Unjustified tax benefit: how to avoid disputes with the tax authorities

The term unjustified tax benefit is widely used by the tax authorities and the courts. If the Federal Tax Service finds signs of an unjustified saving of tax, the business faces field tax audits, additional costs and other problems, up to and including criminal liability.

Where the tax service is able to see an unjustified tax benefit, and how to avoid disputes with the tax authorities, was explained at a webinar by Andrey Rymarev, head of tax practice at Consul Group.

The concept of a "tax benefit" means a reduction in the amount of the tax liability as a result of a reduction of the tax base, a tax deduction, tax relief, the application of a lower tax rate, or a right to a refund or a reimbursement of tax from the budget.

In a number of cases, however, a tax benefit may be held unjustified. An example is a situation in which transactions are taken into account for tax purposes otherwise than in accordance with their real economic substance, or are not justified by reasonable economic or other reasons (business purposes). The main criteria of what makes a benefit unjustified, on which the tax authorities rely, are set out in Article 54.1 of the Tax Code.

One such criterion is an intentional distortion, in the accounts and the reporting, of information about the facts of economic life or about objects of taxation. The Federal Tax Service may, for example, treat as a distortion of the facts of economic life a formal splitting of a business that has no business purpose, or the concealment of the parameters of taxation.

Paragraph 2 of Article 54.1 of the Tax Code covers contracts a company has concluded with "technical" companies. If a taxpayer names particular counterparties, claims deductions in respect of them and includes the costs in expenses for profits tax, there must correspondingly be a real counterparty and a real transaction, under which goods, work or services were in fact received.

Today the tax authorities, even without conducting tax audits, have an effective set of powers to carry out control and analytical work and to identify transactions that involve an unjustified benefit.

What can the tax authorities do without conducting a tax audit?

• Demand documents and information about a particular transaction under paragraph 2 of Article 93.1 of the Tax Code. What is in issue here is a check of a particular transaction, or of a chain of transactions, and not a check of the taxpayer's financial and economic activity.
• Summon a person to the tax authority to give explanations, under subparagraph 4 of paragraph 1 of Article 31 of the Tax Code. The Code provides that the tax authorities may summon a taxpayer to obtain explanations on the calculation and payment of tax. The purpose of such a summons is to point out to the person the tax risks that have arisen in its activity in relation to VAT, and to propose that amended tax returns be filed. In this situation we recommend, above all, remaining in dialogue with the tax service. Ignoring such notices can lead to adverse consequences.
• Use the data of the ASK VAT-2 system, which makes it possible to identify VAT gaps.
• Analyse publicly available information about the taxpayer (including the media); use information obtained in the course of earlier tax-control measures, information received from state bodies, and so on.

The results of the control and analytical work were presented at a meeting of the Public Council under the Federal Tax Service of Russia, at which the results of the Federal Tax Service's work for 2023 were announced. According to the Federal Tax Service, RUB 400 billion reached the budget, and more than half of those receipts, RUB 218 billion, was brought in precisely by pre-audit analysis, that is, taxpayers amended their own liabilities. This made it possible to halve the number of field tax audits.

How a taxpayer can prove that it is not at fault if a counterparty has not met its VAT obligations

Today it is necessary to pay the closest attention to demands for documents or information made outside a tax audit, and to notices inviting the taxpayer to come and give explanations on a particular transaction, so as to rule out the later possibility of a field tax audit being ordered. A taxpayer's failure to give explanations in response to the corresponding requests of the tax authorities is one of the 12 criteria for including a company in the plan of field tax audits.

How can a taxpayer prove that it is not at fault if a counterparty has not met its VAT obligations? First of all, we recommend having to hand the constituent documents of counterparties, and proof of business correspondence and of meetings. If the tax service so requires, provide the contact details of the persons with whom there was contact. Our main recommendation is to adopt a procedure for selecting suppliers, which can justify to the tax service the choice of a particular counterparty. It is the existence of such a procedure that will, where necessary, help to prove that the taxpayer's choice of counterparty met the conditions of ordinary business practice, until the tax authority proves otherwise.

Andrey Rymarev, head of tax practice at Consul Group:

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