The Tax Compliance team shares successful cases. The practice review includes projects on litigation and pre-trial support of tax disputes, tax consulting, and tax monitoring.

I. Judicial settlement of tax disputes

1) Supporting a foreign company in a tax dispute

The taxpayer is part of an international group with a presence in more than 50 countries. The company in Russia is engaged in providing comprehensive engineering support services for the construction of oil refinery facilities, including design, supervision of engineering works and inspection of construction works performed by contractors.

Factual background. A taxpayer applied to an arbitration court with a claim for the invalidation of a decision of the tax authority which had imposed substantial additional charges. In the opinion of the tax authority, the taxpayer, on its own initiative, included counterparties in the chain which had the characteristics of "technical" organizations. However, the reality of the work provided by the first tier counterparties was recognized by the inspectorate in full.

Result. The court of first instance supported the taxpayer's position and overturned the contested decision in its entirety. Tax Compliance specialists managed to provide the court with convincing evidence that the taxpayer had been misled by the unfair actions of its counterparty.

Why this case is important for practice. The special significance of the case for judicial practice is manifested in the fact that the court noted the inconsistency of the tax authority's position with regard to profit tax and VAT. Thus, the court pointed out that if the tax authority recognized the compliance of a business transaction with the requirements of Article 54.1 of the Tax Code of the Russian Federation for profit tax purposes, a different legal qualification for VAT purposes is not allowed.

2) Revocation of a tax authority's decision to "split" the business of a large pharmaceutical company

One of the largest pharmaceutical organizations operating in the market throughout Russia. In addition, the Client delivers medicines to more than 32 regions of Russia, and its own retail network includes 80 pharmacies.

Fabula. The tax authority, within the framework of an on-site tax audit, came to the conclusion that there had been an artificial inclusion of organizations which had attracted unfair counterparties. In particular, the tax authority believed that the nature of the activities of the counterparty's group of companies constituted a scheme for "splitting" a business aimed at unjustified reduction of the tax burden.

Within the framework of the court dispute Tax Compliance lawyers: (1) prepared the Client's legal position (2) represented the Company's interests during the court hearings in the court of first instance, (3) filed interim measures in the form of suspension of the tax authority's decision until the court decision came into force. 

In addition, Tax Compliance specialists prepared arguments to the arguments of the tax authority and evidence substantiating the business purpose of the acquisition of business entities (pharmacies) by the Client's shareholders and the independence of their business activities.

Result. As a result of the project implementation, tax claims were reduced from 698.8 million rubles to 188.7 million rubles.

Why this case is important for practice. In court practice in cases involving the "splitting" of a business, partial reversal of a tax authority's decision is extremely rare. In the course of litigation, a taxpayer has managed to prove to the court that the majority of business entities do not belong to a group and that their financial results cannot be taken into account in determining its tax base.

3) Settlement of a tax dispute of a construction company

The taxpayer was one of the leaders in the construction industry and acted as a general contractor at various facilities of major developers in Moscow and the Moscow region.

Factual background. A taxpayer applied to court with claims for the invalidation of decisions on two tax audits for different audited periods.

The tax authority's claims concerned the company's relations with a number of subcontractors for the performance of construction work and the provision of services for the maintenance of construction sites. After conducting control measures, the inspectorate applied the provisions of Article 54.1 of the Tax Code of the Russian Federation, referring to the independent performance of work and the provision of services by the taxpayer.

Tax Compliance specialists prepared and presented in court a convincing position that the evidence underlying the decision of the tax authority contradicted the factual circumstances and did not support the conclusion that the disputed volume of operations was performed by the company's own resources, and therefore could not indicate the receipt of an unjustified tax benefit.

Result. Based on the results of the investigation and evaluation of evidence, the court of first instance recognized the inspection decision for 2015-2017 (437 million rubles) as completely invalid. The decision entered into legal force after verification by the appellate court.

Why this case is important to practice: 

• Construction activities always involve the involvement of many subcontractors, and the risk of tax authorities' claims regarding relations with them is very high;
• This dispute is one of the few examples of a successful court challenge to a decision on an on-site audit and demonstrates the importance of qualitative elaboration of a legal position and convincing presentation of it in court.

II. Pre-trial settlement of tax disputes

1) Support of a transportation company within the framework of the GNP

A Russian company specializing in wholesale trade in machinery and equipment for mining and construction underwent a field tax audit for all taxes and levies.

Based on the results of the audit, the tax authority concluded that the taxpayer violated Article 54.1 of the Tax Code of the Russian Federation due to the lack of real nature of business transactions with the disputed counterparties, the creation of a formal document flow, and, as a consequence, the Client received savings in the form of unlawful application of VAT tax deductions and attribution of material costs to expenses.

Tax Compliance specialists were assigned the following tasks within the framework of the project: (1) to challenge tax claims; (2) to prevent the recovery of more than 500 million rubles from the Client; (3) to prove the absence of tax enrichment in the form of increase in the cost of goods supplies; (4) to claim the necessity of tax reconstruction; (5) to determine the price of equipment delivery from foreign suppliers to the Client and claim the necessity of its accounting in expenses.

