OREANDA-NEWS. Tax reform continues to move forward in Russia, with the primary focus on transfer pricing and holding company regimes, according to Ernst & Young's 2007 Survey of Taxation Issues in Russia. However, the survey shows there has been disappointment with the slow progress in reforming Russia's tax administration and frustration with the authorities' inconsistent application and interpretation of tax laws. The 2007 Survey of Taxation Issues in Russia was conducted by Ernst & Young among 58 Russian and international companies operating in Russia and polled respondents on such questions as tax audits and disputes in Russia, Russia's tax legislation and administration, the impact of Russia's tax regime on foreign investment, respondents' views on how to improve Russia's tax regime, and information on the tax functions of companies operating in Russia.

According to the survey, in 2007 only 12% of respondents reported having multiple onsite tax audits, down from 40% in 2005. 84% indicated that they had tax disputes with the authorities, with 82% of reported disputes being taken to court. Of cases which went to judgment, 89% were won by the survey participants - a high success rate indicating solid support of taxpayers by the court system. The majority of disputes (63%) were settled in less than one year.

"Our survey shows several interesting trends and results: the proportion of companies indicating positive relations with the tax authorities increased to 32% from 22% the previous year," said Reece Jenkins, Ernst & Young partner and coordinator of the survey. "This relatively positive evaluation has been given despite the high volume of tax litigation activity in Russia."

The majority of respondents consider that the current tax regime has an adverse impact on the investment climate: negative and highly negative perceptions account for 63%, while neutral and positive ratings are down from 54% to 37%. The most important sphere identified for improvement was tax legislation: respondents indicated they would like tax reforms to focus on streamlining the tax legislation and eliminating ambiguities, contradictions, and gaps in the legislation. In addition, the majority (72%) of respondents recovered 90% or more of their input VAT. Most respondents would like the timeframe for obtaining a VAT refund to be accelerated.

"Many of our respondents believe that the government of the Russian Federation needs to enhance the process of simplifying the tax legislation and thus decrease the chances of the subjective interpretation of tax laws," said Petr Medvedev, partner at Ernst & Young and head of the CIS Tax & Legal practice. "Concise, objective, and pronounced legislation could have prevented many taxation disputes."

Other key findings of the survey:

Of 31% of respondents with recoverable VAT on exports, 90% involved amounts exceeding USD 1 million per annum.
The average reported delay in obtaining VAT refunds is two months, significantly less than the previous year's figure of 7.6 months.
82% of respondents said they would contest a back tax claim.
61% of court cases described by respondents involved disputed amounts in excess of USD 1 million.
The primary perceived weakness of both the tax authorities and the court system has not changed in the past three years: according to our respondents, it is still their lack of independence.
Where tax laws are open to interpretation, respondents say that the authorities often follow the letter of the law rather than its intent, giving rise to numerous disputes.
The competence rating in both the tax and court systems has been steadily rising in recent years.
15% of respondents indicated the need to reduce documentation requirements, up from 4% last year.
Only 4% of respondents suggested that authorities implement an anti-corruption campaign, compared to 17% last year.
50% of responding companies employ a dedicated tax department.