Criminal liability for tax evasion

UDC 347.45
Publication date: 30.04.2019
International Journal of Professional Science №4-2019

Criminal liability for tax evasion

Vasilenko V.A.,
Tarakanov A.R.
Sakhalin institute of railway transport – branch of Far East state transport university in Yuzhno-Sakhalinsk, Yuzhno-Sakhalinsk
Sakhalin institute of railway transport – branch of Far East state transport university in Yuzhno-Sakhalinsk, Yuzhno-Sakhalinsk
Abstract: The scientific article analyzes the offenses involving administrative, and in certain cases, criminal liability.
Keywords: tax, taxation, offense, economic activity.

Constitution of the Russian Federation [1] (hereafter RF Constitution,) stipulates that all the RF citizens shall pay legally imposed taxes and fees. Constitutional duty to pay taxes is provided for in the Article 57 of the Constitution.  The Article also contains a rule stipulating that the laws, introducing new taxes or affecting the taxpayers, shall not have a retroactive effect.

The main legal document regulating this public relations field is the Russian Federation Tax Code [2] (hereafter – RF Tax Code).

Types of the tax crimes (offences) are given in the Chapter 22 of the Russian Federation’s Criminal Code [3] (hereafter — RF Criminal Code) «Economical crimes» and are subdivided into three groups, as follows:

–  non-payment of the taxes and fees;

–  non-fulfillment by the tax agent of their duties;

– concealment of the money (funds) or property of organizations (privately owned enterprises) from which the taxes and fees are to be collected;

Tax evasion is considered a serious offence entailing administrative and even a criminal liability under definite circumstances (Articles 198, 199, 199.1 and 199.2 of the RF Criminal Code).  Tax related offences and crimes provide for such forms of punishment as: fines; correction works and incarceration.

In the criminal legislation literature qualification of the crimes means an establishment of an accurate correspondence between the elements of a committed offence and that of a crime, as stipulated by criminal legislation norms [4] and the enshrinement of this correspondence in the proper legislation. Adequate qualification enables to duly implement main criminal liability principles and serve as a guaranty protecting the rights of the Parties to the court process.

Numerous scientific discussions and the absence of a uniform enforcement practice for the tax or fees evasion liability norms over different regions necessitates analysis of their qualification principles and their separation from other offences. The problem is also vital, because there is no proper court interpretations for application of a criminal law to this type of offences based on modern situations and modern criminal legislation.

According to law, subject to criminal liability shall be just physical persons – human beings (employees, private entrepreneurs or legal entities’ founders et. cet.) – i.e. civil rights subjects bearing rights and obligations, As per Article 20 of the RF Criminal Code, Russian citizens shall be subject to criminal liability for tax related crimes only upon reaching the age of sixteen.  To designate persons as the civil rights’ subjects, the Civil Code of the Russian Federation uses definition such as – «citizens», with an additional term – «physical persons» given in the parenthesis next to the former one. The term «citizens», as used in the Code, means people possessing the RF citizenship, with the term «physical persons» indicating that people other than RF citizens can be present within the Russian Federation territory.

When establishing type of liability for legal entities – organizations – it would be the most important to stick to a culpability definition as stated out in the proper legal regulatory acts.  At present, within the frameworks of the science of justice, there are two main concepts enabling to incorporate criminal tax offences’ related liability of legal entities in the legislation in force. They are: the theory of a substitutive liability (objectivistic approach) and that of identification (subjectivistic approach).

Under the objectivistic approach guilt scope for legal entities – organizations – shall be based on actual offences committed by their managing staff by way of violating law rules in exercising of their authorities while possessing real opportunity to prevent an offence [5]. Such an approach is used in the Russian Administrative legislation. The Article 2.1 of the Russian Federation Administrative Offences Code (hereafter RF AC) [6] reads as follows: A person is considered guilty of an administrative offence, provided he / she was capable to observe the appropriate RF norms and regulations on administrative offences, but failed to take all the measures at his disposal to observe the afore-mentioned rules and regulations.

The subjectivistic approach, as stated out in the tax and fees legislation, suggests that legal entity’s culpability shall be determined by culpability of the officials who manage the entity in accordance with legislation and founding documents (agreement or power of attorney), or actually control and direct its activities. Pursuant to the paragraph 4, Article 110 of the RF Tax Code, the culpability of an organization in committing a tax related offence shall be defined based on the culpability of its managing workers or representatives thereof having committed the offences by action or inaction.

