Illegal Tax Benefit Disputes
Legal representation in illegal tax benefit disputes with tax authorities
Business activity is directly related to making a profit, however, each business has an obligation to pay taxes to state budgets of different levels. At the same time, the legislator has fixed the possibility of returning a tax overpayment, offsetting taxes paid or receiving a tax deduction, which entrepreneurs successfully use. Along with this, entrepreneurs can receive the so-called “tax benefit”, which is a reduction in costs by reducing the amount of tax. However, it is important to note that the tax authorities are increasingly conducting desk audits in order to exclude the possibility of an entrepreneur receiving tax benefits. You can get tax benefits through:
- VAT refunds;
- reducing the tax base;
- use of the established tax relief;
- registration of overpayment refunds, etc.
To obtain a tax benefit, it is important to justify the grounds for obtaining it, otherwise the tax authority recognizes it as unreasonable and may charge the entrepreneur additional taxes, as well as fines for violating tax laws. Quite often, disputes with the tax authorities about the validity of the tax benefit reach the stage of consideration in court. To protect their interests, entrepreneurs invite qualified lawyers who have knowledge and experience in dealing with tax authorities.
The legislator, in 2017, amended the Tax Code of the Russian Federation, in accordance with which Article 54.1 was put into effect, paragraph 2 of which determined the circumstances when the taxpayer has the right to reduce the tax base and (or) the amount of tax payable. Such circumstances include:
- purpose of the transaction is not non-payment or offset/refund of the amount of tax;
- obligation under the transaction has been fulfilled by a person who is a party to an agreement concluded with a taxpayer and/or a person to whom the obligation to execute the transaction has been transferred under an agreement or law.
At the same time, in their letter of the Federal Tax Service of Russia dated August 16, 2017 No. SA-4-7 / 16152@ “On the application of the norms of the Federal Law dated July 18, 2017 No. 163-FZ “On Amendments to Part One of the Tax Code of the Russian Federation” reflected the following position that when the tax authorities establish the existence of at least one of the two circumstances within the framework of transactions concluded by the taxpayer, the taxpayer should be denied the right to account for expenses incurred, as well as applications for them to deduct/offset VAT in full.
At the same time, paragraph 1 of Article 54.1 of the Code establishes a ban on the reduction by the taxpayer of the tax base and the amount of tax payable as a result of misrepresentation of information about the facts of economic life, about objects of taxation to be reflected in the tax and accounting records or tax reporting of the taxpayer. This norm actually defines the conditions that prevent the creation of tax schemes aimed at illegally reducing tax liabilities, including by not taking into account objects of taxation, illegally declared benefits, etc. As a rule, when determining the validity of a tax benefit, the tax authorities may request documents related to the fact of verifying the reliability of the counterparty, this may be market monitoring in relation to a specific type of work, goods, services, due diligence of the counterparty, business correspondence confirming the request, for example, constituent documents, etc. As evidence, any information confirming that the transaction is not an operation performed for the purpose of obtaining a tax benefit may be suitable.
To be eligible for tax benefits, entrepreneurs must:
- competently draw up primary reporting documents and all financial documentation;
- check counterparties for reliability;
- establish the legal capacity of persons signing documents on the part of the counterparty, etc.
It is important to note that if the benefit is found to be unjustified, the tax authorities may refuse to reduce the tax. This is due to the fact that, having studied all the documents for a particular transaction / operation, the Federal Tax Service will come to the conclusion that the activities of the taxpayer and his counterparty do not meet the criteria for the possibility of obtaining tax benefits. At the same time, if the tax authorities, after an audit, recognize the applied tax benefits as unreasonable, as a rule, a case is brought against the entrepreneur for bringing to administrative responsibility, often in the form of penalties, but if a significant amount of arrears is revealed, for criminal liability. When proving by the tax authorities, sanctions are applied, for example, in the form of:
- additional charges of taxes, penalties and fines;
- for gross violation of accounting rules, bringing to responsibility in the form of a fine;
- for failure to provide information required for tax control, or providing it in an incomplete or distorted form, bringing to responsibility in the form of a fine.
The disagreement of entrepreneurs with the decisions made by the tax authorities leads to the fact that the resolution of the dispute is transferred to the judicial authorities. In many ways, the decision of the court depends on the evidence base, the correctness of the paperwork, and the competent conduct of the case. The participation of a competent lawyer in such a case allows entrepreneurs to justify the tax benefits in relation to their business and minimize the risk of refusal in a positive decision.
- Advising clients on tax benefits cases
- Preparation of the necessary documentation for conducting cases on the validity of the tax benefit
- Representing clients in disputes with tax authorities