The Letter of the Federal Tax Service of Russia (FTS) No. BV-4-7/3060@ dated 10/03/2021, issued in followup of the monitoring process of law enforcement and litigation, provides new clarifications on the application of the Article 54.1 of the Tax Code of the Russian Federation (TC RF), which stipulates the right of the tax authorities to alter the legal qualification of the taxpayers’ transactions, their status and the nature of their businesses; it establishes the criteria for assessment of the transactions for taxation purposes.
The aim of this document of the FTS is to contribute to combating the abuse in the area of formal document flow, in cases when companies do not operate in the market, or when these are so-called ‘technical’ companies. Most often, they are shell companies.
In particular, tax authorities are supposed to establish not only the facts of default by competent persons, but also the circumstances indicating the intended reduction of tax liabilities by tax payers. Such circumstances may include the data that the taxpayer knew or could have known in advance that their counterparty is a ‘technical’ company.
The legal positions regarding the selection of counterparties and their assessment for tax purposes are set out in paragraph 31 of the Judicial Review of the Presidium of the Supreme Court of the Russian Federation dated 16/02/2017 and in the rulings of the Supreme Court of the Russian Federation No. 309-ES20-17277 dated 25/01/2021 and No. 305-ES19-16064 dated 28/05/2020.
The mechanism for overstating the costs incurred and, therefore, reducing the tax base lies in embedding 'technical' companies in between the taxpayers and the persons who actually settle the transactions.
The tax authorities are recommended to calculate the actual amount of the taxpayers’ liabilities if such tax optimization methods are detected, i.e. it implies additional tax assessment that should have been paid in the absence of abuse.
The tax authorities have been instructed that VAT compliance expenses and credits for such operations under dispute should include the facts established via use of:
- information and documents submitted by taxpayers themselves;
- data obtained during tax control;
- requested documents or information about specific transactions from suppliers, contractors, and providers who actually settled the transactions.
In cases of the absence of relevant information and supporting documents, taxpayers do not have the right to apply tax deductions and record expenses incurred on transactions under dispute.
Thus, if in the absence of the above-mentioned evidence, via the analysis of the specifics of counterparties and the terms of transactions by tax authorities, it shall be established that the transactions do not comply with the terms of business practice, it can be concluded that taxpayers should have known in advance about the transactions with ‘technical’ companies.
Information agency Credinform has prepared a review of trends in activity of Russian food wholesalers.
The largest wholesalers (ТОP-1000) in terms of annual revenue were selected according to the data from the Statistical Register and the Federal Tax Service for the latest available periods (2014 - 2019). The company selection and analysis were based on data of the Information and Analytical system Globas.
The largest company in terms of net assets is JTI Russia LLC, INN 7703386329, Moscow, wholesale of tobacco products. In 2019 net assets of the company amounted to more than 48 billion RUB.
The smallest size of net assets in TOP-1000 had OOO TD DMITROGORSKII PRODUKT, INN 6911023162, Moscow region, non-specialised wholesale of food, beverages and tobacco. The company is in process of reorganization in the form of acquisition of other legal entities since 02.11.2020. The lack of property of the company in 2019 was expressed in negative terms -1,5 billion RUB.
For the last ten years, the average industry values of net assets showed the increasing tendency with growing dynamics of growth rates (Picture 1).
For the last six years, the share of ТОP-1000 enterprises with lack of property had the positive decreasing trend (Picture 2).
In 2019, the total revenue of 10 largest companies amounted to 41% from ТОP-1000 total revenue (Picture 3). This fact testifies the high level of monopolization in the industry.
In general, the decreasing trend in sales revenue with positive dynamics of growth rates is observed (Picture 4).
Profit and loss
The largest company in terms of net profit is also JTI Russia LLC, INN 7703386329, Moscow, wholesale of tobacco products. In 2019 the company’s profit amounted to more than 25,5 billion RUB.
For the last ten years, the average profit values show the growing tendency with the positive dynamics of growth rates (Picture 5).
Over a six-year period, the average net profit values of ТОP-1000 show the growing tendency, along with this the average net loss is increasing (Picture 6).
Main financial ratios
For the last ten years, the average values of the current liquidity ratio were within the recommended values - from 1,0 to 2,0, with growing trend (Picture 7).
Within ten years, the decreasing trend of the average values of ROI ratio is observed (Picture 8).
For the last ten years, this business activity ratio demonstrated the decreasing trend (Picture 9).
55% of ТОP-1000 companies are registered in the Unified register of small and medium-sized enterprises of the Russian Federal Tax Service. Herein, their share in TOP-1000 total revenue is 10,8%, which is almost twice lower than the national average value in 2018 – 2019 (Picture 10).
Main regions of activity
TOP-1000 companies are registered in 78 regions of Russia and are unequally located across the country. Almost 62% of the largest enterprises in terms of revenue are located Moscow region and Moscow (Picture 11).
Financial position score
An assessment of the financial position of TOP-1000 companies shows that the largest part has the above average financial position (Picture 12).
Solvency index Globas
Most of TOP-1000 companies got superior/high and strong/medium Solvency index Globas, this fact shows the ability of the companies to meet their obligations in time and fully (Picture 13).
A complex assessment of food wholesalers, taking into account the main indexes, financial ratios and indicators, demonstrates the presence of positive trends within 2010-2019 (Table 1).
|Trends and assessment factors||Relative share, %|
|Dynamics of average net assets value||10|
|Growth/drawdown rate of average net assets value||10|
|Increase / decrease in the share of enterprises with negative net assets||10|
|The level of capital concentration||-10|
|Dynamics of average net profit||-10|
|Growth/drawdown rate of average revenue||10|
|Dynamics of average profit (loss)||10|
|Growth/drawdown rate of average profit (loss)||10|
|Increase / decrease in average net profit of companies||10|
|Increase / decrease in average net loss of companies||-10|
|Increase / decrease in average values of current liquidity ratio||10|
|Increase / decrease in average values of ROI ratio||-10|
|Increase / decrease in average values of assets turnover ratio, times||-10|
|Share of small and medium-sized businesses by revenue more than 22%||-10|
|Financial position (the largest share)||10|
|Solvency index Globas (the largest share)||10|
|Average value of factors||1,8|
favorable trend (factor), unfavorable trend (factor)