The amount of non-paid taxes is a mandatory attribute of the criminal offences’ definitions provided for in the Articles 198 and 199 of the RF Criminal Code. If an offence would not reach a specific law defined culpability level, it wouldn’t pose the required degree of a social hazard and shall be considered a tax related offence. The same applies to such offences of that category as a non-fulfillment of a tax agent’s duties (Article 199.1 of the RF Criminal Code) and concealment of the funds and / or a property of organizations, or private entrepreneurs from which the taxes or fees are collected. (Article 199.2 of the RF Criminal Code).

It is the amount of the tax money having not been received by the State budget that enables to separate a criminal act from the tax related offences provided for in the Article 122 of the RF Tax Code “Non-paid or not fully paid tax or fees amounts“.

Prior to January 1, 2010 tax or fee evasion amounts to the excess of 500 thou. (500000) rubles had been considered the gross evasion offences — following this date the amounts exceeding 2 (2000000) million rubles were considered as such.  As far as those amounts are concerned, they are given in the Notes to the Articles 199 and 199 of the RF Criminal Code, but they are hard to understand, don’t take account of the inflation rate and even actual devaluation of the ruble in the 2015-2016 years’ period.

Changes in the legal regulation of the procedural order regarding these types of offences entailed their sharp increase suggesting availability of objective and subjective problems.  As far as the tax-related crimes’ investigation outcomes go, more than 4000 tax related offences were processed by the investigators in the year 2017. The investigation of nearly 2500 cases has been completed, which is a 48,4% increase compared to 2015, with the 16.3 billion rubles damage having been compensated [7].

Generalized information on the tax evasion scope in modern Russia and the resulted budget system inflicted damage is given in the paper by B.A. Nazarenko “Criminal policy in the taxation field“[8]. According to the author: “Every year budgets of different levels loose tenth billions of rubles because of usage by the tax payers of the tax evasion financial schemes enabling to avoid tax payments“. But according to many authors the number of the identified tax related crimes is no more than 5 % of the actual criminal acts violating the tax legislation [9].

That’s why an occurrence rate of the socially dangerous offences (crimes), being analyzed is much wider than that shown by official statistics. Tax evasion generated social danger, resulting from the above-mentioned factors, makes the tax offences’ liability regulation in the criminal law socially relevant.

Per Russia’s MVD GIATS data (the data from the Main Information-Analytical Center of Russia’s Ministry of Internal Affairs) 388 544 997 thousand rubles  were not received by the country’s budget system in 2004 — 2014 years period due to tax evasion [10], about 43 billion rubles annual average. It should be mentioned that it is not yet possible to collect taxes in full for the following 2015-2016 years. According to the estimates by different specialists, the country under collects up to 30% of the tax payments due annually. Let’s look at the tax crime statistics in Russia for the last five (5) years. The tax related criminal statistics for 2013-2017 is given in the Table 1.

Table 1

 The tax criminal statistics for 2013-2017

Yy. Criminal acts identified by: Investigated by:
Total Investigation

bodies  with the

Investigation Committee of Russia

Law enforcement agencies Customs Total Investigation

bodies  with the

Investigation Committee of Russia

Law enforcement agencies
2017 1001 7 947 27 233 169 58
2016 9283 97 8106 603 4001 2797 1030
2015 9041 125 7944 682 3846 2866 739
2014 6205 37 5470 480 3200 2322 706
2013 4719 120 4396 121 3109 1929 1147
2017-2013 30249 386 26863 1913 14389 10083 3680

As the Table 1 data show for the recent 5 years’ period the number of the identified tax related criminal acts has grown, while the identification growth rate has slowed down for the last 2 years; the number of the identified acts has grown by 4,9% from 2013 to 2014, has shown a 9,4% increase from 2014 to 2015, but went down to 0,8% growth rate by the year 2016. Investigated over these years have been only 47,6 % of the cases with most of them being conducted by the investigative bodies with the Investigation Committee of the Russian Federation. The law enforcement agencies alone have identified more than 25% of the taxation related crimes.

At the same time the above-given information doesn’t enable to have a full judgment of the actual number of the established mandatory payments order violations.   As a whole  the offences (crimes), punishable under the Articles 198, 199 of the RF Criminal Code, possess very high latency rate. As the Investigation Committee Chairman mentioned, the main portion of the socially hazardous criminal offences in the tax field remains unidentified because: there are no victims; the culprits use tricky ways and schemes and there is usually a relatively big time period between the moment of commitment of an act and the time of its identification.

Criminal offences in the taxation field are identified not only by the law enforcement; investigative and customs agencies, but also by tax agencies, both separately from the Ministry of Internal Affairs, and together with them.

