Tax audits before and now

The tax audit process used to be much longer - it could take several years before a court decision. Now, due to digitalization and going online because of the pandemic, many of the audit processes move in parallel and that time frame has been reduced to a few months. For example, in 2020, the number of field tax audits decreased by 30% to 6,000. Control activities brought in additional nearly 300 billion rubles to the budget, of which 158 billion rubles were provided by online analytical work. At the same time, the Federal Tax Service at the beginning of the year announced the creation of a number of digital platforms to control cash flows online. This suggests that businesses now need to keep a closer eye on changes in tax legislation to avoid claims from the Federal Tax Service.

Key changes for 2020 - 2021:

- New income tax return form. Apply the new income tax return form to your 2020 statements. The Federal Tax Service made amendments to the form of the declaration, its electronic format and how to complete it (Federal Tax Service Order No. ED-7-3/655 of September 11, 2020). The new form provides new codes for taxpayer attributes, and Annex No. 2 to the declaration excludes the obligation for tax agents to fill in payments for transactions with securities or financial instruments of term transactions. Now Appendix No. 2 is to be filled out by companies that have entered into an agreement on the protection and promotion of investments under the Register under Law No. 69-FZ of April 1, 2020

- Refund of insurance premiums. Federal Law No. 312-FZ of 01.10.2020 amended Articles 78 and 79 of the Tax Code. The new rules establish that from January 1, 2021 the amounts of overpaid (recovered) insurance premiums for compulsory pension insurance are not subject to refund if, according to information from the Pension Fund, they are recorded in the individual part of the rate of insurance premiums on an individual account of the insured person, who at the time of the application for refund are assigned the insurance pension.

- Funds of shareholders in escrow accounts have been equated with the means of target financing. Amended Secs. 14 para 1, Art. 251 of the Tax Code - for the purposes of Chapter 25 of the Tax Code to the target funding equate to the means of equity participants placed in escrow accounts in accordance with the Law of 30.12. N 214-FZ "On Participation in Shared Construction of Apartment Buildings and Other Property and on Amendments to Certain Legislative Acts of the Russian Federation. Expenses of the organization-developer to be further reimbursed at the expense of these funds are accounted separately as made under target financing. The use for the target purpose of these funds is recognized as reimbursement by them of the developer's expenses in connection with the construction (creation) of the apartment houses and (or) other real estate objects stipulated by the contract of participation in share participation construction. From January 1, 2020 the difference between the price of the agreements on participation in share participation construction and the actual cost of the construction of the objects of share participation construction should be included into the income of the organization-developer.

At the end of the year should report to the Inspectorate on the intended use of funds received (clause 14 of Art. 250, § 1 of Art. 285 of the Tax Code). To do this, include worksheet 07 in the income tax declaration (clause 1.1 of the Procedure for completing the income tax declaration).

Regarding the administration of tax returns. Previously, the tax legislation did not establish cases for refusal to accept tax returns, which, in turn, could affect the quality and timeliness of verification of the reliability of information about taxpayers. For example, a declaration was filed under the signature of an official, in relation to whom there was already information about the unreliability of the management of this company (nominal manager). According to the innovations in Article 80,88 of the Tax Code a closed list of grounds for refusal to accept returns, if the VAT return does not meet the control ratios, calculations for insurance premiums contain errors, the fact of signing the tax return (calculation) by an unauthorized person was established, and if the tax authority has information about the date of death of an individual, which occurred before the date of signing the tax return. The obligation of the tax authority is to notify the taxpayer within 5 days of the reasons for non-acceptance of the tax return. In practice, this innovation means that the tax authority will not clarify the reasons for rejection. The tax return will be accepted only after the correction of technical violation of the control ratios of tax reporting paragraph 5.3. 174 of the tax code.

Clarification of the procedure for recalculation of property taxes for individuals The right to recalculation of land tax and property tax for previous tax periods is possible in two cases:

- If the cadastral value of the object in the amount of its market value is established;

- if the cadastral value of the object of taxation has been reduced.

The new amendment is mainly related to the clarification of the procedure for recalculation of the value of property, land objects. Thus, the recalculation of the cadastral value will be carried out not by the commission at Rosreestr, but by special budgetary institutions for evaluation. The tax for the previous three periods will be recalculated only if it does not entail an increase in taxes previously paid, overpayment of taxes will be possible to offset against other taxes.

Interaction with counterparties

A separate risk for companies is interaction with counterparties. In March 2021 the Federal Tax Service issued a clarification letter to Article 54.1 of the Tax Code on obtaining an unjustified tax benefit. Now it is practically impossible to avoid paying taxes, and a firm which has taken this step will be charged as much additional tax as a bona fide person would have paid in the same situation. The additional taxation will be applied to companies that have made transactions in order to obtain an unjustified tax benefit. For example, companies that use fictitious counterparties or fail to disclose part of their financial transactions are at risk. The tax authorities also check the company for a "technical" counterparty. As evidence they use the same IP-addresses, the discovery of seals of the counterparty in the office, the facts of cashing of money and the further use of these funds for the needs of the taxpayer and others.

According to the position of the Federal Tax Service of Russia, when embedding a "technical" company or a chain of such companies between the taxpayer and the person who carried out the actual execution of the transaction, the amount of expenses and tax deductions to be taken into account, is based on the parameters of the real execution, as reflected in the financial and business documents of the said person on such transaction (contracts, primary documents, invoices, payment orders, etc.). In order to apply the tax reconstruction the taxpayer must disclose information and submit supporting documents about the actual supplier (contractor, executor) and the parameters of the transactions performed with him.

So, it is important for businesses to take into account the following points:

- In the event that "backlogging and duplication" of work is identified by the disputed contractors, provide a transcript that these costs relate to reputational risks that resulted from the disputed contractor's remediation of the identified violations, which is consistent with customary business practices and accepted in the construction industry.

- It is important to provide information on the physical persons of the contractors involved (from the logs of the safety instructions, applications to cross the checkpoint at the construction sites), to arrange a lawyer interviewing witnesses in order to confirm the reality of the disputed construction work.

Since the fact of execution of works and acceptance of objects by customers is not disputed, it is possible to apply the calculated method of determining tax liabilities. The legal position is that the calculation of tax arrears from the full amount of the transaction did not take into account the actual costs of the disputed counterparties related to the implementation of financial and economic activity on the payment of wages, the purchase of construction materials, payment of taxes and insurance premiums, banking services, which is confirmed by bank statements of the counterparties.

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You can read the text of the article in Stroitelnaya Gazeta #28 of July 23, 2021.