Baker & McKenzie : Changes re Criminal Liability and Prosecution of Tax Crimes

 

On December 29, 2009 the RF President signed a law introducing important changes to criminal liability for tax evasion. It is established that a person violating the tax legislation may be relieved of criminal liability if the respective outstanding taxes and penalties connected to a crime are paid to the budget.

The law’s main provisions shall come into effect in 2010.

 

Raised Threshold for Tax Underpayment to Qualify as a Tax Crime

Amounts of underpaid taxes and duties sufficient to trigger criminal liability are increased six times for tax underpayments by individuals, and four times for tax underpayments by legal entities *). Specifically, the new minimum thresholds for criminal liability are as follows:

  • for underpayment of taxes due by natural persons: underpayment of taxes in an amount exceeding (i) 600,000 RUR (about 20,000 USD) over three consecutive calendar years, given that the sum of underpaid taxes exceeds 10% of total taxes due; or (ii) exceeding 1,800,000 RUR (about 60,000 USD);
  • for underpayment of taxes due by legal entities: underpayment of taxes in an amount exceeding (i) 2,000,000 RUR (about 67,000 USD) over three consecutive calendar years, given that the sum of underpaid taxes exceeds 10% of total taxes due; or (ii) exceeding 6,000,000 RUR (about 200,000 USD).

 

Relief from Criminal Liability in Case of Voluntary Payment of Outstanding Taxes

One of the key changes is the introduction of an amnesty for persons who voluntarily pay their outstanding tax liabilities to the budget. A first- time offender can escape criminal liability for a tax offence if, by the end of the pre-trial investigation before the commencement of court proceedings, the underpaid amounts of taxes, penalties and late-payment interest have been paid to the budget. The relief extends to payment of indebtedness of a prosecuted person as an individual, and of a respective legal entity if this person is prosecuted for corporate tax underpayment. If such a payment is made, the criminal investigation is terminated and no criminal liability is imposed on the offender.

 

Exchange of Information on Tax Offences between the Tax Authorities and Criminal Prosecutors

A set of provisions is introduced to avoid simultaneous initiation of both tax and criminal investigations, - so a person cannot be brought to account both under the Tax Code and the Criminal Code for the same offence. It is envisioned that the tax authorities are to suspend collecting outstanding tax payments until the outcome of the criminal investigation becomes known. Collection of taxes, late payment interest and penalties is then to be resumed if criminal proceedings are not initiated due to the absence of a crime, if criminal proceedings are terminated or if the person is acquitted. Conversely, if the offender is found criminally liable, tax penalties cannot be imposed, and collection is resumed only with regard to outstanding sums of tax and late payment interest.

The new procedure for cooperation between the tax authorities and criminal prosecutors is generally a step in the right direction. It can be expected that it will help avoid situations where a criminal investigation proceeds regardless of whether tax assessments have been paid to the budget or repealed by court.

At the same time, there are concerns that the new procedure leaves room for ‘administrative pressure’ on the part of the state authorities. For example, unless the taxpayer receives injunctive relief in court the tax authorities’ decision enters into force, and two months later criminal prosecution may be initiated before the relevant tax assessments are confirmed in court.

 

Other Changes in Criminal Prosecution of Tax Offences

Important changes are made in the RF Code of Criminal Procedure.

Primarily, detention (imprisonment) as a pre-trial injunctive measure is expressly forbidden for any tax offences, unless suspect is not identified, or he has no permanent address in Russia, or he has already breached injunctive measures issued to him earlier (e.g., not to leave town), or he has escaped from investigation.

From the year 2011, the authority to investigate and prosecute criminal tax offences shall shift from the RF Ministry of the Interior to the Investigatory Committee of the RF Public Prosecution Office, which generally deals with more serious crimes. The change shall extend to all criminal cases initiated as of January 1, 2011.

Finally, the law introduces a provision on universal and incontestable collateral estoppel in respect of circumstances established in any earlier criminal, civil, arbitrazh or administrative court proceedings. Practically, this means that any facts established in any prior court ruling are regarded as res judicata and cannot be ignored or reevaluated in a new criminal trial. As an exception such prior ruling may not predetermine guilt in the new criminal trial. Under the existing law, collateral estoppel is admitted only in respect of court rulings in criminal proceedings, and it can be questioned if another court decides to reinvestigate the issues due to their uncertainty.

 

 

*) Under Russian legislation only individuals are subject to criminal liability. In case of tax underpayment by a legal entity, the criminal liability would apply to the relevant officers of the legal entity responsible for such underpayment.

Questions regarding this practice note may be addressed to Partners Alexander Chmelev, Sergei Zhestkov and Evgeny Reyzman, Counsel, at Baker & McKenzie, Moscow (+7 495 787 2700), or to Ivan Smirnov, Partner, at Baker & McKenzie, St. Petersburg (+7 812 303 9000).

 

 

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