05.07.10

14 Typical Schemes for Evading Taxes
From an Internal Document of the Federal Tax Service
Alexei Spirikhin, Auditor
Alinga Consulting Group

The Federal Tax Service has sent to all its local offices instructional guidelines describing "14 Typical Schemes for Evading Taxes." Judging by this document, inspectors are most concerned with evasion of value-added tax (VAT) and profit tax.

These guidelines were issued "for internal use only," but specialists of Alinga Consulting Group were able to obtain information about all 14 schemes.

Scheme #1: Fictitious Activity through Interdependent Entities.
The Tax Service will challenge organizations that conduct financial operations exclusively through groups of interdependent entities.

Scheme #2: Closed Systems for Circulating Goods and Money.
In this situation inspectors will trace the supply chain up to the fourth level, uncovering fictitious contractual parties in the process.

Scheme #3: Money Transfers Through "Grey" Firms.
The Tax Service encourages denying export VAT refunds if the supply chain includes a "grey" (fly-by-night, suspicious) firm that transfers money received from a buyer to the account of its foreign partner and in the process does not pay VAT on the amount transferred. Similarly, extra attention is given if money is transferred under contract with a "grey" firm and the money is then returned via a private businessman.

Scheme #4: Using Cash Registers for Wholesale Transactions.
The Tax Service will actively repress attempts to use the preferential Unified Tax on Imputed Income for wholesale transactions.

Scheme #5: Reorganization with Subsequent Liquidation.

Scheme #6: Artificially Inflated Prices.
Export operations which use too many intermediaries, thereby increasing prices and the amount of VAT subject to reimbursement, will be considered suspicious by the tax inspectors. For example, prices may be considered artificially inflated if the production cost of export goods was significantly increased as a result of processing raw materials and the commissions paid to these processors.

Scheme #7: Internal Accounts Paid Using Contributions to Charter Capital.
The tax authorities will deny deductions of "internal" VAT between interdependent companies. In this scheme a company pays its suppliers with funds received from its parent company in the form of contributions to charter capital. However, the parent company itself has received the money from its founders who turned out to be those very suppliers. The company thus pays its suppliers with their own money, says the Tax Service, so the Tax Service encourages denying reimbursement of VAT for such operations.

Scheme #8: Unjustified Use of Credits for the Disabled.
Inspectors will verify the conditions under which methods were implemented for using disability credits for VAT payments.

Scheme #9: Acquisition of Goods with Inflated Prices Using Borrowed Resources.
The FNS document describes a case where a logging company acquired equipment on credit obtained from an off-shore firm. Having gathered information from the Internet, the logging company decided the value of the equipment was six times greater than the market value of the equipment and thus borrowed too much. The loan was never repaid.

Scheme #10: Replacing Wages with "Medical Insurance."
The guidelines cite a case where a company concluded an agreement for voluntary medical insurance with subsequent payments to insured employees for insurance premiums and annuities.

Scheme #11: Artificial Creation of Penalties through Contractual Obligations.
Knowingly creating unrealistic conditions for fulfilling a contract for the purpose of reducing taxes by the amount of financial sanctions is considered is also to be considered intentional tax evasion.

Scheme #12: Personnel Leasing.
Documenting employees through organizations using preferential tax systems is regarded by the tax authorities as tax evasion.

Scheme #13: Splitting a Business for the Purpose of Using the Unified Tax on Imputed Income.
If two companies have practically identical names, are located at the same address, etc., then, says the Tax Service, this is evidence the two firms are operating as one firm, split for the sole purpose of lowering taxes.

Scheme #16: Receipt of Losses by a Credit Organization due to Operations with a "Problem" Bank.

A company can expect numerous court battles and additional tax assessments if the inspectors begin denying reimbursement of VAT or tax reductions on profits using these guidelines, since many of the "schemes" are actually legal and have been used by businesses for some time.

Furthermore, in these guidelines the Tax Service urges automatically penalizing companies for certain operations, even if the tax for those operations was eventually paid into the budget. For example, companies periodically purchase products from their founders using resources received from them, but the founders themselves pay tax on the transaction. Furthermore, according to the Constitutional Court, denying VAT reimbursements on purchases paid with borrowed resources is allowed only if the tax authorities can prove that the company had no intention to repay the loan.

Proving criminal intent for many of these operations would be problematic. In fact, the Tax Service only refers to circumstances which, in the opinion of the High Court of Arbitration, cannot in and of themselves attest to a company’s receipt of ungrounded tax benefits leading to sanctions for the company.

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