On 3 July 2012, the Presidium of the Supreme Commercial Court of the Russian Federation (the “SCC”) reviewed another case on the lack of due diligence in choosing a counterparty.
According to the case materials, during a tax audit, the tax authorities assessed additional profit tax on an organisation’s transactions with a supplier which the tax authorities deemed suspicious. The tax authorities based their conclusions on the fact that the supplier (i) was registered at a “mass registration” address; and (ii) did not have any of its own or rented fixed assets, transport and/or staff during the period in dispute. The courts of the first three instances upheld the position of the tax authorities, stating that possession and use by the organisation of the supplied materials in production was not sufficient evidence that the transactions were not fictitious.
In reviewing the case, the SCC noted that the actual nature of a transaction and its economic substance must be taken into account when determining the amount of a tax obligation if there is any doubt as to the substantiation of the tax benefit.
Therefore, if a tax inspection reveals that an organisation has submitted inadequate documents, and that there are grounds to believe that an organisation had intended to receive unsubstantiated tax benefits, or an organisation has failed to provide evidence of due diligence conducted when choosing a counterparty, then the tax authorities must use the market rate of similar transactions to calculate the profit tax on the actual value of assumed tax benefits and expenses which a taxpayer has incurred. The SCC stated that the taxpayer itself is obliged to confirm the “market rate” of prices for the transactions in question. The Ministry has confirmed that an agent may indicate information on the agency agreement in VAT invoices. Consequently, an agent acquiring goods (works or services) in its own name may indicate the number and the date of the agency agreement in the VAT invoice. However, agents are not entitled to issue collective VAT invoices.
It should be noted that the conclusions in this case could substantially alter tax practice on this issue. Indeed, until recently, when considering cases like this, both the tax authorities and the courts paid more attention to the formal criteria of due diligence. In most cases, they detected some infringements in the activity of the suppliers, particularly in proving that the seller had not gathered sufficient information on the activity of the suppliers. Now the SCC directs the attention of the courts to the fact that it must also be duly proved that a taxpayer has received unsubstantiated tax benefits.
Consequently, if a taxpayer confirms the actual completion of transactions (actual acquisition of goods, works and services), then no additional taxes may be assessed if the taxpayer is able to justify that the prices of such transactions conform to the market rates. If the tax authorities disagree with this, then they will have to prove the actual value of any unsubstantiated tax benefits which the taxpayer has received, based on comparable market conditions.
[Decree No. 2341/12 of the Supreme Commercial Court of the Russian Federation, dated 3 July 2012]