Formation of a Sustainable Mechanism of Preferential VAT Taxation of Exports as Evidenced by the Russian Federation Practice

Elena Sidorova,Olga Kostina,Natalia Vikhrova,Alexey Kostin,Yury Kostyukhin,Diana Boboshko,Ekaterina Sebechenko

doi:10.3390/economies9040190

Elena Sidorova, Olga Kostina + Show 5 more

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https://doi.org/10.3390/economies9040190

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Abstract

In this article we review the issues of applying a preferential value added tax (VAT) taxation regime on export transactions involving unlawful tax benefit claims and tax evasion. The main objective of this study is to supplement the theoretical and methodological foundations of transforming the system of indirect taxation of exports in the Russian Federation based on the analysis of legal precedents. We analyzed the foreign trade statistics for the Russian Federation and the volumes of export VAT; we also studied the court rulings in VAT-related tax disputes. Based on our analysis of the court cases, we discovered the main schemes of unlawful application of VAT preferences, such as “false exports”, introduction of additional layers of intermediaries, and use of agency services by exporting sellers. In addition, we formulated two problematic scenarios where bona fide transactions fall under the definition of such schemes. Specifically, these two scenarios include services contracts by foreign service providers that are reclassified by the tax authorities with an aim to challenge the offsetting of incoming VAT amounts and the specifics of applying VAT to transactions involving compensation-free transfer of goods to foreign legal entities. To minimize the number of tax disputes, we suggest that certain provisions of the Russian legislation are amended with more detail. The proposed innovations can positively affect international trade as they bring more easily understandable and stable conditions for the development of businesses engaged in cross-border service provisioning. At the same time, a reduction in the number of disputes based on the tax authorities’ subjective opinion of taxpayers’ activities would allow the tax authorities to concentrate on clearer and more objective criteria of tax compliance by Russian companies, thus simplifying tax administration in one of the domains of tax law.

Highlights

The objective of this study is to identify possible directions of the process of transforming the system of indirect taxation on export transactions in the Russian Federation based on the analysis of legal precedents
In cases where one of the above-mentioned conditions is not complied with, the taxpayer may not include the transaction in question in their tax accounting records, i.e., value added tax (VAT) offset is not allowed and costs are taxes disallowed for the corporate income tax calculation
The goods declared for exports do not cross the customs border as said goods do not exist or have been sold domestically, within the Russian Federation for cash, and incoming VAT related to acquisition of such allegedly “exported” goods was used by the taxpayer to offset their VAT liability (“false exports”); additional layers of vendors are added to the transaction for acquisition of exported goods for the exporter to be able to offset the incoming VAT; the taxpayer de facto is not an exporter but provides agency services for the seller/exporter, which changes the approach to VAT taxation of its operations

Summary

Introduction

The objective of this study is to identify possible directions of the process of transforming the system of indirect taxation on export transactions in the Russian Federation based on the analysis of legal precedents. The objective of this article necessitated finding the solutions for the following scientific problems: Finding the inter-relationship between the trends of development of the national economy and the emergence of risks of tax evasion in foreign trade transactions. Analysis of main schemes used by the taxpayers for tax evasion; factors and conditions defining the indicators of legitimate tax minimization. Development of proposals for improvement of the VAT taxation mechanism of export operations. The study (Frankel and Romer 1999) identified the following channels through which trade influences economic growth: specialization based on comparative advantages and spreading of technologies via investment activity. The study (Frankel and Romer 1999) identified the following channels through which trade influences economic growth: specialization based on comparative advantages and spreading of technologies via investment activity. (Lederman and Maloney 2003) note that, as a rule, growth rates tend to be higher in countries with a more diversified export structure or that improve the quality of their exports irrespective of the level of value added (Henn et al 2017), or in countries that are deeply integrated into global manufacturing and commodity exchange processes (Didier and Pinat 2017)

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