Controlled transactions with foreign companies. How to avoid problems when working with foreign partners?
Publication date/update: 08.02.2023
Criteria for classifying a transaction as controlled
How to correctly determine the annual value of transactions?
Procedure for controlling the value of contracts in controlled transactions
Notification to the tax authorities about controlled transactions
Sanctions for failure to notify the tax authorities about controlled transactions
How to correctly determine the annual value of transactions?
Procedure for controlling the value of contracts in controlled transactions
Notification to the tax authorities about controlled transactions
Sanctions for failure to notify the tax authorities about controlled transactions
Controlled transactions are those concluded between related parties or entities deemed to be related based on paragraph 1 of Article 105.14 of the Tax Code of the Russian Federation. Contracts for such transactions can be concluded between companies, as well as between legal and natural persons. Such transactions may include agreements signed with foreign counterparts.
Thus, the list of persons who can conclude controlled transactions includes:
1
Taxpayers in the territory of Russia;
2
Tax non-residents of Russia;
3
Domestic companies;
4
Foreign organizations.
Controlled transactions with foreign companies have similar features to any other controlled transactions. Among these features, the most important is the need to monitor the contract price at market level, notify the Russian Federal Tax Service about the existence of such a transaction, and face significant fines for violating the first two conditions.
This article will discuss the specifics of controlled transactions and how to avoid penalties when working with a related party.
This article will discuss the specifics of controlled transactions and how to avoid penalties when working with a related party.
Criteria for a transaction to be classified as controlled
Lawyers and auditors from the consulting company DVP Audit, as part of their professional activities, work with clients who engage in controlled transactions, including with foreign companies. To summarize and make the criteria for classifying transactions as controlled transactions more understandable, we have developed a table with the main criteria for interdependent characteristics and other grounds that are equivalent to them.
It is important to keep in mind that the new limit of 120 million rubles was established in 2022. It applies only to contracts signed in the calendar year 2022 or later.
A transaction will not be considered a controlled transaction if it has the following characteristics in accordance with paragraph 4 of Article 105.14 of the Tax Code of the Russian Federation:
A transaction will not be considered a controlled transaction if it has the following characteristics in accordance with paragraph 4 of Article 105.14 of the Tax Code of the Russian Federation:
1
if the contract is signed by entities-participants of a single legal entity association regarding the consolidation of tax payments, with the exception of transactions involving mineral resources;
2
the business entities are registered in the same region of Russia;
3
the companies do not have operating profits in other regions of Russia or other countries;
4
the entities do not pay taxes to the treasury of another region of Russia;
5
the transaction does not meet the conditions set forth in subparagraphs 2-6 of paragraph 2 of article 105.14 of the Tax Code of the Russian Federation;
6
the companies end the financial year without losses, including those carried over to future periods;
7
if the transaction is carried out with the involvement of guarantors, and the entities are not domestic banks;
8
if the subject matter of the transaction is the provision of a "zero" loan from one related person to another within the limits of Russia.
How to correctly determine the annual value of transactions?
As can be seen from the table provided, one of the main conditions for a transaction to be considered controlled is the amount of income from the total value of contracts signed in one year or another time period, where the concluded agreements had signs of related transactions. The limits set out in the table of 120 million or 1 billion rubles should be determined separately for each partner, and for the total sum of contracts with all counterparties.
Since 2021, the Russian Tax Code has been amended to clarify that companies that do not calculate income tax in accordance with chapter 25 of the Tax Code must calculate income from their transactions in accordance with the rules set out in that chapter. Similarly, income from contracts that are concluded through the intermediary of an agent or a trustee must be determined in the same way.
It is important to keep in mind that income that is not taken into account in accordance with chapter 25 of the Tax Code should not be added to the number obtained in calculating the value of contracts for the calendar year. Also, the following are not considered as income:
Since 2021, the Russian Tax Code has been amended to clarify that companies that do not calculate income tax in accordance with chapter 25 of the Tax Code must calculate income from their transactions in accordance with the rules set out in that chapter. Similarly, income from contracts that are concluded through the intermediary of an agent or a trustee must be determined in the same way.
It is important to keep in mind that income that is not taken into account in accordance with chapter 25 of the Tax Code should not be added to the number obtained in calculating the value of contracts for the calendar year. Also, the following are not considered as income:
1
Amounts received on credit;
2
Income not generated as a result of signing various agreements. Such income may include payment for a share in the authorized capital of an LLC when a member withdraws from the company.
However, it is important to know that the interest received as a result of usury activities will have to be included in the annual income from controlled transactions.
The procedure for controlling the value of contracts in controlled transactions
The Federal Tax Service of the Russian Federation closely monitors the prices of contracts concluded in order to combat fictitious and illegal tax optimization. The thing is that lowering the value of a transaction below the market value reduces the price of the contract. It is important to keep in mind that the interdistrict inspection of THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION, which carries out on-site and desk tax inspections in relation to each company, cannot check the value of contracts in controlled transactions. This is done by specialists of the federal service. Within the framework of scheduled and unscheduled inspections, regional service employees may find evidence of unjustified enrichment of the company through changes in prices in controlled transactions.
