Tax control over the taxation of profits of controlled foreign companies: legal specifics and place in the system of state control

Kupin Maksim Postgraduate Student of the Department of International and Public Law of the Faculty of Law of the Financial University under the Government of the Russian Federation 125167, Russia, Moscow, 49/2 Leningradsky Ave.​ maximkupin@yandex.ru

Taxation of profits of controlled foreign companies (hereinafter referred to as CFC) was introduced into the Russian legislation on taxes and fees (the Tax Code of the Russian Federation ^{[1, 2]}, hereinafter referred to as the Code) in 2015. Nevertheless, many aspects of the legal support of tax control in this area have not received their consideration in the domestic science of tax law, in connection with which it seems relevant to consider from a theoretical point of view the legal features of the implementation of this control, determining the place of such control in the system of state control, as well as the study of other related legal aspects. We will consider these aspects in more detail further and begin with determining the place of tax control over the taxation of CFC profits in the system of state control.

State control acts as one of the forms of public administration. Some researchers also note the presence in the nature of state financial control of the properties of public administration [3 p. 38-44, 4 p. 407-434]. Thus, M. K. Yukov points out that financial control can be characterized as "a kind of state authority exercised by a state body in a public legal manner" ^{[5, p. 173]}. In the doctrine, the concepts of control and supervision are usually mentioned in synonymous meaning, although some authors point out the difference between these concepts, noting that if there is no administrative subordination between subjects, then such activity should rather be characterized from a legal point of view as supervision. In the current legislation, the terms are also, as a rule, not differentiated ^{[6, p. 15]}. Thus, in the basic law (Federal Law No. 248-FZ of 31.07.2020 "On State Control (Supervision) and Municipal Control in the Russian Federation" ^[7]), state control (supervision) refers to "the activities of control (supervisory) bodies aimed at preventing, detecting and suppressing violations of mandatory requirements ..." (Article 1). At the same time, the implementation of tax control and state financial control and municipal financial control, control over the use of funds by state corporations (Article 2) does not formally fall under the action of this law.

It can be noted that the state financial control acts as one of the types of state control and is aimed at compliance with legislation in the financial activities of public authorities. In other words, such control is aimed at verifying compliance with financial legislation and how the relevant financial funds of public authorities are used. In the doctrine of financial law, this control is defined as control by authorized bodies over the legality of actions in the accumulation, distribution, redistribution and use of financial funds of public authorities in order to conduct an effective financial policy ^{[8, p. 112]}. It is accepted that state financial control, being a type of state control and an institution of financial law (its general part) ^{[9, pp. 127-131]}, is aimed at achieving the public tasks facing the state and in this property can be considered as a means of implementing the internal policy of the state.

According to the types, depending on the time of the financial control in the doctrine of financial law, it is customary to divide into preliminary, current and subsequent ^{[10, p. 63]}. Some authors point out that there is no need to single out current control as an independent type of financial control ^{[11, p. 141]}, however, in the doctrine of financial law, this approach has not been widely used.

Also, some authors single out initiative (optional) and mandatory financial control ^{[11, p. 156]}. It is also accepted to classify financial control depending on the subjects and scope of its implementation (control by representative public authorities; control by the President of the Russian Federation; control by public authorities of general competence; control by financial and credit authorities; departmental and intra-economic control; public control; and audit control) ^{[12, p. 412]}. Depending on the sphere, the following types can be distinguished, for example: tax control; budget control; banking control; control over insurance activities; currency control.

Tax control, as it was noted before, is one of the types of state financial control and requires constant reflection on the ongoing legal transformations in this area and the organizational and legal mechanisms used for tax exemptions carried out by the state, which are conditioned by the current level of development of tax relations and the constant improvement of legal regulation in the field of taxation ^{[13, p. 15]}. The Code defines tax control as the activity of authorized bodies (tax authorities) to monitor compliance by taxpayers and other subjects of tax law falling under the scope of tax control, legislation on taxes and fees, carried out in a certain manner, which is enshrined in the Code (paragraph 1, paragraph 1, Article 82 of the Code). Some authors generally proceed from the concept of tax control similar to the legal definition ^{[14, p. 17; 15, p. 47; 16, p. 108]}.

