In the course of the tax inspection of a trading company using capital originating in Austria, the inspectors declare a number of the company’s partners to be unscrupulous. By which they mean they are so-called “fly-by-night” companies that don’t carry out real activities and don’t pay tax.On this basis, they have refused to make adeduction and issue a rebatefor VAT, and, in addition, haveimposedfines upon the company. In the opinion of the tax authorities, the company has not displayed the requisite circumspection in their choice of contractual partners.
The Austrians turned to a Russian consulting company for help. The experts analysed the decision of the tax authorities, and came to the conclusion that the inspectors do not have sufficient evidence to define the company’s contractual partners as unscrupulous. This conclusion was put before the Federal Tax Service, and, consequently, the company was able to have its VAT reimbursed.
In reality, the fundamental principle of thepresumption of fair practice by taxpayers in Russia is open to question.According to the law, it is up to the taxmen to provide proof of guilt, but quite often, they can make a decision regarding contractual partners withoutthe inconvenience of providing the necessary evidence.
If you are doing business in Russia, then you must make arrangements for your contractual partners to be checked out. This will enable you to avoid being refused a VAT rebate, which is a substantial amount even for small and medium-sized businesses.Otherwise, you will have to pursue the tax service through the courts on a regular basis, without any guarantee that the decision will be found in your favour.
Collecting the necessary evidence is a lot more straightforward for a company than participating in a protracted legal process involving considerable expense.
The subsidiary organization of a British company trading in communications equipment in Russia has, during the course of a tax inspection, had a claim made against it regarding the way its business activities have been documented. The company was only able to provide its accountsthere and then. At the same time, an audit of the company was being conducted, which highlightedconcerns regarding itsrecording of accounts. The auditors revealed a lack of documentation to support theaccuracy of the sums entered underexpenses and liabilities. The company went to a Russia consultancy firm to request its assistance during the tax inspection proceedings.
The Russian experts immediately demanded and obtained the outstanding documents from the contractual partners. This enabled them to prove, both to the inspectors and to the auditors that the expenses had beenlawfully accounted for in thetax base.
The principle differences in the approach towards documenting receivables and payables in Russia and Great Britain often lead to conflict with Russian auditors and the tax authorities. According to Russian law, every instance of business activity by an enterprise is to be documented for accounting and tax accounting purposes. So official recording of events is vital.
In principle, the law in Russia does not currentlyrequire the use of a particular form of documents.However, there is in the Tax Code of the RFa condition stating that expenses incurred by an organization need to be supported by primary documentation, the form of which is established in law. Furthermore, it is a requirement written in civil procedure law that certain documents related to an organization’s business activities be drawn up, for example, anAcceptance Act for Services Rendered, Delivery and Acceptance Reports, and Service Accounts.
While Russian accounting standards are still the same as they were, and no changes have been made in the Tax Code of the RF, it is good idea for organizations to draw up a standard package of documents for every transaction made. And to make sure that this is done by the organization and contracted parties simultaneously.
If you are doing business in Russia, you need to understand fully that a company’s business activities must be recorded in those documents and in the form established by common business practice, however strange it may seem. Deviation from these existing standards, although seemingly permitted by law, will inevitably lead to complications with the tax authorities and with auditors.
An investment company with French founders and operating in Russia, has granted one of its employees a loan at 2% APR. An inspection by the tax authorities has revealed that the company ought to have deducted income tax from the employee’s earnings for receiving material gain. Consequently, the company has been hit with a fine of 20% of the non-deducted tax. The company turns to a consultancy firm to establish whether these actions by the inspectors are in fact lawful.
The experts explained that in Russia income tax ispayable not only on direct income, as in the West, but also on material gain.Covered by material gain are also the savings made by receiving a loan at a rate 2/3 lower than there financing rate of the Central Bank of Russia. Such an amount of material gain is liable for income tax at a rate of 35%.
Also, it is stated in Russian law that the obligation to calculate and deduct this tax lies with the lender, who, in this instance, is acting as the tax agent. Insofar as, in this instance, the lender is the employer, he is obliged to carry out the duties of atax agent.
If a company provides an employee with a loan, it must work out if material gain will accrue from any savings made on the interest rate. Such a gain automatically leads to the obligation with the employer to calculate and deduct income tax from it.
Foreign companies operating in Russia must understand that even failure to carry out the duties of a tax agent can lead to incurring a fine.