The matter in brief
How it went
Situation. Following a field tax audit, the company was assessed additional corporate income tax and VAT, with the tax authority questioning the reality of transactions with one of its suppliers.
What we did. We gathered and presented evidence that the business transactions were real, from primary documents to witness testimony, prepared objections to the audit report and, after the tax authority’s refusal, brought a claim in the commercial court.
Result. The court found the additional assessment unfounded in full, and the tax authority’s decision was set aside.
Legal framework for cancelling an assessment made after an audit
Scope and duration of a field audit. Under Article 89 of the Russian Tax Code, a field audit may cover no more than three calendar years preceding the year in which the decision to conduct it was issued. As a general rule it lasts up to two months, extendable to four or six.
Article 54.1 of the Russian Tax Code on the limits of tax optimisation. Formal complaints about a counterparty, such as a signatory with signs of being a nominee, minimal staff, or absence from the registered address, do not in themselves prove that a transaction was not real. The tax authority must prove that the obligation was not performed by the named party and that the taxpayer knew, or should have known, this.
Mandatory pre-trial procedure. An audit decision cannot be challenged directly in court. Articles 138 and 139.1 of the Russian Tax Code require an appeal first to be filed with the higher tax authority within a month of service of the decision, before it enters into force. Only then does the route to the commercial court open.
Time limit for going to court. If the higher authority does not uphold the appeal, Article 198 of the Arbitrazh Procedure Code allows three months from the day the taxpayer learned of the violation of its rights to file an application with the commercial court.
How an assessment is usually challenged
The general sequence for a typical dispute following a field audit, leaving aside the postponements and extensions that in practice lengthen the timeframes.
Objections to the audit report
After the report is served, the taxpayer has a month to submit written objections and supporting documents. Timeframe: 1 month from receipt of the report.
Review of the materials and the inspectorate’s decision
The head of the tax authority reviews the report, the objections and other materials, then issues a decision either to hold the taxpayer liable or to decline to do so. Timeframe: 10 days after the objection period expires, extendable to a month.
Appeal to the higher authority
A mandatory stage before going to court. The appeal is filed through the inspectorate that issued the decision and suspends the decision’s entry into force until it is considered. Timeframe: 1 month from service of the decision.
Application to the commercial court
Filed after the higher authority’s decision on the appeal, if the dispute has not been settled out of court. Timeframe: 3 months from the day the taxpayer learned of the violation of its rights.
Court proceedings and review by higher courts
Hearing in the first instance and, if necessary, appeal and cassation by either party. Timeframe: depends on the complexity of the case.
Common mistakes when challenging audit results
Trying to go straight to court. Without following the mandatory pre-trial procedure, namely an appeal to the higher tax authority, the commercial court will leave the application without consideration, however sound the arguments on the merits.
Passivity during the audit. Companies often fail to provide explanations and documents on time, planning to set out their whole position in court. But convincing a court that the transactions were real is much harder without having responded during the audit and to the report.
Focusing on the counterparty’s reputation rather than the reality of the transaction. A dispute is often built around the counterparty having been reputable in itself, whereas the key question under Article 54.1 of the Russian Tax Code is whether the transaction was actually performed, and by whom, not merely the supplier’s formal reliability.
Underestimating the evidential requirements. The reality of transactions is confirmed not only by contracts and invoices but by the whole chain of circumstantial evidence: transport and warehouse documents, correspondence, and the testimony of employees, which usually turns out to be decisive in court.
What to bear in mind while the dispute is unresolved
Late-payment interest keeps accruing. Appealing the decision does not by itself stop interest accruing on the tax arrears. It continues to grow for the whole period of the dispute unless the decision is set aside and the arrears are paid or secured.
Interim measures. The tax authority may take interim measures even before the decision enters into force: a ban on disposing of property without the inspectorate’s consent and, where such property is insufficient, a suspension of transactions on bank accounts.
Risk to the director and controlling persons. If the assessment stands and the company cannot pay it, a large tax debt becomes grounds for bankruptcy proceedings, in which the question of subsidiary liability of the director and beneficiaries arises.
Criminal law risks at a large scale. Tax evasion on a large or especially large scale constitutes an offence under Article 199 of the Russian Criminal Code. Cancelling the assessment through administrative and court procedures also removes the grounds for criminal prosecution on that episode.
Tax audits in numbers
General benchmarks for this practice area, not figures for any specific case.
A similar situation? Let us discuss the details at a consultation.
Frequently asked questions
Can a fine be challenged if it has already been imposed and the money debited?+
Yes, it can be challenged even after the money has been debited. If the court rules in your favour, the money must be returned with interest.
Can a nominee director face subsidiary liability for tax debts?+
Formal status does not automatically exempt a person from liability, but a genuine lack of influence over the company’s decisions is a weighty argument in their defence.
Is this a real case or a generalised example?+
It is a real matter from the firm’s practice. We publish it without company names or the names of the participants, as every client agreement includes a non-disclosure clause.