17 Signs a Tax Benefit is Unreasonable
An analysis of past arbitration court rulings has shown that all or some of the following 17 characteristics can indicate that a business has been split in order to obtain unreasonable tax benefits.
- One business or production process is split between different entities applying special tax systems (simplified taxation or unified taxation) rather than the main entity engaged in the business activity calculating and paying VAT, corporate income tax, and property tax together.
- The split business scheme influenced the conditions and economic results of all participants, including tax liabilities, which decreased or did not change as the whole business experienced an overall expansion.
- The taxpayer, its participants, officials or persons exercising actual control over the activity of the split business, are beneficiaries of the use of the business split scheme.
- Participants in the scheme carry out similar types of economic activity.
- Participants within the scheme were created shortly before expansion of production capacity and / or increase in the number of staff.
- Costs are passed between participants of the scheme.
- Direct or indirect interdependence (affiliation) of the participants in the business breakdown scheme (related relationships, participation in management bodies, official control, etc.).
- Personnel are redistributed between the scheme participants without changing their official duties.
- A controlled entity has no fixed assets, circulating assets, and/or personnel resources.
- The use by scheme participants of the same sign-boards, symbols, contact information, website, physical addresses, premises (offices, warehouses and production bases, etc.), accounts and services from the same banks, shared cash registers, terminals, etc.
- The only supplier or buyer for a scheme participant may be other participant(s), or suppliers and buyers for participants are shared.
- Scheme participants are effectively managed by the same individual(s).
- Participants share resources for accounting, personnel records management, recruitment, search and work with suppliers and buyers, legal support, logistics, etc.
- Participants are represented by the same individual(s) when dealing with state bodies and contractors not included into the split business scheme.
- Indicators such as the number of staff, the area occupied, and income size are close to the limits for the use of a special tax system.
- The taxpayer sees a decrease in profitability after the business is split.
- Distribution between the participants in the scheme of suppliers and customers is based on their system of taxation.
Translated by Alinga Consulting Group.
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