Product Retail Taxes: Failed Tax Optimization
Case No. А19-273 / 2016 is another unsuccessful example of the fact that for successful tax optimization not only the initial “legality” of the scheme is important, but also its adaptation to the company's business processes.
The plot of the case: the company Rusich Market LLC was engaged in the retail sale of food products. Similarly to the Master Instrument case, the main activity (procurement, finance, accounting, marketing) was carried out from the parent company on DOS, and retail sales from additionally created entities in special mode (LLC MAG and LLC GAMMA). As in the “Master Instrument” case, the tax authority combined all entities into one and calculated taxes based on the conduct of all activities by one entity. The Supreme Court of Taxes supported.
The tax authority brought many different arguments that the court accepted, including those widespread as interdependence, common addresses and telephones, and the absence of operating payments (rent, advertising, communications). Analysis of these points can be found in any legal analysis of business fragmentation.
1. A partial purchase from suppliers was directly cited by the taxpayer as an argument in favor of the independence of retail entities. But this argument did not receive a proper assessment by the court, including because the procurement procedure itself (negotiations, placing an order, making payments) was carried out by a category manager who was registered with the parent company. Moreover, both in relation to goods passing through documents through LLC Rusich Market, and directly to Retail.
2. I have already said that a scheme with “simplified” sleeves of sales and centralized procurement is justified when it is possible to isolate the “input” organization in kind (centralized distribution warehouse separate from points of sale). In this case, Rusich Market LLC had no warehouse at all. Suppliers delivered goods directly to retail outlets both in the case of delivery through LLC Rusich Market, and in the case of delivery directly
3. The goal that was pursued when dividing suppliers into “simplists” and “classics” is clear. When delivering goods from a simplist to LLC Rusich Market, one would have to either sell at a loss or “get” VAT on the delivery amount. However, the division of counterparties by taxation systems clearly indicates that such structuring occurred for tax benefits. The taxpayer could not somehow explain such a separation of suppliers. Therefore, tax benefit has remained the sole purpose of such a division. What is recognized by the courts as illegal.
To solve these problems, business processes can not be changed. There are many different structuring tools and you can combine them for existing business processes.
All deliveries according to the documents must go directly to retail. So we do not “fall” to VAT and the actual movement of goods corresponds to the documentary. The question remains how to “document” the centralization of the procurement business process. For example, a category manager can be transferred to a management company. I already considered this option in a previous article.
Another option may be more optimal. Centralized procurement can be done through an agent. The functions of a category manager are close to entrepreneurship. Therefore, this is quite a suitable figure for issuing an IP and concluding an agency contract for the purchase.
The main conclusion: you need to select the scheme not from the “legitimate”, but from the ones suitable for your business processes. There is always a choice! If you can’t choose by yourself, contact a specialist. A selection error is fraught with serious losses.
Structure your business correctly.
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September 25, 2017
Kirill Soppa, partner. I am engaged in taxes, I like to build business processes. I am writing articles, looking for interesting information and suggest ways of its practical use. I believe that thanks to high-quality legal analytics, clients come to a law firm, and not vice versa. Do you agree? Then let's be friends on Facebook.
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