The important grounds for initiating criminal proceedings are the amounts of the arrears to the budget identified in the course of tax inspections (audits). In case of the legal entity, tax audit may send materials to the police only, if the arrears’ amount, identified in the inspection, exceeds 500000 rubles. For physical persons, especially private entrepreneurs, the arrears amount shall be no less than 100000 rubles. With lesser amounts the enforcement bodies would just have no legal grounds to initiate criminal proceedings [12].  However, here we don’t speak about the budget arrears which may arise due to the temporary financial problems in an organization. That is, when a Company maintains financial records correctly, makes proper entries in declarations, submits reporting documentation in time, but anyway has a tax arrears through this or that reason.

At present it happens very often that during the tax audits tax authorities identify budget arrears in the amounts critical for the taxpayers, i.e. to the excess of 500000 rubles. Non-paid amounts like that are not so big for medium and large businesses, that’s why it is very likely for the identified materials to be handed over to the law enforcement authorities. But not every initiated proceeding would mean real criminal offence having been committed in an organization. The matter is that tax and law enforcement agencies use quite different attitudes to the tax offences. That’s why not every tax offence may turn into a criminal act [13].

In the RF Tax Code there are only three articles that provide punishment for non-payment of the taxes, including record keeping violations which can result in tax arrears to the budget. We mean first of all the Article 120 of the RF Tax Code stating out fines for gross violations of the income-expense’ record keeping rules and same for taxation items’. Article 122 of the RF Tax Code states out sanctions for tax non-payments due to the tax base understatement or inaccurate calculation thereof.  And at last Article 122 of the RF Tax Code deals with tax agents not performing their duties to withhold and send taxes to the budget [2].

Now let us turn to the RF Criminal Code.  It contains four (4) “tax-related articles“. Tax evasion for physical persons is covered in the Article 198 of the Criminal Code.   Tax evasion for organizations is covered in the Article 199 of the Code.   Article 199.1 of the RF Criminal Code is for the tax agents not performing their duties. Article 199.2 of the Criminal Code states out punishment for concealment of the funds that can be used for collecting tax and fees arrears [3].

Note that all the above-mentioned articles of both the Tax and Criminal Codes of the Russian Federation touch upon the same subject – tax and fees’s not coming into the State budget. Availability of the arrears to the budget will be enough to bring a company to account for tax related offences. But for initiating criminal proceedings against a company arrears to the budget serve as just a pretext to start an investigation, and not always grounds (guarantees) for incriminating the criminal liability.

If a company would not submit declarations, but may decide prior to the tax audit, to pay all the taxes, including those, covered in the non submitted declarations, the company will be brought to justice anyway, but the offence won’t be considered a tax crime, because the tax had been actually paid to the budget. Let us look at the statistics for additionally charged taxes and fees to the budget for the last 4 years (See the Table 2).

Table 2

 Additionally charged (imposed) tax amounts based on tax audits’ findings

Yy. Number of audits by the tax agencies Additionally charged tax amounts imposed based on the tax audits by tax agencies. mln. rubles Number of tax audits conducted by tax and internal affairs agencies together Additional tax amounts charged based on tax audits by tax and law enforcement agencies together, mln. rubles
2016 30223 9,1 6328 20,8
2015 30663 8,9 6460 19,1
2014 35758 8,2 7123 20,6
2013 41331 6,9 6531 21,6

Table 2 show that taken as an average tax audits conducted by the tax and law enforcement agencies together give the additionally charged tax amounts practically three times as great, compared to the audits conducted by the tax agencies alone. The sum of additionally charged tax amounts tend to grow year by year. This may testify both to the increase of tax evasion cases, and the improvement of the tax and law enforcement agencies’ performance in monitoring financial activities of the taxpayers.

According to I.N. Soloviev, one of the components of the tax crimes’ social hazards is that they get gradually merged with the other types of economical crimes, conventional and organized criminal activity and acts of corruption [11].

Non-payment of the taxes and fees pose definite social hazard with budgetary system facing a danger of not receiving big portion of the planned money. Tax evasion is a quite common phenomena possessing high latency degree (hard to be identified). The tax offences can not be efficiently fought using norms from other branches of legislation [14].

Suggestion to toughen criminal liability for tax related crimes appears to be well grounded from criminalistics standpoint. It is only a criminal liability that can become an efficient deterrent having more positive effect that other means of deterrence [15].

As is shown by statistics, in the years 2017-2018 it became possible to identify much more tax and fees evasion cases despite usage of the tricky evasion methods and schemes in the taxation sphere by the offenders. However, it is very important to avoid subjective attitudes in initiating criminal proceedings, and not violate main principles of criminal legislation, especially the presumption of innocence, enshrined not only in the procedural legislation, but also in the Constitution of the Russian Federation.


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