A New Order to Performing Tax Audits And Tax Control Measures

UnknownIrma Nemshevich Attorney-at-law, Head of Law Practice HLB Vneshaudit
The main changes in the articles of the Tax Code concerning tax control were made by Federal Law No. 137-FZ dated as of July 27, 2006, and were put in force from Jan. 1, 2007.

With the adoption of the federal law mentioned above, the procedure of performing in-house and on-site tax audits were adjusted and regulated.

In-house tax audits shall be performed at the location of a tax authority on the basis of tax returns and documents enclosed in the tax return by a taxpayer in pursuance of law.

Under the updated Article 88 Point 7 of the Tax Code, the tax authority shall not have the right to require a taxpayer to provide additional information, get clarification or documents unless otherwise provided by Article 88 or unless the Tax Code requires such documents to be presented together with a tax declaration.

The tax authority, however, can require a taxpayer to provide documents, confirming the taxpayer's right to use tax exemptions, to reimbursement of VAT, and to apply tax deductions as well as documents that are the basis for the calculation and payment of taxes on the use of natural resources.

If errors are found in the documents during in-house tax audits, the tax authority must inform the taxpayer and request necessary explanations within five days and make adjustments within the established time limit.

If the tax authority finds that a tax offense or another tax violation has been committed, officials of the tax authority shall be obligated to write an audit report.

Since Jan. 1, 2007, on-site tax audits shall be performed at the site of the taxpayer or at the location of the tax authority if the taxpayer is unable to provide premises for the audit.

The changes which were introduced to Article 89 of the Tax Code defined the term of the on-site tax audit as two months. This term shall be calculated from the day a decision to perform the one-site tax audit was issued till the day a certificate of the performance of an audit is created.

An on-site tax audit may be extended to four months or, in exceptional cases, to six months. They may be suspended for the purpose of requesting and obtaining documents in accordance with Article 93.1 of the Tax Code, obtaining information from foreign State bodies, the performance of expert examinations or the translation of documents provided by a taxpayer into Russian.

On-site tax audits may not be suspended for a total period of more than six months.

Exceptions occur when obtaining information from foreign state bodies. In this case, the suspension period of the tax audit may be prolonged by three months.

In accordance with a general rule, the tax authorities shall not have the right to perform two or more on-site tax audits in relation to the same taxes for one and the same period and the total number of on-site tax audits in a calendar year cannot be more then two.

However this rule has an exception. Under Article 89 Points 10 and 11 of the Tax Code repeat on-site tax audits may be performed by the higher tax authority -- inspecting the activities of a tax authority which has performed the tax audit or by the tax authority, which had performed the audit previously, by decision of the head of the tax authority - in case the taxpayer submits a revised tax return in which the stated amount of tax is less than the amount declared previously. In the second case, the tax authority may audit only the period in respect to which the revised tax return has been submitted. Finally, it maybe done if the carrying out of the on-site tax audit is in connection with the taxpayer's reorganization or liquidation.

Changes also touched on the procedure for on-site tax audits of subsidiaries. According to the new redaction of Article 89 of the Tax Code, the tax authority has a right to audit the activity of the branches in connection with an on-site tax audit of the head office. The exception is the audit of branches with respect to matters concerning the correct calculation and timely payment of regional and/or local taxes. In this case, the tax authority shall have the right to perform an independent on-site tax audit of branches.

In 2007, the Federal Tax Service issued criteria for an independent risk evaluation for taxpayers, made on the basis of Conceptual framework for on-site tax audit planning, approved by order of Federal Tax Service of May 30, 2007, No. MM-3-06/333, which are used to select entities for the performance of an on-site tax audit.

Eight criteria are named among the others; if the tax burden for a particular taxpayer is lower than the average level thereof for business entities within the sector concerned; if there are losses shown in financial statements over a number of tax periods; significant amounts of tax deductions in the tax statements for a particular period; if the rate of expense growth exceeds the rate of growth of income from the sales of goods; if the payment of average monthly salary per employee is lower than the average level for the type of economic activity concerned; the structuring of financial and economic activities on the basis of agreements with contract dealers or intermediaries without the existence of any reasonable economic basis; failure by a taxpayer to present explanations in response to a notification of discrepancies from a tax authority; or significant deviation of profitability level according to financial accounting data from the profitability level for the sphere of activity concerned.

The Federal Tax Service will confirm new regulations on the planning of on-site tax audits to which eight criteria will be added to those mentioned above and entities will be named to which an on-site tax audit will be obligatory.

Tax control is not limited by in-house and on-site tax audits. The concept "other measures of tax control" is not defined in the Tax Code, however we can suggest that the following measures are appropriate; requesting documents within the framework of a tax audit and beyond, questioning the witness and expert examination.

The introduction of a new form of tax control is being discussed in the Federal Tax Service's operational tax audits as reported by Deputy Finance Minister Sergei Shatalov in April 2008.