At the end of May, the Supreme Court of the Russian Federation will consider the case of IE Novoselova and decide whether it is lawful to determine the amount of additional tax charges by calculation in a situation where the amount of income (tax base) has been established on the basis of witness testimony. Arbitration courts have held that this testimony is insufficient, but the FTS claims that the taxpayer concealed part of the information. Therefore, the same standard of proof as for bona fide persons does not apply to him.

Ekaterina Kopylova, Tax Compliance tax consultant, analyzed the importance of the outcome of the future case and its possible impact on court practice for Kommersant.

Despite the fact that the case concerns such an issue as real estate rental income and the amount of additional charges is relatively small, the Supreme Court's legal position on the strength and sufficiency of such evidence may have long-term consequences for the entire practice.

When inspecting entrepreneurs who receive income from individuals, inspectors are usually considerably limited in their means of collecting evidence. If clients (buyers, tenants, etc.) paid in cash, no contracts were concluded, and no checks were issued, it remains to rely on information from witnesses.

However, fixing the legitimacy of additional tax assessments by the calculation method on the basis of testimony alone will create a number of risks: from biased results of audit measures to the prosecution of innocent persons.

Developing such an approach, law enforcers (in particular, inspectors and courts) may go to the extreme, for example, establishing the amount of «gray» wages for the purposes of calculating personal income tax and insurance contributions based on the testimony of employees, including former and «dissatisfied» or other critical information from unreliable sources (competitors, uninformed and other persons).

It should be noted that in the case of IE Novoselova the testimony of tenants was not the only evidence. Thus, the entrepreneur independently submitted to the tax authority lease agreements containing the disputed terms.

At the same time, taxpayers are not deprived of the opportunity to refute the arguments of the tax authority and present their own evidence, taking a proactive defense position. For example, in the dispute in question, an individual entrepreneur could present counterarguments and other evidence regarding the actual lease terms and the amount of rental payments, including testimony of other witnesses, bank statements on the crediting of funds to their accounts, an archive of advertisements for the rental of real estate, data on the market price and others.

As regards the application of the calculation method provided for in subpara. 7 п. 3 of Article 31(3) of the Tax Code, the tax authorities are reluctant to apply it in practice precisely because of the difficulty and the need for significant labor input to collect data on the taxpayer itself, as well as on other similar taxpayers. 

As a result, in practice, the use of the calculation method of determining tax liability is most often aimed at worsening the taxpayer's position and is positioned by auditors as a negative consequence of failure to provide comprehensive and reliable information on the parameters of its activities (business operations), accounting with violations and other circumstances to which the law binds the possibility of using this method.