The year that has gone


 

-- 18 January 2009 --
TEXT: S. Alekseev
PICTURE: NL shop - Fotolia.com

 

The following is a series of the most curious developments in law that made the year memorable to us, the team at RussianLawOnline.Com. It is entirely subjective and totally biased.

Let us not be mistaken, though, about what interests us. It is not legislative novelties nor decisions of courts nor the law that we care about: it is Russia that is in our minds and how it has lived through this most difficult and eventful year.

 

On individualism

For years, explaining where exactly the Russian law on shareholders’ agreements stood has been tedious in the extreme. At one point it looked as if there was nothing in principle against them in law. Entering into an agreement that was not directly prescribed by legislation but was not forbidden either seemed sensible and valid.

Back in the 1990’s we used to believe, naively, that the market economy we were building was a place of competitive exchange, and the function of law was to facilitate this exchange. A contract, therefore, was seen as a culmination of this jungle-like rivalry and had to be kept, whatever hard or unfair the bargain might turn out later.

Whether the economy we were building was not what we thought, or whether domestic companies were not a match for the legal sophistry of their international companions, the courts eventually stood against these agreements and cleared the way for paternalistic interventions of the domestic judiciary in the relationships of the parties.

Though shareholders’ agreements were reinstated in 2009 by two federal laws, the feeling of perplexity remained: it seems as if it was not about individualism against protectionism at all. It might even appear - if we look closer at the leading Megafon case - that these agreements were a casualty of the war for telecommunications assets.

Telecommunications assets were a bone of contention in other famous case, Farimex v Telenor where as in the Megafon tussle the spirit of Alfa Group lingered above the battle.

The Farimex (aka Alfa) v Telenor taught us that derivative suits (when holders of various derivative instruments – not even shareholders - start legal actions on behalf of a company) are possible and that forum shopping (various tricks to move hearings to a favourable court – as was the case here, to Siberia) is perfectly valid and admissible.

We learned, as if we did not know already, that you can walk away from your contract and the law can be bent if the need is dire and the lawyers are crafty.

 

On economy

The economic crisis hit Russia later than major developed countries, yet it was not expected. Although the signs of the impeding storm were visible, the widespread feeling was that Russia would be a safe harbour and the waves of the credit crunch would not harm it.

A credit crunch means bankruptcies, and bankruptcies mean a painful and murky scramble for the property of defaulted debtors. Amendments to the insolvency legislation sought to slow down the process by changing a secured creditors’ sword into a shield and forcing them to be patient and seek settlements rather than winding up businesses.

The subsequent change to the law strengthened the creditors’ position by introducing - and this is probably the most remarkable development of Russian law in 2009 - a set of rules to trace the assets of an insolvent company. It gave creditors a powerful weapon: they can now pierce the corporate veil and reach those connected with the company - and not only its officers or shareholders. And that, of course, means new powers to the state in tax collection.

With respect to taxation, Russia, unlike some other countries, did not even try to stimulate consumption: income tax, paid by companies, was lowered and VAT, paid by people when they buy food or clothes, was not. As a result, the country, which has always depended on revenues from indirect taxes, now lives on them almost entirely.

Furthermore, the increase of payroll taxes from January 2010, has doubled the burden on those on a small or medium wage, but has not affected top managers and foreigners.

An idealist would say that the difference in the taxes which the poor and the wealthy have to pay has never been so great as it is today; a pragmatist would argue that in the heat of the battle for low inflation and high revenues the government has lost sight of a far more important task: the urge for people to open their wallets and start spending.

 

On crime

Whether crime rates fell during the fat, pre-crisis, years is a matter of a debate: the authorities say that they did, though some data would suggest that they did not. What is clear is that the year 2009 will be remembered as the start of the campaign against crime.

The law on plea bargaining, an agreement between the accused and the prosecution whereby the former waives his right for a trial in exchange for leniency in sentencing, was introduced to make fighting crime more efficient (and economical). The law proved to be a strong weapon: soon after entering into force it carried the day in the Chichvarkin case, prosecution of the former owner and director of Euroset, the largest Russian mobile phones retailer, who fled to London hours before a warrant for his arrest was issued.

Under the new law on organised crime it is now possible to lock someone up for 20 years not for specific, identifiable offences, but for his connection to organised crime.

The law that vaguely follows the example of Georgia, a former Soviet Union republic, which in 2005 adopted the law ‘On Organised Crime and Racketeering’, differs in a small but remarkable detail: Georgians think that criminals should be hit on their most sensitive spot, the wallet, and ruled that not only the property of a convicted criminal but that of his relatives can be confiscated.

Yet, the death of Sergey Magnitsky, a lawyer from an international company Firestone Duncan, who died in a prison hospital after eleven months in detention awaiting trial for tax evasion, has shown that the problem is not with the law, but with the people who devise the system of law enforcement. And that is the sort of problem that cannot be solved overnight by an act of parliament; it needs laborious and lasting work with no guarantee of success.

