Legislation Changes

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.