When checking contracts for compliance with current market prices, each company must provide the employees of THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION with documents and other evidence that could clarify the validity of setting this price. All documents requested by tax inspectors must be sent to THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION within 30 business days from the date of receiving the corresponding request.
It is important to take into account the fact that since 2021, the Tax Code of Russia has been supplemented with a provision that empowers inspectors to request documents and necessary information from other participants in controlled transactions and receive them within 10 business days from the day the subjects are familiarized with the corresponding request.
In situations where employees of THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION find evidence of differences in the value of contracts from the level of established market prices and, as a result, a decrease in the amount of tax paid is revealed, an inspection report is drawn up. This document and the materials of the inspection with the objections received are considered on the basis of the standard tax inspection procedure prescribed in articles 101 and 105.17 of the Tax Code of the Russian Federation.
To avoid getting into an unpleasant situation and not provoke the beginning of a tax inspection, companies have the opportunity to independently regulate the amount of taxes accrued in case of non-compliance of the contract value with market prices. Thus, one of the ways to compensate for the reduced taxable base is to pay VAT and profit tax based on current market prices. In this case, THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION will send a special request to make a similar adjustment to the counterparty - the second subject of the transaction.
When checking contracts for compliance with current market prices, each company must provide the employees of THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION with documents and other evidence that could clarify the validity of setting this price. All documents requested by tax inspectors must be sent to THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION within 30 business days from the date of receiving the corresponding request.
It is important to take into account the fact that since 2021, the Tax Code of Russia has been supplemented with a provision that empowers inspectors to request documents and necessary information from other participants in controlled transactions and receive them within 10 business days from the day the subjects are familiarized with the corresponding request.
In situations where employees of THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION find evidence of differences in the value of contracts from the level of established market prices and, as a result, a decrease in the amount of tax paid is revealed, an inspection report is drawn up. This document and the materials of the inspection with the objections received are considered on the basis of the standard tax inspection procedure prescribed in articles 101 and 105.17 of the Tax Code of the Russian Federation.
To avoid getting into an unpleasant situation and not provoke the beginning of a tax inspection, companies have the opportunity to independently regulate the amount of taxes accrued in case of non-compliance of the contract value with market prices. Thus, one of the ways to compensate for the reduced taxable base is to pay VAT and profit tax based on current market prices. In this case, THE FEDERAL TAX SERVICE OF THE RUSSIAN FEDERATION will send a special request to make a similar adjustment to the counterparty - the second subject of the transaction.
Notification to the tax authorities about controlled transactions
According to Article 105.16, paragraph 2 of the Tax Code of the Russian Federation, subjects signing controlled contracts are required to report to the tax service about their participation in such agreements. To do this, the parties must submit the appropriate notification by May 20th of the year following the reporting period.
The Federal Tax Service approves the notification form, which consists of several main parts:
The Federal Tax Service approves the notification form, which consists of several main parts:
1
Two cover sheets containing information about the company or individual entrepreneur.
2
Sections 1A and 1B, where comprehensive data on controlled transactions must be indicated.
3
Sections 2 and 3, where information about partners with whom the subject signed agreements must be specified.
The advantages of filling out and submitting such a document lie in the fact that current technologies, such as the 1C program, allow for filling out the template by entering the necessary information into special fields. Then, such programs generate a ready-made document for submission to the Federal Tax Service.
The document can be provided in three ways:
The document can be provided in three ways:
1
Personally deliver it to the inspection.
2
Send it by mail.
3
Send it through electronic services by certifying the notification with a qualified electronic signature and special software, such as the Federal Tax Service's service.
As a rule, companies or taxpayer entrepreneurs face difficulties in filling out sections on controlled transactions and counterparties. To avoid mistakes in listing information and facts, one can seek the help of professionals. Experts from the consulting agency DVP Audit have extensive experience in preparing controlled transaction documentation for submission to government agencies.
As a rule, companies or taxpayer entrepreneurs face difficulties in filling out sections on controlled transactions and counterparties. To avoid mistakes in listing information and facts, one can seek the help of professionals. Experts from the consulting agency DVP Audit have extensive experience in preparing controlled transaction documentation for submission to government agencies.
Sanctions for failure to notify the tax authorities about controlled transactions
According to Article 129.4 of the Tax Code of the Russian Federation, the fine for violating the deadline for submitting the notification is 5,000 rubles.The same amount will have to be paid if the company provides incorrect information in the notification. To avoid punishment, it is necessary to provide the necessary corrections before May 20.
It is important to note that if the interdistrict inspection during a desk or field tax audit detects signs of controlled transactions, the employee will be obliged to report this to the Federal Tax Service. However, information about such contracts is reported in all cases, not just during planned inspections.
To avoid such a situation and future problems from receiving a notification of the need to submit a report, it is necessary to independently check the conducted transactions for signs of controlled transactions and timely submit reports.
It is important to note that if the interdistrict inspection during a desk or field tax audit detects signs of controlled transactions, the employee will be obliged to report this to the Federal Tax Service. However, information about such contracts is reported in all cases, not just during planned inspections.
To avoid such a situation and future problems from receiving a notification of the need to submit a report, it is necessary to independently check the conducted transactions for signs of controlled transactions and timely submit reports.
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