At the end of June 2012, the Supreme Commercial Court of the Russian Federation (the “SCC”) handed down a judgment in which it made important conclusions on the evidence required to substantiate the deduction of expenses for consulting, IT and HR services.

According to the case materials, an organisation entered into agreements with two foreign companies on providing the above services. During a tax audit to substantiate the service expenses incurred, the organisation presented agreements with the foreign companies, service acceptance acts, reports on the services, as well as e-mail correspondence (consultation occurred via e-mail and verbally). The tax authorities determined that the documents had been compiled exclusively in order to reduce tax obligations; therefore, they recognised the respective expenses as economically unsubstantiated.

The SCC, among other courts, upheld the position of the tax authorities. The SCC ruled that the documents presented did not contain substantial terms and conditions of the services, such as information on (i) specifically what type of consultation was rendered; (ii) the hourly and base rates for a specific quantity of services; (iii) the price calculation for actual services rendered; (iv) the actual number of employees rendering the services; (v) the duration of the services rendered; and (vi) the official responsibilities of the employees. Additionally, the service acceptance acts were boilerplate in nature, copied from month to month with the same descriptions and with no reference to the reports of the service providers. The tax authorities also found other deficiencies in the documentation which hindered an exact determination of (i) the actions of those who provided the services pursuant to the agreements; and (ii) the cost of each type of service.

Taking into consideration the above, the SCC confirmed that the expenses incurred by the organisation for the services rendered were unsubstantiated, as the organisation had not submitted documents to clarify the actual transactions completed. Consequently, the SCC stated that there are no grounds for reconsidering the case.

The decision in this case shows that there is a tax risk for taxpayers if they inadequately record services provided to them, and if they fail to indicate the commercial purpose of acquiring such services.

[Ruling No. 667/10 of the Supreme Commercial Court of the Russian Federation “On Rejecting to Transfer a Case to the Presidium of the Supreme Commercial Court of the Russian Federation”, dated 29 June 2012]