2017 was abundant with conceptual approaches to tax control developed by tax authorities both for applicable approaches (methods) and for the introduction of execution limits to taxpayers’ rights to apply methods of tax saving.
Article 54.1 named Limits to the execution of rights to the calculation of the tax base and/or tax, duty, insurance contributions was added to Part 1 of the Tax Code of the Russian Federation.
The first paragraph of this article prohibits taxpayers to reduce the tax base and/or the payable tax due to misrepresentation of business activities, taxable items subject to recognition in tax and/or accounting records or taxpayer’s tax returns.
The legislator further states that taxpayers shall be entitled to reduce the tax base and/or the payable tax pursuant to the regulations of the relevant chapter of Part Two of this Code provided the following conditions are met simultaneously:
Signing of primary accounting records by an unidentified or unauthorized person, violation of the law on taxes and duties by a taxpayer’s counterparty, possibilities of taxpayer’s gaining the same economic results upon the execution of legal deals (transactions) may not be regarded as the sole reason for recognizing reduction of the tax base and/or the payable tax by a taxpayer as an illegal act.
Therefore, from August 19, 2017 on, tax authorities are not entitled to deny the right to reduce the tax base by detecting technical discrepancies in the execution of documents. Tax authorities have to prove that the major goal of a deal is tax non-payment (partial payment) and/or tax credit (refund).
Prior to article 54.1 of the Tax Code of the Russian Federation came to force, the joint collegium meeting of the Federal Tax Service of Russia and the Investigative Committee of the Russian Federation on the issue of raising cooperation efficiency of tax and investigative authorities on tax crime detection and investigation took place and developed ‘Guidelines on substantiating evidences of willful intent in actions of taxpayer’s officials aimed at tax (duty) evasion during tax and procedural inspections’ (Letter of the Federal Tax Service of Russia No. ЕД-4-2/13650@ dated 13.07.2017).
The tone of guidelines is quite aggressive. Particularly, they recommend the following: “evidence presented in a tax audit report should clearly show that a taxpayer’s wrongdoing did not result from any discrepancies in accounting or tax records, but from deliberate and intentional actions by a taxpayer and its representatives.
Tax authorities are advised to follow the style adopted for indictments in criminal proceedings.
Common practice shows that generally tax authorities fully reconstruct tax crimes in details in their tax audit reports, clearly and explicitly describe methods and facts of tax evasion, but pay very little attention to memorable and express interpretation and verbal comments on a taxpayer’s wrongdoing being a deliberate act. Tax authorities are advised to focus on such cases.”
Guidelines give examples of illegal reductions of tax amounts and describe tax evasion schemes, which are worth revising. If you use one of the described examples, it is time to change something.
Final pages of guidelines have lists of questions, which have to be answered by the director and employees (by counterparty’s choice) on the procedure of agreement execution, inventory records. Try to answer them.
Therefore, we strongly suggest reading these guidelines and ensuing letter of the Federal Tax Service of Russia No. СА-4-7/16152@ dated 16.08.2017.
At the end of 2017, tax authorities began to detect companies, which did not locate at their registered addresses. Should a company fail to locate where it is registered, a relevant entry on misrepresentation of the registered address is made to the Unified State Register of Legal Entities. As a result, a bank may freeze company’s accounts, and it will be unable to carry out its business until its reincorporation at the actual location address. Besides, the fact of entry on misrepresentation of the registered address itself may become a warning sign for counterparties and may cause partners’ unwillingness to keep business relations with such a company. Thus, in case the actual location address of your company does not correspond with the registered address in incorporation documents and, consequently, in the Unified State Register of Legal Entities, we strongly suggest changing the registered address for the actual location address of your company. Tax authorities are likely to visit you after that in order to check whether your company is actually located at its reincorporation address.
Taxpayers sometimes lower selling prices and raise acquisition prices in order to minimize tax liabilities.
When may the deviation of transaction prices from the market level serve as the reason for additional tax charges?
