Strengthening of Tax Control
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.
Limits to the execution of taxpayers’ rights
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:
- The main purpose of a deal (transaction) is not gaining tax non-payment (partial payment) and/or tax credit (refund);
- A deal (transaction) obligation was performed by a person acting as the party of an agreement executed with a taxpayer and/or a person thereto a deal (transaction) obligation was transferred under an agreement or the law.
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.
Identification of taxpayers’ actual location at the registered address
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.
Deviation of prices from the market level
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:
- Business (industrial process) split-up takes place among several persons that apply special tax systems (the tax system introducing the single tax on imputed income for certain types of activities or the simplified tax system) instead of computation and payment of VAT, corporate profit tax and corporate property tax by the principal participant which carries out actual activities;
- Adoption of the business split-up scheme influenced business conditions and economic results of all participants of this scheme, including their tax liabilities, which decreased or hardly changed with the general expansion of all business activities;
- The taxpayer, its members, officials or persons with actual control over the scheme are beneficiaries of the business split-up scheme;
- Scheme participants carry out similar economic activities;
- Participants developed the scheme during a short period of time shortly before the expansion of production facilities and/or increase in the number of personnel;
- Scheme participants bear expenses for each other;
- Direct or indirect interdependency (affiliation) between the participants of the business split-up scheme (kinship relationship, membership in governing boards, subordination, etc.);
- Formalistic rotation of personnel between scheme participants without changes in their official duties;
- Controlled persons own no fixed or current assets, human assets;
- Scheme participants use the same signs, identification, contacts, website, actual location addresses, premises (offices, storage and supply facilities, etc.), banks for opening and keeping settlement accounts, cash register equipment, access points, etc.;
- The sole supplier or buyer for one of the scheme participants is either the other scheme participant, or all scheme participants have the same suppliers and buyers;
- Actual management over scheme participants is performed by the same persons;
- Common for scheme participants services on bookkeeping, HR record management, recruitment, search for suppliers and buyers and work with them, legal support, logistics, etc.;
- Representation of arrangements with state authorities and other counterparties (not involved in the business split-up scheme) is performed by the same persons;
- Performance results, e.g. the number of personnel, occupied space and income amount, are close to limits restricting the right to apply special tax systems;
- Taxpayer’s accounting records, including newly established companies, may indicate decreasing production profitability and profit;
- Distribution of suppliers and buyers between scheme participants on the basis of applied tax systems.
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:
- Crediting clients’ accounts with money from numerous other residents coming from accounts opened at the banks of the Russian Federation with their further debiting;
- Debiting accounts within two days from the day of money crediting;
- Regularly conducted (generally, on a daily basis);
- Conducted for a long period of time (generally, for at least three months);
- Client’s activities in terms thereof crediting and debiting are carried out entail no obligations for the account holder to pay taxes, or the tax burden is minimal;
- The account for the abovementioned transactions is either not used for tax payments or other obligatory payments to the budget of the Russian Federation, or those payments are insignificant compared to the scope of account holder’s activities.
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:
- The account is not used for the payment of salaries to client’s employees and associated payments of personal income tax and insurance contributions, or such payments do not correspond with the average number of client’s employees and/or indicate the understatement of actual salary sizes (taxable base);
- Payroll budget of client’s employees is lower than the official living wage;
- The account is used to pay personal income tax, but is not used for insurance contributions;
- Account balance is either null or insignificant compared to the scope of account transactions normally conducted by the client;
- Reasons for payments made from the client’s account do not correspond with the expenses typical for business entities that carry out activities specified by the client upon opening/keeping the account;
- There is no connection between the reasons for prevailing crediting of the client’s account and reasons for its further debiting;
- There is an abrupt increase of turnover on the client’s account, exceeding maximum turnover to the one specified by the client upon opening (keeping) the account;
- The account is not used for payments in the current conduct of client’s activities (e.g. rentals, utility payments, office expenses, etc.);
- The client’s account is credited by counterparty buyers under contracts for goods and services with VAT deductions and almost fully debited by the client to counterparties for VAT-free items (transactions of goods sales, service provision, securing obligations, granting of loans, scrap sales). That notwithstanding, with similar business activities of other clients upon the specified structure of income and outcome payments, VAT amount payable should come close to VAT amount recognized in credits for VAT transactions.
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.
The tax advantage is defined as the reduction of the tax burden due to tax base reductions, granted tax deductions, tax benefits, application of lower tax rates, and the granted right for tax refund (credit) or tax reimbursement from the budget.
February 10, 2018
The New Year brought numerous changes, particularly in taxation. Changes were introduced to various chapters of the Tax Code of the Russian Federation, i. e. Corporate Profit Tax, Personal Income Tax, Simplified Tax System, Insurance Premium, Property Tax and many others. This article will cover those amendments that apply to the majority of legal entities and individuals in the Russian Federation.
February 10, 2018
In autumn, potential changes began to shape up, and by the end of the year the State Duma received the draft law On Amendments to the Federal Law on Foreign Exchange Regulation. The key interest of these amendments was the status of the foreign exchange resident and the expanded list of authorized foreign exchange transactions.
February 10, 2018
At the end of the passing 2017 year, the Supreme Court of the Russian Federation held a plenary session and adopted Resolution of the Supreme Court of the Russian Federation Plenum No. 53 dated December 21, 2017 on the matters of subsidiary liability for people with significant control over the debtor upon bankruptcy.
February 10, 2018
Under the current legislation, any crime is punished with the criminal liability. However, crimes pose different levels of danger to the community, e. g. some crimes endanger lives and well-being, and their consequences are often impossible to compensate, while others endanger state economic interests and assets, and damages imposed thereby may be compensated.
February 10, 2018
In 2015 and 2016, several cases based on pricing regulation norms were already heard by arbitration courts, however, they mainly covered either rights of local tax authorities to apply provisions of transfer legislation when proving unjustified tax advantages, or conditions of qualifying parties as interdependent.
February 10, 2018
On December 20, 2017, Congress passed the Tax Cuts and Jobs Act of 2017 (TCJA), and President Trump shortly thereafter signed it. This law, most of which will become effective as soon as January 1, 2018, dramatically changes the tax environment of the United States.
February 10, 2018
Fast development of the Armed Forces of the Russian Federation in recent years would have been impossible without the systematic renewal of the existing outdated equipment, which, in turn, required multi-million state budget injections as part of the Armaments 2020 priority procurement program.
February 10, 2018
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