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How do I check the supplier?

Roman Shishkin, assistant to the President of ICA “Filippov and partners”, talks about how to distinguish between responsible and law-abiding contractor from unfair: whether it is necessary to request documents certifying the official status of the company and whether to verify the business transactions
Due diligence in selecting a counterparty is Central to assessing the company’s tax risks. For a long time, the Central document that defined for many years the vector of the practice of conducting tax audits and evaluating arguments claimed by courts in tax disputes was The resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of October 12, 2006 N 53 “on the assessment by arbitration courts of the validity of the taxpayer’s tax benefit”. In paragraph 1 of this resolution, the tax benefit is proposed to be understood as a reduction in the size of the tax liability, due to, in particular:
reducing the tax base;
receiving a tax deduction;
receiving a tax benefit;
applying a lower tax rate;
obtaining the right to a refund (set-off) or refund of tax from the budget.
The resolutions of the Presidium of the Supreme court of the RUSSIAN Federation of June 30, 2009 N 2635/09 and of February 25, 2010 N 12670/09 specify that the said resolution was adopted in order to establish uniform judicial practice in cases with signs of tax evasion.

The determining factor for recognizing a tax benefit as unjustified is the failure of the organization to exercise due diligence and caution in selecting counterparties.

The taxpayer is obliged to exercise due diligence, since the negative consequences of working with unscrupulous contractors (contractors who do not pay taxes) can not be transferred to the state (Definition of the armed forces of the Russian Federation from February 14, 2017 No. 305-KG16-20849).

The organization must exercise the necessary care when making transactions. Due to the fact that, according to the legislation on accounting, one of the main tasks of accounting is to generate complete and reliable information about the organization’s activities and its property status, which is necessary for internal users of accounting reports — managers, founders, participants and owners of the organization’s property, as well as external investors, creditors and other users of accounting reports. However, since the civil law does not specify otherwise, in order to reduce the risk of adverse consequences (including both civil and tax consequences), the taxpayer is not deprived of the right to request financial statements from its counterparties and must analyze them when making a decision about the possibility of working with the counterparty.

Also, before making a transaction, the taxpayer is not deprived of the right to request evidence from its counterparties confirming the accuracy of the information set out in the submitted documents, including — check the legal status of the organization, its business reputation in the market, request from the counterparty under the contract evidence and documents confirming its actual activities, information about the number of employees, a copy of the lease agreement or other documents confirming the presence of the counterparty at the address stated in the contract, invoice and other documents necessary for registration; as well as documents confirming the authority of its representative and Manager.

Failure to perform these actions, in the opinion of the auditors, may indicate that the company did not take care to check the reliability and integrity of its counterparties when concluding transactions.

The second criterion is the reality of economic operations.

In terms of disputes about reality, the courts have ceased to formally approach the assessment of the taxpayer’s actions. Currently, in order to confirm the reality of financial and economic operations, it is not enough to simply submit a standard set of primary documents (for delivery: contract, UPD).

Significant changes in approaches to assessing the tax consequences of working with contractors occurred on August 19, 2017, when article 54.1 of the tax code of the Russian Federation came into force. The provisions of this article provide for a ban on reducing the taxpayer’s tax base and (or) the amount of tax payable as a result of misrepresentation of information about facts of economic life (a set of such facts), about tax objects that are subject to reflection in the tax and (or) accounting or tax reporting of the taxpayer.

Examples of such distortions are given in the Letter of the Federal tax service of Russia dated 31.10.2017 N ED-4-9/22123@, in particular, it is noted that tax reporting data are unreliable when identifying such facts as:
“fragmentation” of the business to use the regimes;
artificially creating conditions under which you can take advantage of a reduced rate, benefit, or otherwise be exempt from taxation;
use of illegal schemes for applying international agreements on avoidance of double taxation.
In this case, as specified in paragraph 2 of article 54.1 of the tax code, the taxpayer has the right to reduce the tax base and (or) the amount of tax payable if the following conditions are met simultaneously:
The main purpose of the transaction (operation) is not non-payment (incomplete payment) and (or) offset (refund) of the tax amount.
The obligation under transaction (transactions) performed by a person who is a party to the contract concluded with the taxpayer, and (or) the person to whom the execution of the transaction (operation) are transferred by agreement or operation of law.
Thus, in the context of current realities, the taxpayer must make sure and check before entering into the contract with what forces and resources the counterparty plans to execute the concluded transaction.

Commenting on this rule, the Federal tax service of Russia in a Letter dated August 16, 2017, no. CA-4-7/16152@ explained that in order to apply it, it is necessary to prove not only the fact that there is a potentially “unfair” counterparty in the chain, but also the intent of the taxpayer being audited, aimed at purposefully creating conditions for obtaining unjustified tax benefits.

The existence of such intent may be evidenced by established facts:
legal, economic and other control, including on the basis of the interdependence of the disputed contractors to the taxpayer being audited (in this case, both legal and actual interdependence will be considered (for example, through the presence of former employees/relatives in the state of contractors, etc.).);
established facts of transit operations between interdependent or affiliated participants in related business transactions, including through intermediaries using special forms of settlements and payment terms (to prove this feature, p/s statements will be analyzed, the main goal is to establish a “loopback” in the cash flow (return to the audited taxpayer) or their receipt by a person controlled by the audited taxpayer;
circumstances that indicate the consistency of actions of participants in economic activities, etc. (for proof, first of all, testimony will be used).
Thus, when classifying interactions with potentially “unscrupulous” contractors as unjustified tax benefits, the tax authority will prove the existence of interdependence and intent. Similar recommendations were previously voiced in a Letter from the Federal tax service of Russia dated 23.03.2017 and a joint letter with the RF IC dated 13.07.2017 and are now enshrined at the legislative level in the tax code of the Russian Federation.

The introduction of the new rule actually called into question the approach of the constitutional court of the Russian Federation, which in a number of documents (for example, the Definition of N 138-O from 25.07.2001) indicated that the presumption of good faith of taxpayers is valid in tax relations and that the duty to prove the taxpayer’s bad faith when transferring funds to the budget lies with the tax authority.

Tax authorities have the right to systematically inform taxpayers about those banks that should not be used to transfer tax payments, as well as to encourage conscientious taxpayers to fulfill their tax obligations and prevent cases of abuse when choosing a Bank to transfer taxes to the budget, to make demands to taxpayers to withdraw their settlement documents for tax write-off.

As recommendations for taxpayers to minimize their risks, we can note the following main points that the taxpayer should check.

Thus, when concluding a delivery contract, the company should pay attention to the following main points:
Confirmed fact of registration of the counterparty.
The supplier is not in bankruptcy or liquidation.
There is no sign of “mass character” in relation to the General Director and the address of the state registration.
Availability of OKVED relevant types of proposed activities.
Information about the availability of own / engaged vehicles that will be used to deliver the goods.
Availability of storage facilities for storing products.
Availability of necessary personnel (storekeepers, installers, etc.)
The choice of the counterparty should be given special attention in building the taxpayer’s security system, since the refusal of the tax authorities to accept income tax expenses and VAT deductions can lead to disastrous consequences.

To strengthen its position, the company can also organize a tender between potential partners for the conclusion of an agreement, as well as introduce regulations for the selection of suppliers in the organization’s activities.

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