Specialists from the Federal Tax Service of Russia answered this question in letter No. ЕД-4-13/23938@ dated 27.11.2017. Tax inspectors state that provisions of Section V.1 of the Tax Code regulate pricing procedures for transactions subject to tax control due to entering into transactions with interdependent persons. Unless specified in this section, tax authorities are not entitled to doubt the price of goods (works, services) set by transaction parties and recognized upon tax charging during in-office and on-site tax audit inspections. However, repeated deviation of transaction prices from the market level may be regarded during in-office and on-site tax audit inspections as one of the signs of gaining unreasonable tax advantages combined and interlinked with other circumstances, which revealed discrepancies between the transaction execution and the subject of the business transaction. Specialists from the Federal Tax Service of Russia note that the said viewpoint is presented in clause 3 of the Review of court hearings of cases regarding the application of particular provisions of section V.1 and article 269 of the Tax Code of the Russian Federation ratified by the Supreme Court Presidium of the Russian Federation on 16.02.2017. It clarifies that repeated deviation of transaction prices from the market level may be regarded as one of the signs of gaining unreasonable tax advantages combined and interlinked with other circumstances, which reveal discrepancies between the transaction execution and the subject of the business transaction
However, even less than twofold price deviations, but for 255 million roubles, are deemed as the sign of tax schemes (see Definition of the Supreme Court of the Russian Federation No. 301-КГ17-5808 dated 05.06.2017 in case No. А43-27884/2015).
Letter of the Federal Tax Service of Russia No. СА-4-7/15895@ dated 11.08.2017 On issuing the review of legal precedents on taxpayers appealing against non-regulatory acts issued by tax authorities following the results of tax control procedures, which substantiated facts of gaining unreasonable tax advantages by formalistic business separation (split-up) and artificial operating revenue distribution among controlled interdependent persons is a guideline to follow, as is the abovementioned letter of the Federal Tax Service of Russia No. ЕД-4-2/13650@ dated 13.07.2017. It analyzes signs of action coordination between participants of business split-up schemes for the purposes of tax evasion. Such signs are as follows:
The letter gives examples from arbitration precedents, which were passed either in favour of tax authorities or otherwise on the admission of business split-up facts aiming at the reduction of payable taxes.
The abovementioned list of signs is not complete. It was composed by the Federal Tax Service based on the analysis of arbitration precedents. However, it would not hurt to check your business for the abovementioned business split-up signs, as they may be used to prove the reduction of payable taxes, according to the Federal Tax Service and judging from legal precedents.
For a number of years, companies as well as individuals since 2017, have acknowledged the significance of bank control, which includes thorough analysis of transactions conducted by bank clients and the amount of tax payments.
Letter of the Central bank of the Russian Federation No. 236-T dated 31.12.2014 instructed banks to control transit operation of their clients in order to prevent money laundering, financing of terrorism and other illegal intentions.
Transit operations may feature (simultaneously have) the following characteristics:
Letter of the Central bank of the Russian Federation No. 18-МР dated 21.07.2017 explains in details that if a company pays less than 0.9% of the turnover on account, banks should check whether payments transferred through this company are transit or not. The Bank of Russia recommends considering the following additional characteristics of the clients that conduct the said operations:
Upon detection of the said operations, the Central bank of the Russian Federation recommends to treat the client as a high-risk one and take further measures, e.g. exercise the right under the relevant online banking service agreement to decline the client’s order for account (deposit) transactions signed by the analogue signature.
Furthermore, the letter gives a full list of the most typical dubious transactions, which is worth reading. It may help to avoid ending up among clients that conduct dubious transactions, as well as suspension of account transactions and a close attention from the Central bank of the Russian Federation.
2017 is often called the end year of tax schemes. Having reviewed the abovementioned, it seems fair. Unfortunately, the size of this article does not allow to provide a comprehensive description of tax control strengthening, but only point out the most significant indicators of this inevitable process. Given the tendency of tax control strengthening, tax schemes should be avoided. However, it does not prohibit taxpayers from applying special tax treatments and tax benefits. The point is for the major purpose of a transaction (number of transactions) not to be gaining tax advantages.
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