New service from the Federal Tax Service. Individual assessment of tax risks

By Elena Rybnikova, Head of Internal Audit, Expertise and Methodology Department

The Federal Tax Service intends to launch in 2017 a new online service that will make it easier for companies to check new counterparties and identify shady partners, affiliated entities and fly-by-night companies. This will help companies decrease the risk of additional charges of taxes which are imposed when partners are identified as sham companies.


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Elena Rybnikova
Head of Internal Audit, Expertise and Methodology Department

Over the past decade, disputes over unjustified tax benefits received by taxpayers as result of transactions with dishonest counterparties have ranked first among tax disputes both in terms of their number and amounts. Moreover, a claim can refer to counterparties of the second, third and even fifth level.

The service proposed by tax authorities is currently at the stage of development of requirements so taxpayers can still have the opportunity to have a say by expressing their opinion on the relevance and appropriateness of this new service and putting forward possible improvements.

We will review below a list of assessed risks, the pros and cons of this new service as well as give some recommendations.

List of assessed risks:
  1. Imposition of penalties;
  2. Blocking of accounts;
  3. Rejection of VAT deductions;
  4. Rejection of VAT refund;
  5. Rejection of tax benefits (duties, insurance contributions);
  6. Additional taxes (duties, insurance contributions);
  7. Understatement of revenues for tax purposes;
  8. Unjustified deduction of expenses for tax purposes;
  9. Involvement in tax evasion scheme;
  10. Unjustified tax benefit;
  11. Undue diligence;
  12. Shortlisting for tax control measures.
Federal Tax Service Letter N ED-4-15/16007 dated August 14, 2017 about sending proposals for issues of publication of information on risks in taxpayers’ online account

Pros

  1. The risks assessed by state authorities can be viewed in taxpayers’ online account. This should allow decreasing the risk of claims from the Federal Tax Service as well as the risks of additional taxes and imposition of penalties.
  2. There will be less demand for tax advice from auditors, tax experts and other consultants.
  3. The list of assessed risks is fairly broad. In our opinion, it would make sense to add the changes in risk assessment for companies (for example, over a period of 3 years).
So, upon conclusion of contracts, companies could submit to their counterparties not only a tax clearance certificate from the Federal Tax Service, but also a positive statement of tax risk management or a statement of complete absence of such risks. Such additional assessment will increase the level of due diligence upon conclusion of contracts and transactions.

Cons

  1. The implementation of this “general idea” seems at this stage negative. A full business analysis, i.e. all payables and receivables (whole cycle, not only on a cutoff, date of financial statements) is indeed necessary to provide tax advice to a particular company. Conducting a full company analysis only based on data from tax and accounting reporting is not quite right.

    And this gives rise to the following question: the analysis of the Federal Tax Service will be limited, so will taxpayers be able to use it for business planning? Or is the Federal Tax Service planning to introduce total control over every business aspect? But this would be more like encroachment even when dealing with legal entities (and if we consider intellectual property, then this would already be encroachment on the private life of individuals). Such development will not, in our opinion, be favorably received in the Russian Federation.

  2. Another question arises about the analysis process. Yes, it is possible to develop a software which considers control tax ratio. Yes, it is possible to compare the dates of tax payments made by companies (many pay on the last day), to crosscheck detailed tax invoices and currency transactions. However, no software will be able to assess in detail the risks of penalties or of understatement of revenues. Reviewing tax returns and balance sheets will only result in a superficial risk assessment which will not be relevant for every company. 
The Federal Tax Service will be able to fully assess risks not based on received reports but only after tax audits. Since the Federal Tax Service does not physically check every year all companies in Russia, any assessment will be superficial so its relevance is reduced especially on the back of a recent presidential decree which has decreased the number of audits to be conducted by tax authorities.

Recommendation

As part of the discussion of the initiatives of the Federal Tax Service for development of the abovementioned new service, we recommend:
  1. Expressing an opinion on the relevance and appropriateness of the new service;
  2. Assessing its potential effectiveness for using the information about identifiable risks (particular, on the controller’s side).

You can send your opinions directly to the Federal Tax Service, the Ministry of Finance or to us, and we will compile and forward them to the Federal Tax Service.

How we can help

  1. We can conduct an expert analysis of tax risks for your business in general.
  2. We can assist with ambiguous interpretation of tax laws.
  3. We can conduct a performance assessment of accounting department with the help of Effective Accounting Model.