Recently thanks to extension of its powers and active use of information technologies the Federal Tax Service has access to a huge amount of data not only on tax payers but on owners of businesses. Tax authorities know all banking transactions; through banks they know who manages all your accounts and from which computer (almost all account are now managed through internet banking); they have access to nearly all information databases of governmental authorities (customs service, traffic police, civil registry office, Federal Migration Service and others); tax officers are entitled to inspect your premises and to take part in inventories; are entitled to interrogate employees without notice of the employer and this is not a complete list of opportunities of the Federal Tax Service.
Soon fiscals will have access to foreign banking transaction online, although even now they can request them. The phrase “tax authorities know everything about you” is absolutely true.
One can draw a simple conclusion out of this: the times of “documentary” tax optimization is gone forever. To save taxes one used to execute documents properly, put them on a shelf and work as usual and that was enough. But now tax officers using their unlimited knowledge can easily prove that everything was not the way it was described in the documents submitted. Analysis of current legal cases can be the evidence.
Not to look weak in court it is necessary to “lay” “real structures” underneath tax schemes. Today many auditors, accountants, lawyers and different tax consultants smelling a new spin of conjuncture sell the latest “tax schemes”.
Except for adequate execution of documents audit and re-engineering of business processes is necessary. This is beyond the competence of lawyers and accountants.
Any kind of reorganization should meet the requirements of economic efficiency. Additional “real structures” cost money (for instance, to rent a warehouse for a company, which can be estimated by tax authorities as a “shell company”), that is why one should try to use the ones he has to the limit. But to separate a department into a single legal entity is not enough. To separate contracts on mobile service, internet, on supply of office materials and pure water – this is an incomplete list of issues which should be resolved to make restructuring right. An office manager used to handle these contracts before by who is going to do that in an “independent” company? This is delicate management but today tax optimization is not possible without it. Tax consultants don’t mention it.
A case of the Korolevskaya Voda company established a new important trend. Now a debtor is determined based on actual criteria but not on Tax Payer Number (INN). If a different legal entity sells the same product to the same clients under the same brand having the same employees, the same contacts and the same website it means that it is the same business that owes taxes to the budget. Formal independence of the founders of this new legal entity means nothing. This trend has been supported by the courts of all instances. If it is fair or not is a question of philosophy. Today this is objective reality – one cannot leave a legal entity with unpaid taxes and keep conducting the same business activity. Even stopping this business gives one no guarantees.
By the end of 2016 legislators amended subparagraph 2 paragraph 2 of Article 45 of the Tax Code of the Russian Federation and replaced the “companies” with the “person”. So tax authorities were given an opportunity to collect tax debts not only from interdependent companies but also from interdependent natural persons. But there is a simple recipe against these seemingly “unlimited” opportunities of tax officers. Tax consultants scaring entrepreneurs with new amendments forget that Article 45 of the Tax Code of the Russian Federation says only about tax debts found as a result of the on-site tax audit. If one thinks about tax security of a business ahead and not the day before (and not during) the on-site tax audit as many do today he has a good chance to avoid unpleasant consequences.
Many entrepreneurs do not restructure their businesses because they do not understand why they need it. They think if tax authorities come they will face big additional charges anyway and there is no use in suing the government. That is why one just should make as much money as he can and hope for the best. The conclusion is doubtful. I would not deny that the statistics of recent legal cases does not on the side of tax payers. But I don’t think the main reason is that courts are bias.
Now tax officers actively use a risk-based approach. They go only there where they can definitely impose a lot of additional charges and if where there is property to pay with. The companies they have doubts about are split off at the stage of the pre-audit analysis. This has been the main reason of high efficiency of tax control measures recently. That is why the purpose of the restructuring of the business is to be considered as a “distasteful” client following tax pre-audit analysis. Given that 1% of the tax payers are audited now it is not an impossible task. And taking into account that most of entrepreneurs keep working in an old-fashioned way this is rather realistic.
Banks are another offensive front against tax optimization. It is a surprise but many entrepreneurs think that a purpose of shell companies is to receive cash. My acquaintances regularly ask me for something like this: “We need an invoice to reduce taxes but we don’t need cash, we can take goods. Can we do without shell companies in this case?”
No, “cash-out” is first of all to clean money of taxes. That is why financial monitoring of banks helps tax officers but, on the other hand, an average life expectancy of shell companies is progressively decreasing, cost and risks are increasing. When the cost of “cash-out” reaches 15% the risk will be not commensurate with the saving because VAT of the total amount of the transaction is 15,25%=18%/118%. If one pays VAT and chooses a simplified tax system paying 6% tax of the profit, then the effective tax burden will be 20.1%=100%—85%*94%. To risk business for 5% of margin is questionable fun. And the cost of “cash-out” will soon reach 10%.
So, the economy of shell companies is close to the pay-back point and unlike tax control bank control is complete. Bank claims may concern your working current accounts, for instance, of a subordinate individual entrepreneur. It should be understood that banks are not rewarded for closing of suspicious accounts. You are still their client, and the banks are interested in you. As for the financial monitoring the major task of the bank is to prepare its “cover” for an audit by the Central Bank in order not to lose its license. Bank employees are regularly examined, and they know what kind of documents can withdraw claims of the auditors. It is better to develop a common language with bank employees and prepare a necessary documents package in advance.
What should one do to achieve tax security?
First of all, it is necessary to assess tax risks. If you cash out one million of rubles per year you don’t need to worry and keep working until shell companies disappear. Of course, this should not be considered as my advice to violate the law.
Then possible additional tax charges for three years should be evaluated. If you are ready to lose this amount of money in the worst case scenario even by selling some assets you can keep working the same way hoping you won’t become an object of the on-site tax audit and if you do you will bribe your way out.
If the amount of possible additional charges seems harsh, it should be thought about tax security now. But this should not be just consultations and buying some “schemes”.
Today proper business structuring (restructuring) is a kind of service including audit of your business (not only legal but also organizational one) and development of an individual solution consisting of a new structure of your business, paper work and re-engineering of business processes including reorganization of budgeting procedure, and management accounting. All other compromises are just waste of money.
February 12, 2019
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