A recent court case demonstrates that the Russian tax authorities relied on the confidential information obtained via Interpol in order to support their claim that a royalty-payment structure involving a Cypriot, BVI and a Russian entity was no more than a transaction created to receive unjustified tax benefit.
On 15 May 2012, the Federal Arbitration Court of the Urals Circuit reversed lower courts’ rulings and found in favour of the tax payer by concluding that the transaction carried out by the tax payer neither lacked business purpose nor created unjustified tax benefit. The finding is not novel in itself, however, the case was remarkable in that the Court was presented with the confidential data, which was obtained by the Russian tax authorities via Interpol — identifying the real beneficial owners of the companies involved in the transaction in question.
The case was brought about as a result of the finding by the Russian tax authorities that during tax years 2006-2008, the Russian corporation incorrectly deducted over RUB 470mln (roughly USD 15mln) in expenses. The company counted as expenses the royalty payments it made to a BVI company via a Cypriot sublicensee company, which according to the tax authorities were related entities. Due to this alleged relationship and the nature of the transaction, the tax authorities claimed that the Russian taxpayer obtained unjustified tax benefit by entering into transactions that lacked actual business purpose.
The tax authorities presented the following facts to the Court. A certain BVI company purchased a trademark from a Russian individual, who at the time was a director of the parent company of the Russian taxpayer. The BVI company then licensed this trade mark to a Cypriot entity, which then sub-licensed it back to the Russian taxpayer. The unjustified tax benefit, according to the Russian tax authorities, arose not only because it would have been much more transparent for the director and the original owner of the trade mark to license the trade mark directly to the Russian taxpayer but also because all the entities in the transaction were related on the beneficial ownership level.
The Russian company argued that the information filed with the registrar concerning the shareholders of the Cypriot company showed that there was no affiliation between the entities. Thereby, the tax authorities simply did not have sufficient evidence to demonstrate any affiliation between the companies. The authorities, however, argued that the shareholders who appeared on the register were actually nominee shareholders and according to the information obtained by them demonstrated that the beneficial owner of those entities were related. This information, although not generally available to the public, is known to the service providers, banks, auditors and other third parties, therefore, it is with all probability that the tax authorities obtained such information from one of those sources using Interpol resources.
The Court found that there was no unjustified tax benefit obtained from this transaction. This decision was reached based on the fact that the evidence as to the affiliation of the companies was obtained through illegal methods, which the Court considered to be in violation of established procedures. Thereby, any such evidence could not be taken into consideration. Furthermore, the Court mused, that even taking into consideration possible affiliation, there was no sufficient evidence to demonstrate that the transaction was of nature other than at arm’s length.
Although in the present case the decision was in favour of the taxpayer, the case nevertheless demonstrates, that Russian tax authorities will be paying closer attention to the royalty payment schemes. It is also worth keeping in mind that in the future the courts may be more accepting of ‘alternative’ methods of collecting information.
Source: Oracle Capital Group