inconsistent application of tax law and the high number of tax audits and disputes with the authorities. These firms are also increasingly concerned at the readiness of the tax service to file criminal charges against management and their employees in tax cases.

The survey found that 80% of respondents had been involved in a dispute with the tax authorities in the last three years, 92% of which ended up in court. However, 90% of these court hearings eventually found in favour of the taxpayer, leading E&Y to conclude that a significant number of tax issues of “limited merit” are being raised and litigated by the tax authorities.

The statistics also suggest that the frustrations with Russia’s tax system are centred on the administrative arm, rather than on the legislation itself or the court system, which tended to be viewed favourably by investors. In fact, the respondents ranked the court system above the tax authorities on their knowledge of tax legislation and issues.

According to Petr Medvedev, Ernst & Young partner and Head of Tax in the CIS, the competence shown by the court system in tax disputes is one of the most "substantial achievements" of Russian tax reform.

"Excluding some politically motivated cases, tax dispute hearings generally are efficient, and the judges demonstrate competency in the tax issues involved," he observed.

The survey results also revealed a split between foreign companies and their domestic counterparts. While 65% of foreign multinational respondents believed that the tax regime has a negative influence on foreign investment, almost half (47%) of the Russian firms who answered the survey disagreed with this view.

However, E&Y stated that its survey is firm evidence that the Russian government must do more to make the tax system less ambiguous and more certain. To improve the situation, the firm recommended that: procedures for filing tax returns be simplified; better support services for taxpayers using email and telephone be put in place; taxpayer complaints be handled more appropriately; formal rules for the VAT recovery procedure be put in place; tax reporting rules be aligned with statutory accounting rules; and the overall number of tax audits be reduced.

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