The global problem of undeclared funds requires advisers and others who work in the wealth management industry to understand the possible civil and criminal exposures for both their clients and themselves. Tax authorities around the world are becoming more sophisticated with the advent of more efficient and more aggressive investigatory and enforcement tools. Best practices requires advisers to know how best to help their clients regularize previously undeclared income through governmentally authorized channels. When clients are unwilling to regularize, advisers should take steps to avoid making their clients' problems their problems.

In Russia, the failure to declare funds to the tax authorities may lead to administrative or criminal liability for tax evasion on various grounds, depending on the circumstances and the financial structures used. For example, funds may be undeclared in kickback structures or by direct transfer to an offshore jurisdiction in sham transactions. Third parties are subject to liability if they act as perpetrators, abettors, or accomplices. Practically speaking, if a person can be proven to have been aware of the tax evasion or participated in it, grounds for liability may arise. This article summarizes current Russian law on administrative and criminal liability for the nondeclaration of funds for tax purposes, as well as the Russian statutes of limitations for administrative and criminal offenses.

Administrative Liability
Administrative liability is set out in the Russian Tax Code, which defines a tax offense as a culpable unlawful act (action or inaction) of a taxpayer, tax agent, or other person. The major tax offenses that could be committed by an individual taxpayer are failure to submit a tax declaration and nonpayment or incomplete payment of tax. Administrative tax liability applies whether or not the tax evasion is committed intentionally or negligently.

Penalties are severe. Failure to submit a tax declaration to the Russian tax authorities can incur a penalty of 5 percent of the tax payable on the basis of the declaration for each full or partial month past the deadline for submission, but no more than 30 percent of that amount and no less than RUR100. Failure to submit a tax declaration for more than 180 days after the deadline is subject to a penalty of 30 percent of the tax payable on the basis of the declaration and an additional 10 percent for each full or partial month past the 181st day.

The nonpayment or incomplete payment of tax as a result of the understatement of the tax base or other incorrect calculation or as a result of other unlawful actions or inactions is subject to a penalty of 20 percent of the unpaid tax. If the nonpayment or incomplete payment of tax is committed with intent, the fine is 40 percent of the unpaid tax.

Criminal Liability
Criminal liability for tax evasion in the form of a criminal fine and/or imprisonment for a period of up to six years applies only to individuals (either individual taxpayers or officers of the company). Such liability is triggered when the tax evasion is committed with direct intent (i.e., the person is aware that he/she is committing the acts for the purpose of tax evasion).  Such intent can be proven by either direct or circumstantial evidence.

Thus, criminal liability in the case of individuals arises where the individual taxpayer deliberately fails to submit a tax declaration or other required documents to the tax authorities, or reports false information in a tax declaration or other documents, if that conduct results in a tax evasion on a large scale.  Tax evasion is committed on a “large” scale if: (a) the amount of unpaid taxes that are payable during three consecutive years exceeds RUR100,000; and (b) either the amount of unpaid taxes exceeds 10% of the total amount of taxes payable or the amount of unpaid taxes exceeds RUR300,000.  Punishment for tax evasion may include large fines and imprisonment with or without hard labor, depending on the scale of the offense.

How to Regularize Your Tax Position
Although Russian law does not set out specific regulations on tax regularization, taxpayers may avoid liability for tax offenses if they fall within the tax amnesty regime. In 2007, a tax amnesty was introduced in relation to the income of individuals received before 2006. This regime provided for the release from liability under the Russian Tax Code and the simplified declaration of income, without the need to provide confirming documents, until 1 January 2008, if no criminal sentence was applicable in this regard. No new tax amnesty is currently planned.

Other options

If a taxpayer files an amended tax return before the undeclared amounts are discovered by Russian tax authorities, the taxpayer may avoid tax penalties. In particular, if the term for filing has already expired, but the Russian tax authorities have neither discovered the tax underpayment nor initiated the field tax audit with respect to the relevant tax, the taxpayer may still pay the outstanding amount of tax, together with the late payment interest, and file the amended tax return for the respective tax period to avoid tax penalties.

Taxpayers may also avoid penalties by following the official clarifications issued by the Russian tax authorities. Moreover, the Russian Code for Administrative Offenses and the Russian Criminal Code allow penalties to be at least halved in cases of mitigating circumstances. In any case, tax liability should not arise if the applicable limitation period has expired (discussed later in the article).

Sentencing is within the court’s discretion and depends on the level of the taxpayer’s involvement, the existence or absence of mitigating or aggravating circumstances, the taxpayer’s willingness to cooperate in the criminal investigation, and other relevant facts. Decriminalizing amendments that reduce liability for tax offenses are expected to be added to the Russian Criminal Code.

Limitation Periods
Limitation periods depend on the type of tax offense and the type of liability (criminal or administrative). Tax evasion is deemed committed as of the date the tax liability becomes overdue when the liability is based on an unsubmitted declaration or a submission of false accounting documents and/or tax declarations to the tax authorities. The limitation periods under the Russian Criminal Code are either two years or six years, depending on the gravity of the crime.

If there are no grounds for criminal liability, there may be grounds for administrative liability under the Russian Tax Code (which applies to companies, individual entrepreneurs, and individuals not having the status of individual entrepreneurs) and the Russian Code for Administrative Offenses (which applies to the officers of a legal entity, such as a general director or chief accountant). Under the Russian Tax Code, the statute of limitations for administrative liability is three years, measured from either the date of commission of the tax offense or the first day after the end of the relevant tax period (in the case of such tax offenses as underpayment). Under the Russian Code for Administrative Offenses, the statute of limitations for tax liability is one year. Calculation of the relevant limitation period starts from the date the tax offense was committed or discovered (in the case of continuing offenses).

Sharing of Information with Other Jurisdictions
Many double tax treaties concluded by Russia with other countries allow information exchange between Russian tax authorities and the fiscal agencies of those countries. Moreover, other bilateral and multilateral conventions between Russia and other countries should be considered (e.g., multilateral conventions and bilateral agreements on legal assistance in criminal matters). Internal-affairs agencies may also obtain information from Interpol.

Currently, Russian authorities are negotiating amendments to a number of double tax treaties, including those with Austria, Luxembourg, and Switzerland. Signed on 16 April 2009, the protocol to the double tax treaty between Russia and Cyprus is expected to go into effect on 1 January 2010. Under this protocol, Russia and Cyprus agree to introduce certain limitations for the tax treaty benefits and improve provisions on the exchange of information.

In Russia, tax liability can be broad, tax penalties are severe, and information exchange is becoming more fluid. Strategies to regularize undeclared income are therefore important. Russia is not unique in this regard, so advisers would be wise to incorporate these considerations in their advisement.

Sergei Zhestkov is a partner at Baker & McKenzie in Moscow, Russia, and author of LawInContext’s Private Banking Helpdesk Russia country report.