How courts calculate the fictitiousness of payments that increase deductions.

It is not uncommon for companies to develop and put into practice schemes which enable them to increase the amount of tax deductions. Taking advantage of this, they transfer to the budget smaller amounts than they are entitled to under the law. If the tax authorities find out such actions of the firm during an audit, they will have to pay not only the full amount of taxes, but also fines and penalties. Let’s consider the example of a specific case, which may lead the courts to the conclusion of the fictitious actions of the company, which are made only to obtain tax preferences.

The Arbitration Court of the North Caucasus District considered case No. A32-60888/2022, in which the above issues were raised. Initially, the company appealed against the decision of the inspectorate, which charged it additional VAT, personal income tax, profit tax, as well as insurance contributions, penalties and fines. The fiscal authorities referred to the company’s formal document turnover in order to reduce mandatory payments.

The court of first instance partially overturned the decision of the tax authorities. The annulment concerned additional VAT, insurance contributions, a part of profit tax, as well as the corresponding penalties and fines. The remaining claims of the firm were denied.

Then the fiscal authorities appealed, which reversed the decision of the court of first instance in the appealed part. The company’s claims were denied. With this approach agreed and cassation, its conclusions are recorded in the decision of February 8, 2024.

The higher courts found that the group of companies, which included this company, conducted coordinated activities. The actions of the entities did not pursue any particular business purpose. They were aimed at enabling the firm to obtain VAT deductions and reduce the amounts paid to the budget as a compulsory payment. Such conclusions of the courts were based on the following circumstances:

affiliates transferred amounts to the company that did not correspond to either the volumes or the list of actual supplies;
the money under the transactions was not transferred according to the payment schedule. The formality of actions was also indicated by the fact that the letters of the company with a request to return the money payments had a later date than the return of funds itself;
in the course of the court session no evidence was presented to confirm that the company had concluded transactions with foreign partners for the supply of equipment for the purchase of which it had transferred an advance payment to the counterparty. Despite the fact that the delivery date of the equipment had already expired and it had not been delivered, the advance payment was not returned to the company. However, the company never issued a claim to the counterparty;
the sham nature of the concluded transactions was discovered when receiving funds under loan agreements.
Taking into account all this, the judicial body confirmed that the fiscal authorities rightfully additional VAT, as well as the relevant penalties and fines.

In addition, it turned out that the company for two years paid lease payments on objects that in fact it was not used. The company did not dispute this. As a result of such machinations it overstated profit tax expenses.

Also, the company’s accounting records recorded a fictitious right to claim a debt from another entity and receive finances under the guise of debt repayment under this right. The courts qualified the receipt of this money as gratuitously received property, which was not recognized as non-operating income for profit tax.

Guided by these arguments, the judicial body noted the legitimacy of the tax authorities’ additional charge of profit tax to the company, as well as the corresponding penalties and fines.

Finally, the company paid its employees wages equal to half of the minimum wage or even less. This indicated that the employer had a scheme to pay employees in black cash. In order to understate the tax base for insurance contributions, it was practiced to enter incorrect data on the time actually worked by employees. The courts concluded that the fiscal authorities were justified in charging the firm additional insurance contributions, as well as the relevant penalties and a fine.

Source: https://antifinrazvedka.club/kak-sudy-vychislyayut-fiktivnost-platezhej-uvelichivayushhih-summy-vychetov/