THE FEDERAL TAX SERVICE CLARIFIED ON THE RULES FOR COMBATING FICTITIOUS TRANSACTIONS
18/03/2021
The Federal Tax Service issued a Letter dated 10.03.2021 No. BV-4-7/3060 where it provided extensive explanations on how to apply the provisions of Article 54.1 of the Russian Tax Code (hereinafter “art. 54.1”). These comments were long-awaited by the taxpayers due to controversial interpretation of the said article, numerous discrepancies, excesses and formalism on the part of the local tax inspectorates.
In practice, this letter will be used by both the tax inspectors when performing tax audits and the taxpayers when checking their business partners before entering into any agreement and/or when facing a tax audit.
The clarifications of the Federal Tax Service may be summarized as follows:
- Art. 54.1 applies only in cases where damage has been caused to the budget;
- Four criteria shall be assessed when evaluating a transaction for tax purposes: (i) reality of the transaction, (ii) performance of the obligation by the proper party, (iii) real economic meaning of the transaction, (iv) existence of a business purpose;
- Fictitious transactions shall not be taken into account for tax purposes, other criteria in their respect shall not be evaluated. Real transactions shall be further evaluated in the light of other criteria;
- In case of distortion by the taxpayer of information about the facts of economic life and taxable basis, proper legal qualification of transactions is made on the basis of their true economic content, and taxes are additionally charged as if the taxpayer did not commit violations;
- If the taxpayer entered into a questionable transaction deliberately (whether intentionally participated in the tax scheme (direct intent) or knew about the counterparty's defects (indirect intent)), the taxpayer can expect a reconstruction of tax consequences (deduction of expenses for profit tax purpose based on the documents of the real supplier/contractor), only if the taxpayer discloses information on the real supplier/contractor during tax audit (or when filing objections to the tax audit act). The penalty for this offense will amount to 40% of unpaid tax amount;
- If, when entering into a questionable transaction, the taxpayer did not meet due diligence standards (acted without intent), the taxpayer should be able to deduct the expenses, if demonstrating their compliance with the market value, and VAT on the basis of information on the real supplier/contractor available from the tax authorities and/or obtained with the assistance of the taxpayer. The penalty for this offense will amount to 20% of unpaid tax amount;
- If the real supplier/contractor remains unknown, the taxpayer will be unable to deduct VAT;
- Due diligence standards: the degree of verification of the counterparty depends on the subject-matter, amount and importance of transaction, possible risks, etc. The taxpayer shall be proactive and evaluate business reputation, solvency and performance capabilities of the counterparty before concluding a transaction (i.e. position on the market, availability of advertising, professional experience, effectively executed contracts, existence of office, industrial site, subcontractors, etc.).
This document provides general information on the subject and does not constitute a legal opinion or recommendation. Consulting a specialist is recommended before taking an action. No claim arising from the content of or relating to this document can be asserted against NAZALI.