Tax authorities, when exercising tax control, rely in their activities on various documents (information), including those provided by the taxpayer himself. In this case, tax reporting is one of the main sources of information at the initial stage of tax control. According to Evteev M. Yu., "a tax declaration is a kind of taxpayer reporting form, on the basis of which the tax authorities exercise control over the correctness of the calculation of taxes" ^{[17, p. 1]}. We agree with the specified tract tax reporting forms in relation to the topic we are considering, since, indeed, the starting point for tax control in most cases it is the documents (tax reporting) that are submitted by taxpayers to the tax authorities with a certain frequency established in the legislation on taxes and fees. A.V. Reut considers the grounds for conducting tax audits as an element of the tax control procedure and indicates that the fact of filing a tax return will be the basis for desk control, while for on-site control such a basis should be specifically regulated ^{[18, p. 10-14]}. In this case, the author focuses on the grounds that are initiating for the purposes of tax control by tax authorities.

It is worth noting that the conduct of desk control (KNP) in the area we are considering (taxation of CFC profits) has its own legal features ^{[19, pp. 52-62]}. Thus, the Code provides that if the tax return is not submitted by the controlling person of a foreign organization within the prescribed period, the tax authority has the right to conduct a tax audit on the basis of the documents (information) available to them about the taxpayer, as well as data on other similar taxpayers within three months from the date of expiry of the deadline for submitting such a tax return (paragraph. 2 paragraph 2 of Article 88 of the Code). In other words, a desk tax audit can be carried out without submitting a tax return, which differs from the general procedure for conducting a tax audit.

In our opinion, this can be justified by the following. Firstly, the tax authority could initiate an international tax request and receive the financial statements of the CFC from a foreign tax authority (financial reporting is the main way to determine profit (loss) for Russian tax purposes in terms of the CFC). Secondly, the tax authority could receive such reports from other controlling persons (for example, when two Russian persons jointly own a foreign company and one reported on such a company with financial statements submitted to the tax authority, and the other person did not submit such reports).

According to Ilyin A. Yu., the forms and methods of tax control that make up the mechanism of tax control determine the overall effectiveness of tax control if the appropriate forms and methods were correctly chosen by the tax authorities ^{[20, pp. 28-34]}. This is especially important in the field we are investigating. Some authors also note that the requirements for the quality of the legislative (regulatory) framework in the field of CFC profit taxation are increasing ^{[21, pp. 59-63]}. We consider this thesis reasonable and also point out the need to improve legal support in this area, which will increase the efficiency of the work of tax authorities within the framework of tax control.

Speaking about the legal support of tax control in this area, it seems necessary to note the following. The legal support of tax control over the taxation of CFC profits should include not only procedural and procedural norms (norms on the procedure for tax control), but also substantive legal norms regulating the procedure for taxation of CFC profits itself, since without the latter norms it is impossible to ensure, from a legal point of view, the effective implementation of tax control in this area. Since in carrying out such control, the tax authorities are primarily guided by the norms regarding the procedure for taxation of CFC profits, and the norms regarding the procedure for tax control are in this case the basic element of any tax control, regardless of the specifics of the public relations under consideration. It can be stated that the rules (norms) on the taxation of CFC profits in this case act as the basis for the legal support of tax control in this area and the monitoring of compliance with which is the main purpose of tax control in this area. This is also confirmed by the legal definition of tax control, which shows that control is primarily carried out "for compliance with the legislation on taxes and fees" (paragraph 1 of Article 82 of the Code).

