Since January 1, 2007 the Tax Code of the Russian Federation has limited the Russian tax authorities as to what documents they can demand from companies during desk audits. Previously, the authorities had the right to demand an unlimited amount of documents, which created a situation where audits often became a year-long affair. Now, under the new provisions in the Tax Code, additional documents can be required only for audits related to the Mineral Extraction Tax (MET), Value Added Tax (VAT), and audits of taxpayers enjoying tax privileges.
However, experience has shown that companies battling the tax authorities for every deduction have not been helped by these amendments. In fact, since the introduction of a uniform “Declaration of Export and Domestic VAT” in 2007, companies have had to submit even more documents than before. In verifying VAT declarations, the inspectors often can require any primary documents.
Demanding large volumes of documents is one way of fining companies, since it can often be impossible for large companies to come up with them in time. For example, during one field audit the tax authorities demanded that a large telecommunications company present 14 million documents within 5 days or pay a fine of 700 million rubles (at 50 rubles per document).
Experts believe that requiring that all primary documentation be presented is a direct violation of the new rules. The Chairman of the Superior Commercial Court (SCC) has asserted that, in desk audits surrounding VAT payments, the inspectors can require tax invoices from the taxpayer, as well as documents provided for by Art. 172 of the Code (regarding tax deductions). The head of the SCC also believes that paragraph 8 of Article 88 of the RF Tax Code (on desk audits) can be interpreted thus: "Documents can be required by the tax authorities only if the taxpayer is demanding reimbursement of taxes." Furthermore, if the amount sought to be reimbursed is not declared, then according to this interpretation, the tax authorities can’t even demand invoices (regardless of the size of deductions). And all other documents (contracts, acts, bills of lading) can be required only in field audits.
Many tax experts believe that companies who are required to produce too many documents during VAT declaration audits should take the situation to court.
Tax authorities, for their part, have found the following ways to circumvent restrictions in the tax code:
1. The authorities will increasingly seek documents from the taxpayer’s contracting parties.
For example, they may request from a bank an expanded current account statement for the taxpayer, determine its contracting parties, and then "demand from them information or documents on a specific transaction." Prior to January 1, such activities were referred to as "third-party audits", but now there is no such term in the Tax Code. As a result the mechanism of demanding documents from contracting parties has become more dangerous for businesses. Tax authorities may obtain information not only on specific transactions, but from any who knows anything about the company.
2. Tax authorities often require documents from the company's partners, and from the company itself, ostensibly in connection with verification of the partners.
3. The tax authorities also have a way of circumventing a prohibition in the Tax Code against conducting more than two field inspections per year.
For example, if the authorities assess additional social taxes, the company can reduce its taxable income. However, this is grounds for conducting another audit.
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