New standards on the unjustified tax benefit included in the tax code

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Federal Tax Service of Russia issued Letter № CA-4-7/ 6152 @ of 16.08.2017, in
which it clarified to its subordinate tax authorities the application of new Art.
54.1 of the Tax Code of the Russian Federation "Limits on the Exercise of
Rights in Calculating the Tax Base and (or) the Amount of Tax, Levy, Insurance
Contributions", which was included in the Tax Code of the Russian Federation
by Federal Law № 163-FZ of 18.07.2017.

The main provisions of the Federal Tax Service of Russia letter of 16.08.2017
№ SA-4-7 / 16152

1. According to clause 1 of Art. 54.1 of Tax Code of the
Russian Federation it is prohibited for the taxpayer to reduce the tax base and
(or) the amount of the tax payable as a result of distortion of information
about the facts of economic activity (the totality of such facts), taxable
objects subject to disclosure in financial and (or) tax accounting or tax

The Federal Tax
Service of Russia notes that this provision is a legal prohibition on the
creation of tax schemes designed to reduce tax liabilities.

In order to prove
the facts of non-fulfillment of the obligation to pay taxes, tax authorities must
ensure the evidence of intentional participation of taxpayer in creation of
conditions exclusively aimed at obtaining tax benefits through, >inter alia, the actions of its officials
and founders.

In the opinion of
the Federal Tax Service of Russia, the intentional nature of the taxpayer's
actions can be established by the following facts:

  • controllability
    (legal, economic, etc.), including the interdependence of the counterparties;
  • the
    transit nature of transactions between interdependent counterparties in
    business transactions, including the use of intermediaries, special forms of
    settlements and the terms of payments for such transactions;
  • coordination
    of actions and transaction among the counterparties.

In case the
intention of the taxpayer to receive unjustified tax benefits was proven by the
tax authority, the tax obligations should be adjusted in full.

2.In accordance to clause 2 of Art. 54.1 of the Tax Code
of the Russian Federation if there is no circumstances described in clause 1 of
this article, the taxpayer has the right to reduce the tax base or the amount
of tax payable if two conditions are simultaneously met:

  • the
    purpose of the transaction (operation) is not non-payment (incomplete payment)
    and (or) offset (refund) of the amount of tax (business purpose doctrine);
  • the
    obligation under the transaction (operation) is executed by the person who is a
    party to the contract concluded with the taxpayer, and (or) by the person to
    whom the obligation to execute the transaction (operation) was transferred
    under a contract or law (the reality of the transaction).

The Federal Tax
Service of Russia notes that failure to comply with at least one condition
entails adverse consequences for the taxpayer in the form of refusal to account
of such transactions for the tax purposes in full.

3.The Federal Tax Service of Russia instructed the subordinate tax
authorities not to use a formal approach during the identifying the
circumstances of underreporting the tax base or tax evasion.

On the basis of clause
3, Art. 54.1 of the Tax Code of the Russian Federation the signing of primary
accounting documents by an unidentified or unauthorized person, violation by
the counterparty of the taxpayer (as well as counterparties of the second and
subsequent links) of the tax legislation, the possibility of obtaining the same
result of economic activity in the course of other transactions (transactions)
not prohibited by law cannot be considered as independent grounds for
recognizing the tax

In addition, Art.
54.1 of the Tax Code of the Russian Federation does not use the evaluative
concept of "failure to exercise due diligence". Therefore, formal
claims to counterparties in the absence of evidence of unrealistic nature of transactions
are not grounds for refusing to provide tax benefits. The provisions of clause 2
of Article 54.1 of the Tax Code of the Russian Federation, as noted by the
Federal Tax Service of
Russia, do not provide negative consequences for the illegal actions of
counterparties of the second, third and subsequent links for taxpayers.

Conclusions and recommendations

Analyzed explanation
is the first step of tax authorities on the way to a unified and definite

The provisions set
forth in the Letter will help taxpayers to determine tax risks and assess the
possibility of subsequent additional tax charges.

Specialists of
Schekin and partners are ready to provide legal advice on the application of
existing and introduced rules for assessing the validity of tax benefits, as
well as to provide legal assistance in the court disputes on this issue.

Denis Schekin

Managing partner

Schekin & Partners

Tel.: +7 (495) 984-63-01

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