OREANDA-NEWS  On 17 October was announced, that tax reform continues to move forward in Russia, with a noticeable reduction in the frequency of onsite tax audits from once a year to once every two or three years, according to Ernst & Young’s 2008 survey of taxation issues in Russia. Respondents this year noted a dramatic reduction in the number of reported tax disputes being taken to court (65% versus 82% last year). A considerable majority (89%) of reported cases which went to court judgment continue to be settled in favor of the taxpayer.

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 survey was conducted by Ernst & Young among 78 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.

Respondents evaluate the tax authorities’ overall performance as having noticeably improved – 32% of respondents said they thought the tax authorities were performing slightly better than the previous year (up from 11%). The primary perceived weakness of the court system, according to respondents, is still the lack of independence. The tax authorities’ emphasis on form rather than substance is considered to be the weakest area of the tax authorities’ performance this year.

“Seventy percent of respondents recover more than 90% of input VAT. Fifty-three percent of those respondents had recoverable input VAT amounts exceeding USD 1 million per annum,” said Reece Jenkins, Ernst & Young partner and coordinator of the survey. “Transfer pricing, VAT and deductibility of expenses are considered to be the weakest areas of tax legislation.”

According to the survey, a significant number of respondents reported delays in obtaining VAT refunds from three to four months (42%) and even from four to six months (22%). In addition, an increasing number of respondents (53% against 28% last year) indicated that one of the key issues for the company’s tax function in the future will be developing adequate processes and finding personnel with the skills and knowledge to handle tax issues in a systematic matter.

“The survey results indicate a steady decrease in the perception that the tax regime has a negative impact on the investment environment in Russia,” said Petr Medvedev, partner at Ernst & Young and head of the CIS Tax & Legal practice. “However,” he said, “respondents indicated that a softening of the approach to deduction of business-related expenses, as well as simplified documentation requirements, are the first steps toward further improving the Russian tax system.”