Among the large number of legislative and secondary acts recently adopted and to be adopted concerning taxation in the near future, particularly notable are documents intended to extend the capacity of state authorities to carry out tax controls and increase pressure on taxpayers to increase the state's tax receipts.
These documents include, above all, a new VAT return form and the Federal Law changing the procedure for initiating criminal cases for tax offenses (art. 198 – 199.2 of the RF Criminal Code).
New VAT return form
The restated clause 5 and new rules of clauses 5.1 and 5.2 of article 174 of the RF TC (Federal Laws No. 134-FZ of 28.06.2013 and No. 238-FZ of July 21, 2014) take effect on January 1, 2015.
These amendments to the RF TC provide for the submission of VAT returns in electronic form only, with the inclusion of information from the taxpayer's sales and purchase books.
Intermediaries acting for other persons (agents) that have VAT taxpayer status and are not released from performance of the corresponding obligations must also include information from their registers of VAT invoices issued and received during the performance of intermediary activities in the VAT return. If such intermediaries are not VAT taxpayers or are released from performance of the obligations of a VAT taxpayer, they must submit the actual registers of VAT invoices issued and received to the tax authorities in electronic form.
FTS Russia Decree No. ММV-7-3/558@ of October 29, 2014 approved a new VAT return form, procedure for completion, and the format for submission in electronic form. The new form is to be used from the first quarter of 2015.
According to the new form and procedure, the date and number of each VAT invoice received or issued by the taxpayer, and amended or corrected VAT invoices are to be reflected on a separate page of the return. The return must also indicate the date the purchased goods, works or services were entered on the books, and the number and date of the document confirming payment of tax to the counterparty (according to received VAT invoices). If there are several such documents with respect to transactions reflected in a single VAT invoice, a separate page of the return must be completed for each document. The return must also state all other information recorded in the sales and purchase books (tax declaration number, INN/KPP of intermediary, etc.) and the registers of VAT invoices issued and received (for intermediary transactions).
As a result of the amendments to art. 174 of the RF TC and approval of the new VAT return form, by the end of the first quarter of 2015, the tax authorities will gain the ability to generate the sales and purchase books of any taxpayer and its counterparties, and even the counterparties of the taxpayer's counterparties, practically online. In other words, using special software the tax authority will be able to obtain and verify practically instantly information on the commercial transactions of all parties to the chain of commercial relations represented in the VAT accounts.
This measure will significantly increase the tax risks associated with working with organizations that meet fly-by-night criteria, as well as organizations that do not meet such criteria, but are intermediaries in the chain of commercial transactions between the taxpayer and organizations that do meet such criteria.
Amendments to the RF Criminal Procedure Code concerning procedure for initiating criminal cases for tax-related offenses
Amendments made by Federal Law No. 308-FZ of October 22, 2014 establish a new procedure for initiating criminal cases in tax-related offenses (art. 198 – 199.2 of the RF Criminal Code).
According to these amendments, upon receiving notice that a tax offense may have been committed, an investigator forwards the information together with the corresponding materials and a calculation of the unpaid amount to the higher tax authority of the tax authority with which the taxpayer/tax agent is registered.
The higher tax authority has 15 days to send a reply to the investigator concerning information it has on tax offenses. This reply essentially comes down to whether a tax audit had been or was being performed at the time the query was received from the investigator with respect to the taxpayer/tax agent. If an audit has been performed, and the tax authority has issued a valid decision recording the tax offense referred to in the investigator's query, the tax authority shall forward the report on the tax violations to the investigator.
Within 30 days of receiving the notice of the offense, the investigator must decide whether a criminal case should be initiated. However, the tax authority's response is not binding on the investigator. A criminal case may be initiated even if a tax audit of the taxpayer/tax agent has not been performed or is being performed at the time the information is exchanged.
Therefore, clause 1.1 of art. 140 of the RF Criminal Procedure Code, which provided that only materials received from a tax authority following a tax audit could serve as the basis for initiation of a criminal case, has been rescinded.
RF Investigative Committee investigators therefore once again have the power to independently initiate criminal cases concerning tax offenses, irrespective of tax audits. The tax authorities have been given the role of an advisory authority in the process of initiating criminal cases, whose opinion is not binding for the investigator.
The adoption of this law and the amendments to art. 174 of the RF TC essentially create the legal and, to some degree, technical basis for initiating criminal cases for tax offenses practically immediately after the VAT tax return deadline, without even waiting for the three-month deadline for conducting desk audits.
It is worth adding that, at the time of writing, the RF State Duma had already adopted a draft law1 in the first reading on amendments to the RF Criminal Code introducing a new qualification for evasion of corporate taxes (art. 199 of the RF Criminal Code), commission of the said act using organizations established through fronts, that is, organizations that meet the criteria for fly-by-night companies.
The above-described legislative measures create serious scope for increasing pressure on taxpayers that directly or indirectly (through "intermediary" organizations) interact with organizations that meet the criteria for fly-by-night companies and do not perform their tax obligations. Upon the entry into force of these amendments, this pressure will most likely be brought to bear not only using the means provided in the RF TC (freezing bank accounts, etc.), but also by means of criminal prosecution of the taxpayer's officers. This is supported by the public statements of RF Investigative Committee representatives.
Our observations and personal experience in the commercial courts in disputes concerning the activities of companies that meet fly-by-night criteria and unjustified tax benefits show that in most cases there is a tendency to issue judgments unfavorable to taxpayers.
For the reasons noted, due care in choice of counterparty is becoming vital to managing a company's tax risks.
We advise companies to make every effort to verify the good faith and legal probity of counterparties, and to improve verification procedures where necessary. This is especially true for transactions for large sums, where the tax authority challenging costs or VAT deductions may trigger the initiation of a criminal case.
The specialists of the Dentons tax practice apply their extensive experience of successfully conducting tax disputes and consultation work to produce corporate policies and verification programs for checking potential counterparties in order to prevent and mitigate the risk of disputes concerning due care in choice of counterparty.