Tax Compliance specialists managed to prove the reality of business transactions, reliability of counterparties declared in the chain of goods movement to the Client and to carry out tax reconstruction based on the results of expertise of the cost of logistics costs for transportation of equipment for their accounting in expenses. 

The tax authority accepted this position on reconstruction and recognized logistics costs in expenses.

Result. As a result of Tax Compliance lawyers' work at the pre-trial stage of the dispute, the amount of additional charges against the Client was reduced by 82% - by more than 410 million rubles.

It was critical for the Client to challenge additional tax assessments based on the results of the field tax audit, as their amount is significant for the business and in case of non-payment there is a risk of bankruptcy of the company, as well as bringing the CEO of the organization to criminal liability under Article 199 of the Criminal Code of the Russian Federation. 

2) Supporting a construction company within the framework of the GNP

The client specializes in construction of administrative and industrial facilities, reconstruction of buildings, installation and repair works of engineering systems.

The taxpayer contacted the Tax Compliance team as part of a consultation on minimizing risks in interaction with the tax authority under the GDPR. 

During the field tax audit Tax Compliance specialists advised the client on: (1) correctness of reflection of certain business transactions in tax accounting (2) procedural actions of the tax authorities within the framework of the field tax audit; (3) legal interaction with the tax authority during the field tax audit; (4) justification before the tax authority of the principles of accounting policy applied by the taxpayer.

The Tax Compliance team helped the client to develop a legal position confirming: (1) the reality of the transactions; (2) the validity of the absence of additional income tax charges; and (3) justifying the need for additional VAT charges on tax "gaps".

Result. As part of the pre-trial settlement of the dispute, the tax authority's claims were reduced from RUB 385 million to RUB 46.7 million.

III. Consulting on taxation issues

1) Assessment of the organization's ability to apply IT tax benefits

The Client's company was formed by spinning off an IT function from a large pharmaceutical organization. Prior to contacting Tax Compliance, the organization had already obtained IT accreditation. 

The company considered the possibility of applying IT tax benefits also in order to minimize tax risks, for which purpose it turned to Tax Compliance specialists. 

As a result of the project implementation the Tax Compliance team: (1) analyzed the corporate structure of the Company for the presence of risks of business "fragmentation" (2) prepared proposals for adjusting the corporate structure to minimize tax risks; (3) analyzed the Client's IT service contracts and developed proposals for their compliance with the requirements of tax legislation.

Why this case is important for practice: At the moment, IT companies are exempt from tax control for a period. After the end of the three-year moratorium, the tax authority will begin to check IT companies, including with regard to the validity of tax exemptions. 

In order to minimize tax risks, IT companies should analyze the structure of business relations in advance and make appropriate amendments to corporate documents.

2) Assessment of tax risks in the provision of intragroup services

The client - one of the largest manufacturers of bread and flour confectionery products - planned to transfer part of the functionality to an interconnected service organization. 

The lawyers' task: (1) to prepare a legal opinion on the legality of accounting for expenses that may be incurred as a result of transferring part of the functionality after restructuring; (2) to develop a draft agreement between the Client and the service organization, as well as templates of documents that are its integral part.

As a result of the analysis of the business structure, the Tax Compliance Team (1) identified tax risks of refusal by the tax authority to account for corporate income tax expenses for more than 540 million rubles, (2) developed recommendations to minimize this risk, and (3) prepared a draft agreement aimed at forming transparent relationships between business entities and generating protective files.

Result. The work of specialists allowed the Client to obtain information on the presence of risk and take timely measures to minimize it. The project is of significant importance for the Client, given the size of potential tax claims from the tax authority (more than 540 million rubles excluding penalties and fines).

Why this case is important to practice. The provision of intra-group services always attracts increased attention from the tax authority. The business purpose and economic feasibility of the relevant expenses of a business entity are subject to assessment. In this regard, businesses need to analyze tax risks before concluding intra-group expenses.

IV. Tax monitoring.

Company diagnostics for transition to tax monitoring

The Tax Compliance client potentially meets the criteria for transition to tax monitoring and is considering a potential transition to this tax control regime. However, due to the complexity and duration of the transition process, as well as a large array of requirements of tax authorities to a tax monitoring participant, the Company needed to plan the transition process and determine the full list of required improvements.

Diagnostics of readiness for transition to tax monitoring is the first stage of the transition process, which allows to optimize the order of further actions and minimize unnecessary labor costs, so when organizing the transition to tax monitoring should not underestimate the importance of this stage.

Tax Compliance specialists carried out a comprehensive diagnostic of the Company's readiness for the transition to tax monitoring and determined the list of necessary improvements to the internal control system, accounting processes and IT systems. Based on the results of the diagnostics, a detailed schedule was drawn up, following which the Company will be able to switch to tax monitoring from 2025.

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Tax Compliance specialists will always be able to find an appropriate and effective defense at any stage of a tax problem a business is facing.