Recently, taxpayers have to attract more and more resources to check counterparties (both potential and those acting within the framework of regular audits) in order to be more and more prudent.

Ivan Tsvetkov, Head of Tax Compliance practice area, in an interview to the publication «Taxes. Economy. Society» explained the differences between due diligence and commercial diligence, and what businesses should pay special attention to.

- What is due diligence? 

- In the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 12.10.2006 No. 53 «On the assessment by arbitration courts of the validity of the taxpayer's receipt of a tax benefit» this term occurs for the first time. The document states that a tax benefit may be recognized as unjustified if the tax authority proves that the taxpayer acted without due diligence. In 2009. In 2009, the Russian Ministry of Finance, in explaining what actions of a taxpayer would indicate that it had exercised due diligence, suggested limiting itself to checking the legal capacity of a counterparty. 

In the clarifications of the Federal Tax Service of Russia in 2013, the term is interpreted more broadly: the actual location of the counterparty company should be checked, as well as the availability of production/shopping space, the possibility of the counterparty to actually fulfill the terms of the contract, taking into account the time required for delivery or production of goods, performance of work or provision of services (Letter of the Federal Tax Service of Russia No AS-4-2/710@ dated January 23, 2013). 

Gradually, the term began to be interpreted as the taxpayer taking all available measures aimed at assessing a potential counterparty, including the assessment of its business reputation, solvency, the risk of non-fulfillment of the counterparty's obligations, the availability of the counterparty's necessary resources and relevant experience. However, until 2017 there was no specific list of actions to check counterparties and documents that could be used to confirm the exercise of due diligence, which gave a wide discretion to courts and authorities. 

- What changed in 2017? 

- Article 54.1 was added to the Tax Code of the Russian Federation. The Federal Tax Service of Russia clarified that the concept of «due diligence» is no longer used in field and cameral tax audits (letters of the Federal Tax Service of Russia dated 31.10.2017. No ED-4-9/22123@, from 28.12.2017. No ED-4-2/26807). Taxpayers were advised to use the criteria of independent risk assessment (Order of the Federal Tax Service of Russia No. MM-3-06/333@ dated 30.05.2007), as well as information from official databases of the Federal Tax Service of Russia on the amounts of taxes paid by counterparties, the average number of employees, etc. The taxpayers were advised to use the criteria of independent risk assessment (Order of the Federal Tax Service of Russia No. MM-3-06/333@ dated 30.05.2007). 

Despite this, for some time the courts continued to refer to the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 53 (Decision of the SCEC of the Supreme Arbitration Court of the Russian Federation of 14.05.2020 in case No. A42-7695/2017). 10.03.2021 issued a letter of the Federal Tax Service of Russia No BV-4- 7/3060@ «On the practice of application of Article 54.1 of the Tax Code of the Russian Federation», which returned to the concept of prudent behavior of the taxpayer. At the same time, in addition to the term «due diligence», another term - «commercial diligence» - was used. 

- What is the meaning of this term? 

- According to the same letter of the Federal Tax Service of Russia, commercial diligence means «the standard of reasonable choice of a counterparty applied in turnover». The actions of a director (as a representative of a taxpayer) are unreasonable and in bad faith if: 

a) he knew of the unfavorable terms of the transaction or the counterparty's deliberate inability to fulfill the obligation or should have known about these circumstances; 

b) he failed to take actions prior to the transaction to obtain the necessary information, which are customary for business practice in similar circumstances; 

c) the transaction was made in violation of internal procedures for coordination, necessary approval or contrary to the business strategy. 

In paragraph 15 of the letter, the Federal Tax Service provides an extensive list of information and documents that a taxpayer must potentially have in order to be considered to have exercised commercial prudence. 

- How difficult is it in practice to fulfill this requirement? What problems do taxpayers face and how can they be avoided? 

- The taxpayer has to mobilize more and more resources to check contractors. I would say that the standard described in the letter of the Federal Tax Service of Russia 2021 is easier to comply with for large businesses than for small and medium-sized businesses. There is still no exhaustive list of documents sufficient to confirm the verification of a counterparty. There is an accusatory bias on the part of the tax authorities when, due to objective reasons, a taxpayer is unable to document certain facts of commercial diligence.

Tax compliance can be a solution to this problem. Among the key points are: the allocation in the organization of an employee responsible for checking the counterparty, the development of appropriate regulations and instructions, the recording of each action to check the counterparty both within the organization and in communication with a potential partner, so that the future evidence base is automatically generated; the delegation of certain functions to tax lawyers and attorneys on outsourcing. This approach will prevent claims from tax authorities and protect against additional tax assessments on transactions with counterparties.