The Supreme Court (SC) of the Russian Federation has expanded the possibilities of applying tax reconstruction, having found it unacceptable to charge a business with additional income tax and VAT in a larger amount than would have been payable without abuse on its part. If the company in the documents inflated its costs for the purchase of goods through “technical” companies, and the tax authorities had information about the actual supplier, they may require additional payment only for the amount of the markup. Lawyers call this decision a “New Year’s gift for taxpayers,” but warn that it will only work if the real supplier has faithfully fulfilled its obligations to the budget.
Kommersant analyzed the determination published by the Supreme Court on the evening of December 16 on the issue of tax reconstruction, and came to the conclusion that it could change the current approach of the tax authorities to the amount of additional charges for the use of “gasket firms”. A precedent-setting position for practice was expressed in the framework of a dispute in which OOO Spetskhimprom challenged the decision of the Moscow Inspectorate No. 27 based on the results of the audit for 2014-2016.
In June 2019, the tax authorities demanded that the LLC pay an additional 38.9 million rubles. income tax, RUB 39.6 million VAT and RUB 42 million. interest and fines. The claims were related to the fact that Spetskhimprom actually bought the goods from NPP Altayspetsprodukt JSC, and according to the documents, it was allegedly supplied by Polyflok LLC and ChemTrading LLC at a higher price. The latter firms did not conduct real activities, they were managed by nominee directors, and their payments to the budget were “insignificant in comparison with turnover.” The difference in price was displayed in fly-by-night firms. The tax authorities recognized Polyflok and ChemTrading as “technical companies”, thanks to which Spetskhimprom received an unjustified tax benefit by overstating its expenses and VAT deductions.
An appeal against additional charges in the FTS administration in Moscow did not yield any results, and the LLC applied to the arbitration court, but lost there too. The courts of three instances considered the company’s actions unlawful and rejected its request to apply “tax reconstruction”, considering that the inspectorate had determined the amount of arrears correctly. “Spetskhimprom” complained to the Armed Forces and succeeded in transferring the dispute to the economic board, which canceled the decisions of lower instances.
The Supreme Court referred to the position of the Constitutional Court, which obliged the tax authorities to take exhaustive measures to establish the “actual size of the taxpayer’s tax liability” in order to exclude the imputation of tax to him “in an amount greater than that established by law.”
Obtaining an unjustified tax benefit should be suppressed, the board admitted, but business abuses should not lead to additional tax arrears, “exceeding the treasury losses from non-payment of tax,” otherwise it becomes a sanction.
With regard to transactions with the use of “technical” companies, the possibility of applying tax reconstruction presupposes the search for an actual executor in order to get the actually completed transactions out of the shadow circulation. And if the tax authorities have information about the real supplier of goods, who at the same time paid their taxes, then additional arrears should be charged on the amount of the “gasket firms” markup, explained the Sun. In this dispute, the inspectorate knew about the difference in prices and about the real supplier, but “did not take this information into account, which could lead to an arbitrary overestimation of taxes, penalties and fines,” the board concluded. The case was sent for new consideration for the courts to correctly calculate the amount of arrears.
Tax reconstruction enables the taxpayer to restore valid tax liabilities for a situation as if no “technical” companies were used in the supply chain, explains Aleksandr Ovesnov, lawyer of the PKF MEF tax litigation practice. He believes: “The decision of the Supreme Court on” Spetskhimprom “opens up opportunities for reconstruction, even if the tax authorities during the audit reveal intent in the actions of the taxpayer, as is often the case.”
Until recently, there were different approaches in practice, up to a complete refusal to take into account the costs of transactions with “technical”, says Alexei Artyukh, partner at Taxology. “But if the tax audit established that the real delivery of the goods was carried out, for example, by a large plant, then it is unfair to deny the buyer the full costs and deductions for such a transaction,” he said. In the letter of the Federal Tax Service dated March 10, Mr. Artyukh continues, for the application of the reconstruction there was a condition that the taxpayer himself must disclose the real supplier. However, it follows from the new decision of the Supreme Court that information about the actual supplier can be obtained by the inspection from any sources, not necessarily from the taxpayer, draws attention to Alexander Ovesnov.
This approach can be used in the acquisition of not only goods, but also works and services, lawyers say.
Moreover, the Armed Forces made it possible to apply reconstruction to VAT as well, “which earlier taxpayers could not even dream of,” says Alexander Ovesnov. Mr. Artyukh confirms that the VAT reconstruction “was first heard at the highest judicial level.”
“Although the case has been sent to the second round, the decision of the Supreme Court looks like a small New Year’s gift for many taxpayers in the country,” concludes Alexander Ovesnov. However, it is worth noting that the position of the Supreme Court presupposes accounting for the costs of the actual executor of the transaction only if he himself acted legally and fulfilled his obligations to the budget. “If the real supplier has not paid taxes on its operations, then this will not help the buyer,” warns Mr. Artyukh.
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