It follows, naturally, that in the meantime it is sensible to decriminalise tax fraud and by a special law restrict the imposition of pre-trial detention in a series of offences, mostly economic. Russian law, already lenient to criminals in business, is now even less strict – yet, this can only be guaranteed as long as one stays out of its reach.

 

On the state

Where the state ends was spotlighted in the case of the Stavropol avenger. Alexander Taran, a beekeeper from southern Russia, was charged with the assassination of three people, including two policemen, plus two attempted murders in revenge for the death of his daughter and son. Evidence collected by investigators seemed conclusive, yet the jury decided in his favour, apparently feeling sympathetic to this man who seemed to have stood up against rampant corruption and crime in state organisations, first and foremost, in the police.

Although a jury’s verdict is deemed final, here it was cancelled by the Supreme Court with an understandable but somewhat lame excuse: one of the juries did not disclose his criminal conviction. On re-trial Taran was convicted to 23 years in prison. Yet, what seemed an unfortunate but largely inconsequential blunder in a remote province, happened to be a warning signal.

When in November 2009 Dymovsky, a former police major, posted a video on Youtube in which he claimed that corruption in the police has become endemic and framing innocent people to meet official crime detection targets or to extort bribes is widespread, the video became a national hit.

Less notable yet not least illuminating was the conflict in the Constitutional court, the highest judicial body that interprets the Constitution and has a unique authority to denounce any legal act, including a federal law.

Two judges were ostracised by their peers for voicing in interviews their concerns about the state of the judiciary in Russia. What seemed, at first, somewhat narcissistic yet valid matter of the judicial ethics and restriction on a member of the court not to wash dirty linen in public turned out a pathetic, personal vendetta.

In his pompous, atrociously written article court’s chairman Valery Zorkin revealed that the interviews were a part of an organised campaign to discredit Russia and, thus, he concluded, those two traitors could no longer be part of this ‘very small circle of very respected people’.

 

On to the year 2010

Looking back to the year 2009 we believe that, despite inevitable blunders, the overall picture is positive. The crisis shook Russia but also nudged it to refine its laws and institutions. As for the Chair of the Constitutional Court: well, he is just that - a man, fallible and mortal.

 

 

PAYROLL TAX REFORM: A WISE MOVE?
TEXT: Roman Zherebtsov, Senior Consultant, Tax&Legal, KPMG in Russia and the CIS
Unified Social Tax (UST) has been cancelled as of 1 January 2010. Taking its place are insurance contributions to corresponding non-budgetary funds.

As compared to the regressive UST scale, there is only one flat rate for the contributions, which will come to 26% in 2010 and 34% in 2011. Contributions are charged on salary of up to 415.000 Rubles per year. It is estimated that in 2010 the reform will increase the burden on employers that have employees who receive less than 63.000 Rubles per month – the most common salary level on the Russian labor market today (appr. 95%, State Statistics Committee of the Russian Federation).

Considering tense financial situation in which many organizations find themselves today, this increased employer burden could lead to the further reduction of salaries and headcount, and prompt a return to a system of “under the table” salary payments. This, in turn, could threaten the budgets’ chances of achieving its financial and other goals.

However, the reform can be advantageous to employers – expenses on the payment of insurance contributions for specialists in the upper salary ranges (salaries of more than 755.000 Rubles per year) in 2010 will decrease in comparison to expenses which would have been paid on UST. Furthermore, wages paid to foreign workers temporarily residing in the RF are not subject to the new insurance contributions. Additionally, contributions to the RF Pension Fund on behalf of employees have grown, which could positively impact the size of future pensions, given that employers do not take measures to reduce employee wages.

 

 

DIRECT v INDIRECT TAXES: IS THE BALANCE RIGHT?

TEXT: Roman Bilyk, associate, Baker & McKenzie

The unwillingness of the Ministry of Finance to lower, let alone abolish, VAT in exchange for sales tax, is explained by the fact that it is the largest and best collected tax (together with the mineral extraction tax).

At the same time, I believe that in an efficient market economy the state should primarily focus on direct taxes and, first and foremost, on corporate income tax. The corporate income tax, if levied and administered properly, allows the results of business activity to be taxed fairly, and, therefore, facilitates market competition. Moreover, the corporate income tax is a powerful instrument of state regulation by providing incentives to depressed state regions and strategic industries of the economy.

Most probably it will be possible to envisage increasing the role of corporate income tax after the adoption of new transfer pricing rules, which is expected by the end of 2010. If new rules are adopted and effectively implemented, the share of corporate income tax in state revenues should start to grow. In this case, the opponents of VAT will have new arguments in favour of lowering it or replacing it with sales tax. However, this is likely to be possible only in 2012 at the earliest.

 

 

RussianLawOnline.Com looks back at what fascinated us most in 2009
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