Recently, there has been a worrying trend: the tax authorities often assess the reality of transactions formally, ignore facts that confirm the real nature of the parties' relations, and pick on minor errors in documents in order to impose additional taxes, penalties and fines.

Ivan Tsvetkov, Head of Tax Compliance practice, in the December issue of “Company Lawyer” discusses how to defend yourself against claims and convince the court to invalidate the decision of the inspectorate. 

How does the tax authorities detect fictitious transactions?

The purpose of tax control measures is not only to verify timely and full payment of fiscal payments by taxpayers, but also to identify tax avoidance schemes.

One of the possible abuses on the part of taxpayers is the realization of fictitious transactions, for example, using the so-called “paper” VAT. Such a scheme consists in the artificial acquisition of goods (services, works) from a “technical” company, i.e. the transaction takes place only “on paper”, as:

- goods are not actually shipped to the buyer, services are not rendered, work is not performed;

- no payment for goods (services, work) is made to the one-day company.

What tools do the tax authorities use to detect fictitious transactions?

The tax authorities use the VAT ASK system to detect dubious transactions and prevent taxpayers from using schemes involving one-day firms. The program is designed to identify potential violations in the procedure for calculating and paying VAT. The service automatically compares data on each transaction along the chain of movement of goods (services, work).

The system assumes that the tax accounting data of the taxpayer and the counterparty for such a transaction must match. Discrepancies in tax accounting data indicate the presence of “gaps” in the chain, which are instantly detected by the system along the entire chain.

In addition, ASC VAT allows the tax authorities to fully control the movement of funds along the chain. Thus, the system allows to automatically build chains of money movement between counterparties and see, in particular, whether VAT has been paid in these chains.

Further, within this chain the beneficiary is identified according to predetermined criteria on the basis of a point system established by the internal regulations of the Federal Tax Service of Russia on interaction between the tax authorities when working out discrepancies.

Based on our practice, any company engaged in real economic activity is at risk of being recognized as a beneficiary, even if it performs its tax obligations in good faith.

In the course of carrying out control measures, a tax authority may conclude that a transaction is fictitious on the basis of, inter alia, the following factual circumstances.

The “technical” nature of the activities of counterparties.

The first thing that auditors look at when carrying out control measures is the ability of a taxpayer's counterparty to fulfill its contractual obligations. In the opinion of the tax authorities, the counterparty's lack of material and technical base and labor resources, the minimum amount of taxes paid, cashing of funds through the chain, the discrepancy of commodity and cash flows indicates the counterparty's inability to fulfill its obligations, which indicates the unreality of the transaction.

At the same time, the courts have recently taken a rather critical approach to such an assessment of the reality of the transaction on the part of the inspectors. Thus, the presence of counterparties signs of “technical organizations” in itself can not automatically lead to the conclusion about the formality of document flow [1]. Courts side with taxpayers if it is established that the conclusions of the inspectorate about the unreality of the transaction are based solely on the negative characteristics of the counterparty as a business entity [2].

Nevertheless, some courts still support the arguments of the tax authorities, if during the audit it will be established the “technical” nature of the counterparties' activities [3].

Thus, taxpayers should avoid cooperation with organizations that have the characteristics of “technical” companies, as this may entail possible claims from tax authorities.

Deficiencies in the documents used to formalize a transaction.

Often tax authorities use errors and inconsistencies in a contract and primary documentation as evidence that a transaction is unrealistic.

In some cases, the courts uphold the conclusions of the tax authorities, stating that the preparation of transaction documents with errors indicates a formal document flow and the unreality of the transaction itself. Thus, the unreality of the transaction may be evidenced by the indication in the contract of unreliable settlement accounts of counterparties or accounts actually belonging to other organizations [4].

At the same time, some courts note that the presence of various technical errors in the transaction documents cannot indicate the unreality of the transaction in the absence of other evidence [5].

Thus, taxpayers should carefully approach the process of drafting and signing transaction documents with their counterparties, because the presence of any errors or inconsistencies in them can be critically assessed by the auditors. In addition, it is necessary to avoid vague or formulaic wording that does not specify the terms of interaction between the parties in the execution of the contract.

Lack of accompanying documents

When examining documents relating to a transaction, tax inspectors often draw attention to provisions in contracts which provide for the transfer of any accompanying documents in the course of the transaction. Their absence is regarded by the auditors as a fictitious transaction, which the courts sometimes agree with.

Thus, under the contract, the supplier had to provide the company with quality certificates, travel vouchers, delivery notes, offsetting certificates, and accounting account cards. These documents were not provided by the taxpayer either within the framework of the audit or during the court proceedings. In the absence of these documents, the court considered such a transaction to be fictitious [6].

However, some courts believe that the violation by an organization of its civil law obligations under the contract with customers does not in itself indicate the receipt of an unjustified tax benefit [7].

Businesses should request from the counterparty those supporting documents that are specified in the contract. Even if these documents are not provided to the taxpayer, the company will have confirmation that it made attempts to seek and obtain them.

For more details on these and other signs indicating the possible fictitiousness of the transaction, you can read the material of our expert Ivan Tsvetkov in the December issue of “Company Lawyer”.

[1] Ruling of the Arbitration Court of the Ural District of 22.07.2024 in case No. A47-5257/2022.

[2] Resolution of the Ninth Arbitration Court of Appeal of 06.06.2024 in case No. A40-150966/2023.

[3] Resolution of the Arbitration Court of the Volga District of 05.12.2023 in case No. A72-6298/2022.

[4] Resolution of the Fourteenth Arbitration Court of Appeal of 10.09.2024 in case No. A13-4920/2021.

[5] Resolution of the Arbitration Court of the North Caucasus District of 21.11.2022 in case No. A63-4558/2021.

[6] Resolution of the Arbitration Court of the West Siberian District of 25.05.2023 in case No. A70-11212/2022. 

[7] Resolution of the Twentieth Arbitration Court of Appeal of 21.10.2020 in case No. A68-3170/2016