Claims over ‘abusive exercise of taxpayer rights’ constitute on a stable basis a substantial part of tax disputes in Russia, while the case-law on application of Article 54.1 of the Russian Tax Code relating to such abuse is rather inconsistent. Under the circumstances, the Letter of the Federal Tax Service “On practical application of Article 54.1 of the Russian Federation Tax Code”, No. БВ-4-7/3060, of March 10, 2021 (“Letter”) seems to be of critical importance.
One of most critical provisions of the Letter is the principal assumption allowing so-called ‘tax reconstruction’, i.e. charging taxes to a taxpayer in the same way as if the taxpayer had not exercised its rights abusively. This is a softer alternative to the approach that had been adhered to by tax authorities before publication of the Letter, which was full refusal to recognize deductible expenses and deductions on transactions to which a tax inspection might have claims.
A most typical example of tax reconstruction is recognition of VAT deductions and expense deductibles on goods supplied to a taxpayer via a ‘technical’ intermediary. In such case, tax reconstruction enables a taxpayer to recognize its expenses and deductibles based on the real seller’s sale price; while a refusal of recognition will only be applicable to an intermediary’s mark-on. To be able to evidence the real price, it will be necessary to receive relevant documents (such as tax invoices, acceptance certificates, etc.) from the real seller. As an alternative, market evaluation of goods supplied may be conducted.
That said, application of ‘tax reconstruction’ as a mechanism to assert taxpayer’s interests is not limited to disputes over unfair supplier only. For instance, in matters concerning business splitting or forced termination of preferential tax treatment, it allows a taxpayer to substantiate its entitlement to VAT deductions which it would not otherwise be able to recognize under a special taxation treatment, however would be entitled to recognize them as a taxpayer under the common taxation system. One cannot predict all and every cases where tax reconstruction would be appropriate. Therefore, a taxpayer facing any claims under Article 54.1 of the Russian Tax Code should thoroughly assess the possibility of using this mechanism, based on the taxpayer-specific basis.