Russia: Tax Control Trends
By Irina Orlova-Panina, Nektorov, Saveliev & Partners
Russian tax authorities started to apply rules introduced in 2017 that establish the limits by which taxpayers can reduce their tax base. Now more efforts should be made by taxpayers to prove the “good faith” of their counterparties and business substance of the transactions. Taxpayers should proactively mitigate tax risks for previous and future tax periods.
On 19 August 2017, amendments to the Russian Tax Code that changed the rules by which taxpayers prove their right to account expenses (offset VAT) on transactions with counterparties were introduced (new article – Article 54.1).
The new rules do not allow reduction of a tax base as a result of misrepresenting transactions and taxable items. Presuming there are no misrepresentations, taxpayers may reduce their tax base when two conditions are both met:
- The transactions are not primarily aimed at reducing tax liabilities; and
- Obligations specified in a contract were discharged by the counterparty, or performance of the obligations was assigned to other party in a statutory or contractual manner.
It is important that Article 54.1 is applicable to contracts concluded before Article 54.1 was introduced.
The new rules require that taxpayers make sure that their counterparties can perform a contract (e.g., in the case of construction, have necessary human, machinery, and other resources, etc.).
Previously, the tax authorities and courts allowed for expenses to be accounted at their fair value if a transaction was performed, without identifying its performer. Under Article 54.1, in the opinion of the Russian tax authorities, this approach no longer works. If the performer is not identified, then accounting for the expenses (VAT offset) is impossible. At the end of 2019 and in the beginning of 2020, courts started to support this approach and refuse to apply “fair value” criterion.
Now taxpayers should figure out how to mitigate tax risks for prior periods open for tax audit and take actions to shape relations with their counterparties to decrease tax risks in the future. What should be done:
- Updating internal policies and procedures governing relations with counterparties in accordance with Article 54.1 and recent case law trends. Using tech solutions to decrease “human factor” mistakes.
- Compiling defence files for major transactions.
Irina Orlova-PaninaGGI member firm
Nektorov, Saveliev & Partners
Law Firm Services
T: +7 495 646 81 76
Nektorov, Saveliev & Partners is a law firm established in 2006 in Moscow, Russia and focuses on providing comprehensive legal solutions to corporate and private clients under Russian and English law. Their main practice areas are public-private partnership, tax, corporate and M&A, arbitration and litigation, banking and finance, investments, and real estate. They provide legal support to clients in Russia, CIS countries (Belarus, Kazakhstan, Ukraine), and worldwide.
Irina Orlova-Panina specialises in tax dispute resolution (prelitigation and litigation).
Published: International Taxation Newsletter, No. 12, Spring 2020 l Photo: vvoe - stock.adobe.com