It was a tale of two cities…… err… I mean, two parties.

On one hand, you have the Moscow Tax Authority (”MTA”) and on the other, you have the Russian Mafia.

In most jurisdictions around the world, the Tax Authorities are an essential part of the war against organised crime. When there is not sufficient evidence to convict criminals based on their illicit activities, they may be caught out by infringements of tax law.

We have covered our recent Australian programs in a previous blog post.

In this case, the Russian Mafia conspired with senior tax officials within the MTA to secure a tax refund worth US$230m via Hermitage Capital, a British hedge-fund manager.

It started with a raid by the MTA to confiscate all the company seals and documentation. The ownership of the company was then illegally changed over to a known criminal.

A bogus lawsuit for US$1billion was filed against the company upon which it was found liable. This in itself is rather disturbing as it suggests that there are elements within the Russian legal system that were also conspirators.

This allowed the criminals to claim the lawsuit as a tax deduction which gave them the nice hefty tax refund of US$230m.

This must be the world record for the quickest refund ever (shame on you, ATO)… but, it only took them 2 DAYS to process AND transfer US$230 MILLION DOLLARS into a nominated bank account.

The Russian government started an anti-corruption investigation into the matter which resulted in the criminals being convicted for the crime. However, no MTA officials were implicated in the crime.

Our view

Russia is a fascinating place with a rich history…..  But, like all things, there are two sides to the coin….

Hermitage Capital hints that it has evidence that fraud against the Russian government is widespread and common.

Some have dismissed this as just one of those things you have to deal with in Russia…. Which is fair enough to a certain extent…. The same attitude have been adopted for China, India, Africa and other countries in South East Asia….

The thing is….

China has changed..! The Chinese government have realised that to grow the economy, you need a strong accounting & legal system in place to attract and retain foreign investment.

To that end, there has been considerable work done in China to educate itself in global accounting standards and taxation law via its many students abroad.

For more about the changing scales of the Chinese Dragon, please read our blog post “China Business Review” from the CPA Congress 2009.

In a future economic world, with China & India as major players with strong legislative systems, where will Russia be?

The question is…

How can you trust a government that defrauds itself?

Cheers,

Taxabull Team

You can follow us on twitter: twitter.com/austax