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Who Will Pay For Foreigners: Tax Collections from Tax Agents


Can tax be collected from a Russian company that does not properly withhold tax as an acting tax agent? Until recently it was considered impossible, and that corresponding claims may be addressed only to the foreign taxpayer. However, a recent ruling of Supreme Arbitration Court on this issue has radically changed the previously formed judicial practice.

Tax Agent

As a rule, the law places responsibility of a tax agent on certain entities when for some reason it is technically easier to collect money from these entities rather than the taxpayer himself. For example, an employer acts as a tax agent in regards to PIT due on an employees’ salary. When a foreign company does not have a permanent representation in Russia, and a Russian company makes certain payments to this foreign organization (such as dividends, interest, royalties), it also acts as tax agent in regards to profit tax received by this foreign organization and/or VAT from sources within Russia.

If a tax agent does not fulfill its responsibility to withhold and/or transfer the tax, it will be charged a fine of 20% of the unpaid tax amount. In addition, a delayed payment of withheld tax by the tax agent will result in penalty fee.

The Tax Code has not regulated one issue. Let us suppose that, despite requirements of the law, tax agent did not withhold the tax and did not pay it to the federal budget. In such case, the tax agent may be charged penalty fee and a fine. But can the tax agent be charged the full amount of tax debt if the transaction has been completed and full payment transferred from the foreign entity to the Russian entity, including tax? On the one hand, it is the debt of the foreign entity, not of the tax agent. On the other hand, it will be difficult to collect the money from the foreign contractor who is the taxpayer.

Accordingly, the decision on this issue belongs to courts.

Until recently, arbitration practice was in the tax agents’ favor. Most of the arbitration courts took the following position: if the tax agent did not calculate, did not withhold and did not transfer the tax, it cannot be obligated to pay the tax out of its own funds. Even the Supreme Arbitration Court of the Russian Federation on several occasions ruled in favor of tax agents in this issue.

However, it seems that lately the Supreme Arbitration Court changed its position on debt collection from tax agents, at least in relation to VAT.

There is an interesting court ruling regarding VAT on transactions with a foreign entity, made by the Presidium of the Supreme Arbitration Court in April 2012.

JSC “Ulyanovski Motorny Zavod” entered into a business agreement with a British company. Apparently, the British company completed the required work and received compensation according to the agreement. However, contrary to the requirement of the legislation, the JSC did not withhold 1.8 mln rubles in VAT from the payment to its British contractor.

Russian tax authorities held the JSC liable for tax offense and required it not only to pay the penalty fees and fines, but also the full amount of the tax that should have been withheld from the contractor.

Arbitration courts have ruled that the demand to pay tax arrears from the tax agent’s personal funds is unjustified. However, in this instance the Presidium of the Supreme Arbitration Court did not uphold rulings of courts below. The Presidium states: “the breach of the Russian company’s duty of tax agent for withholding VAT from funds paid to a foreign contractor does not nullify its’ responsibility to compute this tax and to pay it into the federal budget.”

The Presidium did not explain why in this case it made the ruling opposing previous practice.

One way or another, it is necessary to point out that rulings of the Presidium of the Supreme Arbitration Court hold precedent authority for the arbitration system. Accordingly, this phrasing will be repeated in many rulings of lower courts.

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