Refusing to Reimburse VAT Based on "Suspicious Foreign-Partner Companies" is Illegal
A Russian company suffered on account of their business partner when tax authorities refused to reimburse 29 million rubles of export VAT on transactions from 2002 with an American company. The refusal was explained by the fact that the tax authorities had not received, from customs or from the bank, confirmation of the exports and earnings. During 2003, the company proved their right to the reimbursement in three judicial instances, and the tax service was ordered to return the money.
However, in January 2006 tax authorities unexpectedly requested the Moscow Arbitration Court to review the decision made three years prior in view of newly discovered facts. These appeared to be letters from the administration of the Federal Tax Service (FNS) of Moscow, the central office of the FNS, and the Internal Revenue Service of the USA, which stated that the above mentioned American company did not obtain a Taxpayer Identification Number and did not file a tax report. On this occasion, the court ruled in favor of the tax authorities, and the Russian company was compelled to appeal to the High Arbitration Court (VAC) which established that the first ruling of the courts was correct.
The VAC declared that only in very exceptional cases can a company be forced to pay back money that had been obtained as a tax return from the state in the past. At the same time, evidence presented by the tax authorities could not be considered significant for this specific case and should not effect the rulings, since the tax code does not connect a company's right to reimbursement of export VAT to its foreign partner's adherence to their country’s law.
Experts claim that the VAC is thus refuting one of the most widely used arguments of tax authorities, that is, that a foreign company is suspicious (a "one day firm," created to specifically for the tax benefit of another company) and therefore VAT from transactions with this company should not be reimbursed.
In order to refuse VAT refunds, tax authorities more and more often look into the activities of the foreign business partner. They think that a multitude of minor evidence can convince the court of taxpayer dishonesty. Tax authorities use the assumed foreign partner’s offences and the absence of a tax identification number as a means to resurrect cases they had lost in the past. Now the VAC has decided that a violation of the law by foreign partner does not justify starting a new process of reviewing the courts' rulings.