Taxes: being optimized or charged
Amendments in legislation stimulates the search for new ways of checking counterparties.
Counterparties check is now not the only ground for obtaining tax benefit. How to carry out due diligence if the law prescribes cases when a company can receive a tax refund?
Referring to the Ruling No. 53 of the Plenum of the Supreme Arbitration Court of the Russian Federation of 12 October 2006 “Concerning the Evaluation by Arbitration Courts of the Legitimacy of the Receipt by a Taxpayer of a Tax Benefit”, entrepreneurs and the FTS kept to the due diligence trend for over 10 years.
The Article 54.1 of the Tax Code of Russia entitled “Limits on the Exercise of Rights Relating to the Calculation of the Tax Base (or) the Amount of a Tax, a Levy or Insurance Contributions”, that came into force in August 2017, sets the standards for obtaining tax rebate. The first one - optimization of tax liabilities is not a part of transaction; the second one – the counterparty fulfills the obligations.
In general, the Article 54.1 is a try to formalize a concept of unreasonable tax benefit legislatively.
The Article provides prohibition on tax refund after deliberate misrepresentation by a company of facts about business activity and objects of taxation.
Case studies of “misrepresentation”:
- «split-up» of business to misuse special taxation regimes;
- unreality of settlement of a transaction by the parties;
- concealment of actual income by a taxpayer, designedly unreliable information about the objects of taxation
Signs of unreasonable tax benefits:
- transaction does not have a reasonable explanation from the point of view of economic necessity. For example, joining a company with an accumulated loss without assets in the absence of an economic justification;
- fact of cashing out of funds by a company or interdependent person, fact of using such funds for needs of a company, founders, officials, the use of the same IP addresses, detection of seals and documentation of the counterparty in the territory of the audited company;
- atypical workflow, business practice mismatch of transaction participants, officials.
Obligation under the transaction must be fulfilled by the counterparty declared in the contract, not by any "third person".
For the first time this point of law directly focuses on the need to verify the execution of transaction by the counterparty specified in the contract. The counterparty's reliability is easy to find in case of tax control: fly-by-night companies usually do not have the necessary staff to fulfill their obligations.
There is a presumption of unreasonable tax benefit as long as the person liable for the contract has not fulfilled obligations thereunder. In other words, if the transaction is real, there are no tax claims against participants. However when the actual executor was a third party, the taxpayer loses the right to receive tax benefits on the transaction.
In essence, this norm fixes an objective imputation of tax offense to the taxpayer, depending on the counterparty’s actions.
Among other innovations - the article contains a proviso that one ought not to deprive the taxpayer of his rights if only because documents on transactions were signed by unidentified persons, or counterparties appeared to be fly-by-night companies, or companies used special tax regimes, benefits or reduced tax rates.
Henceforth, the following economic facts cannot give occasion to tax claims in obtaining unreasonable tax benefits:
- signing of primary accounting documents by unidentified or unauthorized person;
- violation of the tax legislation by the counterparty;
- possibility for the taxpayer to obtain the same result of economic activity when making other transactions (dealings) not prohibited by the law.
The new norm of the Tax Code does not waive responsibility for carrying out due diligence activities from the business; however, additional tools appear for the tax authority to prove the facts of obtaining unreasonable tax benefits by using fly-by-night companies or creating affiliated schemes of interdependent persons. Companies are obliged to verify their counterparties even more thoroughly, and the tax body will look for the facts of possible violations.
The adopted Article 54.1 does not abolish previous anti-fly-by-night companies practice, but expands the ability of tax authorities to identify dubious transactions, and gives business additional motivation to check the counterparty.