Sergey Ivanov, Tax Compliance tax consultant, assists in clarifying the wording and explains what should be taken into account in order to draft a competent response to a tax authority's demand.

The tax authorities have numerous mechanisms at their disposal to obtain and analyze information on the taxpayer's activities, in particular:

• ASC VAT-3 risk management system - tracking the path of goods and settlements from the manufacturer to the end consumer along the chain;
• SAI-WI - aggregation of taxpayer information from external sources;
• "GNP-selection" and "Risk Dossier" - to build ratings using a system of expert assessments of tax risks;
• PC "Visual Network Analysis of Objects and Relationships" - for building graphical schemes of a group of interdependent persons, business schemes, etc.;
• Summary query - for building analytical tables on indicators of tax liabilities, tax reporting, results of tax audits, etc.

Thus, the information received from the taxpayer on requests for documents is only a small part of the total amount of information available to the tax authority.

And yet this tool is actively used by the tax authorities, and often in a completely different way than originally planned by the legislator.

П. 2 of Article 93.1 of the Tax Code of the Russian Federation provides as follows:

"Where, outside the framework of tax audits, the tax authorities have a justified need to obtain documents (information) concerning a particular transaction, an official of a tax authority has the right to request those documents (information) from the parties to that transaction or from other persons who have documents (information) about that transaction".

According to Letter No. ED-4-2/12216@ of the Federal Tax Service of Russia dated 27.06.2017, the tax authority should take into account when requesting documents:

• the real need for the tax authority to request specific documents (information) based on the substance of a particular situation (reasonableness and justification of the requirements);
• the real possibility of the tax authority (auditing officials) to study (analyze) a large volume of requested documents, as well as whether all the documents (information) that were submitted on the basis of a specific request, including in partial fulfillment of it, were studied;
• the real possibility of the counterparty of the taxpayer being audited to make and submit copies of the documents requested in large quantities.

It turns out that not only the norm of the Tax Code of the Russian Federation itself contains rather vague wording, but also the explanations of supervisory authorities hardly make their interpretation clear.

Let us try to understand how courts interpret such ambiguous formulations in practice.

What is "reasonable necessity"?

What is not a "reasonable necessity"?

How should the tax authority identify the transaction?

Enforcement practice indicates:

• "The tax authority, when requesting documents and information due to objective reasons, may not have information about the details of primary accounting documents which relate to the taxpayer's internal business activities. In the presence in the requirement for the submission of documents indicating the name of primary accounting documents and the tax period to which they relate, the requirement is sufficiently certain and binding" [5];
• "At the same time, the tax authority indicated sufficient identifying features of the transaction, regarding which the documents are requested (parties to the transaction, details of the contract, the period to which the documents relate)" [6] ;
• "The court of cassation instance agrees with the courts' conclusions to the extent that the applicant's arguments that the requirements lack sufficient data allowing to identify the transaction in respect of which the documents (information) are requested cannot be recognized as well-founded, since the requirements contain the name of the insurance agent (with the agent's identification number), as well as the period of the agency agreement, which allows to identify the transactions in respect of which the documents (information) are requested"[7] .

The conclusions that follow from the above cases can be summarized as follows:

At the same time, the Constitutional Court of the Russian Federation points out [8] :

A taxpayer has no grounds to refuse to provide the required documents (information) on the sole ground that the tax authority does not specify in the request, for example, the number or date of conclusion or other details of the relevant agreements, given that certain details are determined by the parties to the transaction and may, for a number of reasons, be omitted or not specified at all.

Consequently, the contested statutory provision allows the tax authority to determine the subject of a claim by any clear, clear and unambiguous attribute, in particular by the specific goods (batch) transferred (to be transferred), work performed (services rendered), as well as the time of delivery and acceptance, primary documents, etc., if these attributes individually or together make it possible to identify a specific transaction in respect of which the taxpayer is obliged to submit documents (information) relating thereto.

