Changes in the assessment of good faith of taxpayers' actions by the Federal Tax Service

The letter of the Federal Tax Service (FTS of the RF) №ED-5-9/547@ «On the Identifying Circumstances of Unjustified Tax Benefit» from 23.03.2017 provides recommendations on the implementation of tax control in order to identify facts of receiving of unjustified tax benefit by taxpayers.

Legal, economic or other forms of the controllability of counterparties, including mutual dependence of taxpayer’s counterparties, can be regarded by tax authorities as willful acts of such taxpayer in order to obtain unjustified tax benefit. Conducting transactions with a troubled counterparty or organizing a formal document flow of the chain of dependent counterparties can be recognized as methods of obtaining of such benefit.

If the taxpayer's control over its counterparties is not proven, tax authorities will examine the actions of the taxpayer himself for good faith when choosing counterparties.

At the same time, the denial by an authorized person of the fact of signing the documents on behalf of the counterparty cannot be regarded as the fact that the taxpayer doesn’t use caution when concluding a transaction.

This also cannot be the reason for recognizing of the tax benefit as unjustified.

When analyzing the rationale for choosing of one or another counterparty, tax authorities are instructed to study such questions as:

• how different was the choice of a counterparty from conditions of the normal course of business or the practice of choosing counterparties that was established by the taxpayer himself;
• as the taxpayer has assessed:
  • conditions of transactions and their possible commercial results,
  • business reputation and solvency of counterparties,
  • the risk of non-fulfillment of obligations by counterparties,
  • the availability by contractors of necessary and sufficient resources (production facilities, manufacturing equipment, skilled staff) and relevant experience in the performance of work or services;
• whether the taxpayer has given the priority to counterparties, which do not fulfill their obligations to pay taxes and fees. The tax authorities are required to request from taxpayers documents and information on their actions when choosing a counterparty.

Previously, following regulatory documents of the Federal Tax Service of RF were devoted to this topic:

The letter №3-7-07/84 from 11.02.2010 determines that in order to exercise «due diligence and caution» taxpayers can apply to their counterparties, with whom it is planned to enter into contractual relations with a request to provide copies of a number of documents.

The letter №ED-4-2/4124 from 16.03.2015 recommends at the stage of choosing counterparties to check their legal status and business reputation, thereby exercising «due diligence». At the same time, the availability of an extract from EGRUL by a counterparty confirms only the fact of its state registration in accordance with the established procedure. Its obtaining cannot automatically be considered as the confirmation of exercising «due diligence and caution» of a taxpayer when choosing a counterparty. At the stage of selecting suppliers the FTS of the RF recommends taxpayers to study the combination of signs that indicate a high degree of risk of cooperation provided for by the Order of the FTS of the RF № MM-3-06/333@ from 30.05.2007.

To carry out a comprehensive verification of counterparties in an automatic mode and in accordance with the requirements of the FTS of the RF and other authorities, is allowed by the Information and Analytical system Globas-i® The System help realize in practice the concepts «compliance» and «due diligence».