Thus, the profit of a CFC is exempt from taxation at the level of a taxpayer — controlling person in Russia, if at least one of the conditions (grounds) established by paragraph 1 of Article 25.13-1 of the Code is fulfilled in relation to such a company, which are not homogeneous in their structure and cannot always be considered as tax benefits. The grounds for the release of profit can be classified into qualitative (non-calculated) and quantitative (calculated): quantitative indicators imply that in order to fulfill them, it is necessary to calculate the corresponding indicators in order to fulfill (confirm) the conditions of release, while qualitative indicators do not imply such a calculation (they are released due to the existence of certain circumstances). Considering that the application of these exemptions is widespread in practice, tax authorities, exercising tax control over the taxation of CFC profits, should approach this issue with special care and assess the possibility of applying these exemptions by taxpayers – controlling persons, taking into account both the actual circumstances and the legal grounds for applying such exemptions.

To apply such exemptions, controlling persons must submit a package of supporting documents to the tax authority, while the Code does not specify a specific list of documents. For the purposes of simplifying the administration and implementation of tax control by tax authorities, it seems that it is necessary to structure the grounds for the exemption of CFC profits from taxation in Russia and provide a specific list of documents that would confirm the fulfillment by taxpayers of the conditions for a specific exemption. It would also make it possible to increase the degree of certainty for taxpayers regarding what the tax authorities expect to confirm the relevant conditions and grounds, taking into account the established responsibility for failure to submit such documents at the request of the tax authority.

We consider it expedient to also focus on a special procedure for requesting documents from controlling persons in respect of CFC profits and the exemptions applied, which can be considered as one of the methods of tax control in this area. The law adopted relatively recently expands the list of powers of tax authorities in terms of tax control over the determination of CFC profits by taxpayers and the exemptions from taxation of CFC profits applied by controlling persons in Russia ^[22]. The Code is supplemented by Article 25.14-1 "Requesting documents from taxpayers — controlling persons in respect of foreign companies controlled by them". So, if the taxpayer — controlling person (both an individual and an organization) has not submitted the documents necessary to confirm compliance with the conditions for the exemption of CFC profits from taxation or documents confirming the amount of profit (loss) of the CFC, an official of the tax authority has the right to demand these documents (paragraph 1 of Article 25.14-1 Code). Accordingly, there are two types of documents that can be requested from controlling persons: documents related to the calculation of the tax base (profit or loss of the CFC); and documents related to the applicable tax exemptions in Russia.

It seems that in the absence of an approved list of documents confirming the relevant exemptions, abuse by the tax authorities is possible, since they may request any additional documents that have not been submitted by the taxpayer. De facto, this will be reduced to the application by the tax authorities of professional judgment on the list of necessary supporting documents. At the same time, the relevant documents may not be available to the taxpayer or their request will take considerable time, which will eventually lead to the possibility of the tax authority to hold the taxpayer liable under a new article (the composition of the formal article is sufficient for failure to submit the requested documents at the request of the tax authority). At the same time, according to the taxpayer, the documents submitted earlier may be sufficient to confirm the fulfillment of the conditions applicable to the exemption.

It is worth noting that this article was not incorporated by the legislator into the general chapter regulating the implementation of tax control by tax authorities (Chapter 14 "Tax Control"). In this connection, this article de facto has an independent meaning — the implementation of requests under the new article can be carried out by tax authorities outside the framework of tax audits and even tax monitoring in relation to individual taxpayers. The request is also not limited to the depth of in—house and on-site tax audits - it can be sent regardless of whether or not such inspections are carried out in relation to the taxpayer. It seems that this circumstance indicates an increase in the importance of the sphere of tax control in relation to the taxation of CFC profits, as well as the desire of the legislator to provide the tax authorities with additional (expanded) legal mechanisms (methods of tax control) with which it would be possible to carry out tax control measures in relation to taxpayers — controlling persons.