Thus, the Constitutional Court of the Russian Federation, in essence, gave the tax authorities the possibility to identify a transaction on any basis, the only criterion being its clarity. However, it appears that such criterion, due to the breadth of its possible understanding, will not play a significant role in reducing the number of disputes arising.

The Letter of the Federal Tax Service of Russia dated 26.06.2023 No. SD-4-2/8096@ "On Recommendations on Demand" states that in determining the list of documents to be demanded one should take into account the existence of an obligation to compile such documents, as well as their relevance to the documents serving as grounds for (and also confirming the correctness of) the calculation and payment of taxes and fees, the tax authority may not demand documents which the taxpayer has no obligation to maintain.

Is it necessary to indicate in the request to carry out a specific tax control measure?

In relation to this issue it is impossible to make an unambiguous conclusion, but law enforcement practice is rather in favor of the fact that a specific tax control measure does not need to be specified:

• "The absence in the demand of an indication of a specific tax control measure does not indicate the invalidity of a demand issued on the basis of the authority provided for in para. 2 of Art. 93.1 of the Tax Code of the Russian Federation". [9];
• "In this case, the requirement of the inspectorate contained all the necessary information to identify the requested documents, and the absence of an indication of a specific tax control measure in it does not indicate the invalidity of the requirement, since this deficiency is of a formal nature and does not prevent the tax authority from exercising the powers provided for in paragraph 2 of Art. 93.1 of the Tax Code of the Russian Federation". [10] .

Are there restrictions on the number of documents requested?

In this part, the vast majority of courts indicate that there are no quantitative restrictions, even if virtually all documents available to the taxpayer are requested:

• "The applicant points out that the volume of requested documents exceeded 95% of all transactions of Elegant-Market Ltd. [...] The main activity of the Company is leasing of property. As follows from the explanations of the representatives of the parties, "Elegant-Market" Ltd. has 4 real estate objects, its activities are conducted with the same counterparties (the number of tenants is not more than 5). From which it follows that the volume of primary documentation requested by the tax authority from the taxpayer on these transactions is not overstated and is assessed as permissible and reasonable" [11] ;
• "The cassation appeal's argument regarding a significant number of claims sent to the Company (161) was subject to evaluation by the court of appeal instance and was reasonably rejected, since in fact there were 127 such claims, and 37 claims were sent repeatedly due to the Company's refusal to submit documents. [...] The courts came to the rightful conclusion that under such circumstances the tax authority was justified in sending to the Company the said demands in accordance with p. 2 of Art. 93.1 of the Tax Code. 2 of Article 93.1 of the Tax Code of the Russian Federation". [12] .

Letter of the Federal Tax Service of Russia dated 30.12.2022 No. СД-4-2/18011 "On Liability for Failure to Provide Documents (Information) on Demands of Tax Authorities" states that tax authorities should form demands in such a way that the taxpayer has a real opportunity to prepare and send to the tax authority the requested documents within the established time limit.

Are the restrictions established for audits applicable when requesting documents under clause 2 of Article 93.1 of the Tax Code of the Russian Federation?

There are no such restrictions, but the tax authority needs to be guided by general principles (which, unfortunately, does not bring specificity to the wording in question):

• "Based on the above, the tax authorities are authorized to request documents (information) regarding a particular transaction, which are not limited to the scope of tax audits, but in such a case the tax authority should be guided by general principles (expediency, reasonableness, justification)."[13] In this case, however, the tax authority should be guided by general principles (expediency, reasonableness, justification)

Failed turnaround in law enforcement practice

At the end of 2021, the Moscow Arbitration Court considered another case [14], in which the taxpayer insisted on the illegality of requests for documents sent outside the framework of the tax audit.

