Analysis of contracts for tax risks

Feb, 03 2020

The entrepreneurial activity of any company is connected with the close control of the tax authorities. Therefore, when making transactions, it is necessary to analyze the documents for the presence of tax risks carefully. Before entering into any contract, it is advised to take into account the following mandatory conditions:

  • economical value
  • integrity of the counterparty
  • technical mistakes
  • inconsistency.

Unless a company conducts analysis of contracts for tax risks before the deal, it can become a subject to ongoing tax audits or court proceedings with tax authorities, legal entities and individuals.

Economic value

Expenses specified in the contract must meet the requirements set forth in Article 252 of the Tax Code of the Russian Federation. One of the main conditions is to direct expenses on the activity, which will lead to income. Besides, all expenses must be drafted in written form according to requirements of current legislation.

This condition is especially relevant for the companies using simplified taxation system, which have chosen income reduced by the amount of expenses as the object of taxation. In this case when determining the tax base expenses provided for in the Article 346.16 (1) of the Tax Code of the Russian Federation are taken into account, the list of these expenses is exhaustive. Expenses not listed in this article are not considered for tax purposes.

There are such expenses, which cannot constitute objects of taxation irrespective of the applicable system of taxation – they are listed in the Article 270 of the Tax Code, for example:

  • dividends
  • authorized capital
  • voluntary insurance contributions
  • penalties etc.

Inconsistency

It is also important that the subject matter and objectives are clearly stated in the contract, the legal form of the document should be consistent with its economic content. If there are any inaccuracies in the documentation, it will be necessary to draw up clarifying attachments after the analysis and evaluation of the contract.

If the submitted documents contain unreliable or contradictory information, it may be a reason for the tax authorities to audit. The commission needs to make sure, that the company has not created a formal paperflow for artificial overstatement of costs.

When drafting a contract, it is also necessary that the content of a document is fully consistent with the data contained in the annexes to the contract and other supporting documentation.

Technical mistakes

In order to avoid extra red tape in cases of proving tax justification of expenses, it is needed to exclude technical mistakes from the text of the contract. Such mistakes include, for example, wrong specification of the parties to the contract, details, dates, terms, list of all annexes specified in the contract, etc.

Good faith of the counterparty

In order to estimate business reputation of the counterparty and minimize the risk of conclusion a contract with an unscrupulous business partner it is required to:

  • Receive an up-to-date extract from the Unified State Register of Legal Entities/Individual Entrepreneurs, which will confirm that the counterparty is appropriately registered and not deregistered at the time of receipt of the extract.
  • Analyze the balance sheet as of the last reporting date with the tax inspection mark. It will be possible to determine whether the company submits reports, whether it is conducting an active business activity and what amount of money it has.
  • Check the address of the company’s location for mass character. Mass address is one of the main features of one-day companies.
  • Check if director of the counterparty is not included in the register of disqualified persons. Disqualification is an administrative penalty, which consists of depriving the individual of certain rights, in particular, the right to hold senior positions in the executive body of the legal entity, to be a member of the Board of Directors (Supervisory Board), to carry out entrepreneurial activity in managing legal entity.
  • Check the presence of ongoing trials which the company was involved in. Check of arbitration cases is important not just for proving due diligence of the taxpayer, but also for obtaining information about his business reputation and his market behavior.
  • Verify the authority of the person signing the contract.

Therefore, all companies should responsibly treat issues of tax planning in the area of tax risk assessment when concluding contracts.

VALEN has many years of experience in the area of tax and contract law. Our lawyers will advise you on taxation and carry out detailed analysis of contracts for tax risks.