VAT Deduction and the Grounds for Obtaining Tax Benefits

In accordance with Clause 1 Article 171 of the Tax Code of the Russian Federation (TC RF) the taxpayer has the right to decrease the total amount of value added tax calculated in compliance with Article 166 TC RF by the sum of tax deductions.

Subject to Clause 2 Article 171 TC RF, the sums of tax imposed on the taxpayer’s purchase of goods (work, services) as well as property rights on the territory of the Russian Federation or the sums paid by the taxpayer when importing goods to the customs territory of the Russian Federation for internal consumption, temporary import and processing outside the customs territory or on import of goods through the customs border of the Russian Federation without the customs control and the customs formalities, in respect of goods (work, services), as well as property rights acquired for transaction of operations, which are subject to taxation in accordance with the present Article, except goods specified in Clause 2 Article 170 of the present Code, are subject to deduction.

Subject to paragraph 1 Clause 1 Article 172 TC RF the tax deductions provided under Article 171 TC RF are made on the basis of invoices extended by the sellers to the taxpayers for purchase of goods (work, services), or on the basis of documents proving the actual payment of taxes.

As follows from Clause 2 Article 173 of the Tax Code of the Russian Federation, if the sum of tax deductions in any tax period exceeds the total sum of tax calculated in accordance with Article 166 of the Tax Code of the Russian Federation, the positive difference between the amount of tax deductions and the sum of tax imputed on the operations, which are subject to taxation in accordance with sub-clauses 1 and 2 Clause 1 Article 146 of the Tax Code of the Russian Federation, is refundable to the taxpayer.

The tax legislation does not provide any requirements that the taxpayer should prove his right to value added tax deductions by presenting evidences of receipt of the claimed amount by the federal budget.

However the tax bodies quite often ask the taxpayer to provide documentary proofs that his counteragents under the deals have paid VAT to the budget, not only despite the provisions of the Tax Code of the Russian Federation, but also the legal position of the Constitutional Court of the Russian Federation, which is stated in the Ruling of 16.10.2003 N 329-_, according to which interpretation of Article 57 of the Constitution of the Russian Federation in interconnection with the other provisions of the Constitution of the Russian Federation does not allow concluding that the taxpayer is liable for the actions of all participants of the multistage process of payment of taxes to the budget.

By implication of Clause 7 Article 3 TC RF, the presumption of good faith prevails in the sphere of tax legal relations. The law enforcement bodies may not interpret the concept “good faith taxpayers” as assumption by the taxpayer of additional obligations, which are not provided by the law.

And still, in case of commercial proceeding the taxpayer will have to prove his good faith and due diligence in the choice of counteragent. Therefore, under conclusion of deals it is necessary to ask the counteragent to present the documents confirming its legal status, extract from the Unified state register of legal entities (EGRUL), Articles of Association, Certificate of registration with the tax body, notices of Mosgorstat (Moscow Statistics Agency), in particular.

In accordance with Clause 10 of the Resolution of the Plenum of the Superior Arbitrazh (Commercial) Court of the Russian Federation of 12.10.2006 No. 53 the fact of infringement by the taxpayer’s counteragent of its tax obligations does not prove by itself the receipt by the taxpayer of unfounded tax benefit. The tax profit may be recognized ungrounded, if the tax body proves that the taxpayer acted without due diligence and that the taxpayer should have been aware of the infringements made by the counteragent due to interdependent or affiliated relationship between the taxpayer and the counteragent, in particular.

The existing tax legislation does not contain any provisions regarding measures to be taken by the taxpayer to prove its due diligence in the choice of counteragent.

For realization of such measures one may be governed, for example, by explanations provided by the official bodies.

Thus, in the Letter of the Ministry of Finance of the Russian Federation of 10.04.2009 No. 03-02-07/1-177 it is stated that due diligence in the choice of counteragent on behalf of taxpayer includes such measures as receiving from the counteragent a copy of certificate of tax registration, verification of the fact of entering the counteragent’s data in EGRUL, receipt of documents on signatory powers of authorized persons, use of official sources of information.

The right to VAT deduction in accordance with the existing tax legislation of the Russian Federation does not depend on payment of taxes by the supplier of goods (works, services), and therefore the taxpayer is not liable for the actions of third parties, especially if the due diligence has been observed by the taxpayer.

Having established the non-payment of VAT to the budget by suppliers of the taxpayer claiming VAT deduction, the tax bodies may in accordance with sub-clause 7 Clause 1 Article 31 TC RF calculate the sums of taxes on the basis of the available information about the suppliers.

Absence of a legal entity in the legal address of its location may not prevent the tax body from conducting the respective tax audit, identifying the sums of unpaid taxes, charging and collecting them. However, judging from the judicial practice, the tax bodies refuse to perform their obligations, they refer to absence of legal entities, the taxpayer’s counteragents, at their registered addresses, unlawfully charge the taxpayers with all responsibility and deprive them of the right to deductions.

The taxpayers are actually refused the VAT deductions due to improper and untimely control on behalf of the unified centralized system of the tax bodies over observation by the third parties of requirements of law on the state registration of legal entities, legislation on taxes and duties, and performance of their tax obligations.

As follows from Clause 9 of the Resolution of the Plenum of the Superior Arbitrazh (Commercial) Court of the Russian Federation of 12.10.2006 N 53, when establishing economic or other reasons (business aims) of the taxpayer’s actions the court should consider the circumstances testifying to its intention to achieve economic effectiveness of the real business or other economic activities.

Obtainment of tax benefits may not be regarded as an independent aim of business.

Thus, when concluding deals, the taxpayer should be ready to prove that he as an economic subject has taken all preventive measures, and the aim of the deals concluded by him is to achieve economic efficiency, not to obtain ungrounded tax privileges.