The case was widely publicized after the first instance court issued a judgment with very unusual findings for this category of cases. In particular, the court stated:

• "П. 2 of Article 93.1 of the Tax Code does not provide for the possibility of requesting documents from the taxpayer itself, but is aimed at obtaining information about him and his transactions from counterparties or other persons";
• "The meaning of p. 2 of Article 93.1 of the Tax Code of the Russian Federation is to give the tax authorities the right to request documents from the "chain of transactions" rather than from the taxpayer. A different understanding leads to an illegal circumvention of the prohibition to request documents within the framework of a desk tax audit, in the process of suspension of an on-site tax audit, at the end of an on-site tax audit";
• "The tax authority, without providing any justification for the request for documents indicates in the Request: "outside the framework of a tax audit", although there is no such tax control measure, and there can be no reference to it in the Request either. The Tax Code of the Russian Federation has only two main tax control measures - desk and field tax audits, but neither of them is mentioned in the Request"
• "The tax authority requested from the Company acts of set-off of mutual claims, acts of reconciliation of settlements, powers of attorney, cards of accounting accounts, turnover and balance sheets. These documents are not documents relating to a specific transaction";
• "Requesting documents for an audit for three years is only possible within the framework of a field tax audit, which directly follows from Article 89 of the Tax Code of the Russian Federation. However, no on-site tax audit is carried out in respect of the Company, which indicates that it is unlawful to request documents for three years and impose an unjustified administrative burden on the Company".

After this case was upheld by the Ninth Arbitration Court of Appeal, it seemed that the judicial practice might take a serious turn in favor of the taxpayer. However, as time has shown, this has not happened - the courts continue to issue multidirectional rulings.

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The Tax Compliance team has a broad expertise in strategizing when dealing with claims sent by tax authorities outside of a tax audit. In case you need assistance, you can contact us.

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[1] Ruling of the Ninth Arbitration Court of Appeal of 14.10.2021 in case No. A40-94513/2021.

[2] Definition of the Supreme Court of the Russian Federation from 23.09.2020 in case No. A56-51770/2019, Decision of the Arbitration Court of the Orenburg region from 24.03.2021 in case No. A47-13502/2020.

[3] Ruling of the Arbitration Court of the Ural District of 20.11.2020 in case No. A71-798/2020.

[4] Decision of the Arbitration Court of the Voronezh Region of 14.11.2017 in case No. A14-9588/2017.

[5] Ruling of the Arbitration Court of the East Siberian District of 28.03.2018 in case No. A33-16695/2017.

[6] Definition of the Supreme Court of the Russian Federation from 23.09.2020 in case No. A56-51770/2019, Resolution of the Arbitration Court of the North-Western District from 15.06.2020 in case No. A56-51770/2019.

[7] Ruling of the Moscow District Arbitration Court of 11.03.2020 in case No. A40-170619/2019.

[8] Definition of the Constitutional Court of the Russian Federation from 07.04.2022 № 821-O "On refusal to accept for consideration the complaint of limited liability company Trade House "Platinum Kostroma" on violation of its constitutional rights by paragraph 2 of Article 93.1 of the Tax Code of the Russian Federation".

[9] Decisions of the Supreme Court of the Russian Federation dated 25.02.2021 in case No. A50-1983/2020, dated 15.09.2017 in case No. A24-4380/2016, dated 14.04.2017 in case No. A09-6454/2016, Decision of the Arbitration Court of the WSO dated 02.04.2021 in case No. A81-3931/2020, Decisions of the Arbitration Court of the Ural District dated 03.10.2019 in case No. A50-34784/2018, dated 09.10.2020 in case No. A50-589/2020.

[10] See ibid.

[11] Resolution of the Twentieth Arbitration Court of Appeal of 30.09.2021 in case No. A09-3904/2021.

[12] Ruling of the Moscow District Arbitration Court of 11.03.2020 in case No. A40-170619/2019.

[13] Ruling of the Arbitration Court of the North-Western District of 15.06.2020 in case No. A56-51770/2019.

[14] Decision of the Moscow Arbitration Court of 14.10.2021 in case No. A40-105384/2021.