Federal Tax Service entitled to void tax returns

By Olga Palkina, Business Development Manger

Tax authorities may initiate a procedure for voiding tax returns if evidence of breach of Article 80 of the Tax Code is found during desk tax audits of VAT and corporate income tax returns. The Federal Tax Service of Russia provided some clarifications in its letter of July 10, 2018 about the prevention of tax law violations (Letter No. ED-4-15/13247).


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Olga Palkina
Business Development Manger

In other words, tax authorities can cancel the reporting of organizations which can be considered fly-by-night companies on a number of grounds. There used to be 109 signs for fly-by-night companies, but tax authorities have significantly shortened this list down to 22 signs. The aforementioned letter of the Federal Tax Service of Russia states that tax inspectors need to find a “number of signs” of fly-by-night company to void tax returns, that is, at least two.

Entry into force

Tax authorities will be able to void tax returns starting from desk audits of VAT returns for the 3rd quarter of 2018 and of annual corporate income tax returns for 2018. It will not be possible to void tax returns of previous periods. It will also not be possible to void tax returns which can no longer be audited due to the expiration of the term for desk tax audit.

Cancelation process

If tax inspectors can prove through tax control measures (interview, inspection, document requisition, expert examination) that a certain company does not engage in actual financial and business activity and shows sign of fly-by-night company, then the procedure for tax return cancelation will be initiated, and the company will receive a notice of void reporting.

The complete procedure for voiding (canceling) VAT and corporate income tax returns is provided in an appendix to letter of the Federal Tax Service of Russia dated July 10, 2018 (Letter No. ED-4-15/13247).

Notification of cancelation

After following the entire procedure for cancelation and selecting the grounds for declaring tax returns void (only 5 altogether) from the program set out by the Federal Tax Service of Russia, tax authorities will have to send within 5 days a notice of void tax return to the offending company. Tax authorities will also be able to freeze the settlement accounts of offending companies within 10 days of completion of the cancelation procedure.

What to do if one of your counterparties has a tax return canceled

If one of your counterparties has a tax return voided, this will be indicated in the VAT Automated Control System, and this will not be – to put it mildly – a good thing for your company. Tax authorities will request explanations and propose that you remit additional VAT voluntarily. In this case, it might be worth finding out from the supplier what ground was used to void its tax return. Each cancelation ground should be analyzed individually and ways of rectifying the situation should be sought out. There might be one or several grounds at play. For example, a tax return could be voided because your counterparty’s company is headed by a fictitious director. In such case, ask your counterparty to promptly change the director details and re-submit reporting.

The main purpose of the letter of the Federal Tax Service (Letter No. ED-4-15/13247 dated July 10, 2018) is to identify fly-by-night companies, and the new procedure will certainly achieve this while at the same inconveniencing the counterparties of fly-by-night companies. In this case, counterparties of fly-by-night companies will not be able to deduct VAT and expenses for profit tax purposes. They will also have to submit revised tax returns and pay additional taxes. Companies need to be ready for this and thoroughly check each new counterparty with which they enter into contracts and complete transactions. Many counterparty check services are available at the moment, and I recommend using them when you select a partner to avoid having all future transactions subject to additional proceedings with the Federal Tax Service and having to pay additional taxes in the future.

Is it possible to challenge tax return cancelation? If so, how?

Tax returns voided on the basis of the letter of the Federal Tax Service of Russia (Letter No. ED-4-15/13247 dated July 10, 2018) have not yet been challenged so this is something to look forward to.

Taxpayers can always file a suit with a state commercial court in their region to challenge the validity of tax authorities’ actions, and the prospect of winning is, in this case, reasonably real. I would also like to note that court practice of the past few years shows that companies often win in court if tax authorities decline tax returns on the grounds listed in Item 28 of the Federal Tax Service administrative order approved by Ministry of Finance Decree No. 99n dated July 02, 2012.

Examples of court decisions rendered in favor of taxpayers:

  • Ural District Commercial Court Ruling No. А60-46912/2017 dated June 27, 2018
  • Tomsk Region Commercial Court Ruling Case No. А67-7436/2017 dated March 02, 2018

It is important to remember that tax authorities have to prove the circumstances evidencing tax offenses and that the offending party was at fault. Moreover, all taxpayers are presumed innocent until proved otherwise (Article 108(6) Russian Tax Code), and companies are entitled to protect themselves and their business as prescribed by law.

Summary

The desk tax audits conducted at the end of the 3rd quarter of 2018 will show how this new system works. But it is necessary to know already now about it and its principles in order to take measures to minimize the risks associated with this new procedure.