In order to ensure the operation of this rule on the right of tax authorities to request information about CFC outside the framework of tax audits, a new type of liability was introduced for failure to submit documents to the tax authority upon request under Article 25.14-1 or submission of such documents with obviously false information. This composition is formal. For this violation, a tax sanction is provided in the form of a monetary penalty (fine) in the amount of 1 million rubles (paragraphs 1.1-1 of Article 126 of the Code). It is worth noting that the amount of the fine, if compared with the liability for failure to submit documents on the CFC together with the declaration or notification of the CFC, has been doubled, which indicates a greater public danger of this tax offense from the point of view of the legislator. However, such differentiation of responsibility seems rather unreasonable, since the de facto objective side of these tax offenses is similar — the failure to submit documents for the purposes of tax control. So, for example, a general violation in the form of failure to submit documents and other information to the tax authority on time according to paragraph 1 of Article 126 of the Code provides for a sanction in the form of a fine of 200 rubles. for each non-submitted document. Failure by a tax agent to calculate the amount of personal income tax entails the collection of a fine in the amount of 1 thousand rubles (paragraph 1.2 of Article 126 of the Code). Failure to provide information about a taxpayer at the request of a tax authority entails the collection of a fine in the amount of 10 thousand rubles from organizations and 1 thousand rubles from an individual (paragraph 2 of Article 126 of the Code). Thus, from the comparison of these sanctions for similar tax offenses, expressed in the failure to submit documents or information (information) to the tax authority, it can be concluded that the liability under paragraphs 1.1-1 of Article 126 of the Code significantly exceeds the similar liability (in relation to 100 to 5 thousand times in the direction of excess). It seems that the responsibility for the specified tax offense should be reduced and brought in line with the responsibility for similar types of tax offenses.

From the point of view of current law enforcement practice in this area, it can be noted that it is just beginning to develop. One of the first court cases (2017) considered in Russia and related to the rules of taxation of CFC profits (having a basic methodological basis) is the case of Expocentre JSC ^[23], which was related to the failure to submit a CFC notification due to the presence of a negative financial result (loss) for the corresponding financial year for a foreign company. year (after which the Code was amended). In general, the law enforcement practice regarding the rules on taxation of CFC profits can, as it seems, develop in two main directions: 1) disputes related to the formal requirements and procedural obligations of the taxpayer (the need to submit appropriate tax reports); 2) disputes related to the determination of the taxpayer's tax liability — the amount of the tax base and the amount of tax payable (the procedure for calculating profit and loss for the purposes of the rules, the definition of adjustments, the applicability of applicable and claimed exemptions, etc.). Taking into account the currently available law enforcement practice (no more than 50 cases in total in arbitration courts and courts of general jurisdiction), it can be concluded that currently only the practice in the first direction is known (duties in terms of filing tax reports); there are no cases related to the calculation of CFC profits. The existing cases are mainly related to fines for violating the established procedure and deadlines for submitting CFC notifications or notifications of participation in foreign organizations ^{[24, 25, 26, 27]}. It seems that with the development and improvement of the quality of tax control in this area, any progress (development) may appear in judicial practice.Thus, summing up all the above, we can draw, in particular, the following general conclusions.

Tax control over the taxation of CFC profits is a kind of state financial control, which in turn is one of the forms of public administration. The implementation of tax control in this area has its own legal features: for example, a tax audit can be initiated and carried out without submitting a tax return; the powers of the tax authority in terms of requesting information (documents) from controlling persons have been significantly expanded (requests can be sent by the tax authority outside the framework of tax audits and tax monitoring in relation to the taxpayer). It is advisable to provide a specific list of documents that would confirm the fulfillment by taxpayers of the conditions for a specific exemption. The amount of the fine for a tax offense provided for in paragraphs 1.1-1 of Article 126 of the Code should be reduced and brought into line with the amount of tax penalties for similar types of tax offenses from the point of view of the objective side of the tax offense. Judicial practice in this area is just beginning to develop, there is no second line of judicial practice — disputes related directly to the definition of the taxpayer's tax liability.