Russia Adopts Risk-Based Approach to Assess VAT Claims

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By Natalia Suvorova

The Russian Federal Tax Service is instructing local tax offices to take a company’s tax history into account when determining how much documentation to request in claims for value-added tax-exempt transactions.

The Federal Tax Service issued guidance for tax inspectors in a Jan. 26 letter on how to apply the risk-based procedure during documentary tax audits.

The measure will facilitate the process of confirming the right to VAT exemptions for bona fide taxpayers, the tax service said on its website on Jan. 26.

The letter mostly affects businesses whose activity is subject to VAT exemptions, such as banks and insurance companies, said Vladimir Konstantinov, tax partner at PwC in Moscow.

The FTS is formalizing the requirement to request a limited number of supporting documents on VAT-exempt transactions, which had previously been requested randomly and sometimes in unlimited amounts, “depending on the goodwill and rationality of certain inspectors,” Konstantinov told Bloomberg BNA by phone Jan. 31.

The risk-based approach makes companies with previous tax violations face stricter tax control compared to those with a good tax history.

“The more reliable the taxpayer, the less they will call him out,” Konstantinov said.

Still, the taxpayer is not aware of the level of risk that the automated system assigns to them, so it is hardly possible to predict the exact amount of scrutiny which tax authorities will subject them to, the practitioner said.

Determining Risk

According to the letter, while handling claims for VAT-exempt transactions tax offices should consider several factors, including:

  •  level of company’s tax risk according to the automated control system VAT-2, a nationwide database that collects and analyzes tax data from electronic tax forms; and
  •  the result of previous documentary tax audits with regard to tax violations.

“Having the ‘tax history’ of the company and determining the extent of the risk that the organization commit illegal actions, the tax authority will proceed from total to selective control of preferential VAT transactions,” the tax service said.

High, Low, Medium Risk Instructions

The tax service suggests that the taxpayer provide a register listing supporting documents. The register is attached as an appendix to the tax authority’s letter on its website.

Another appendix establishes the amount of supporting documents to be requested, based on the level of risk assigned to the company by VAT-2 automated system:

  •  Companies with “high” level of tax risk should provide 40 percent of supporting documents mandatory for each transaction code (but not more than 500 documents).
  •  For “medium”-risk companies, 40 percent of supporting documents are required for transaction codes to which a tax benefit is applied for the first time or for those that involved previous tax violations, and not more than 10 percent for other transaction codes. “
  •  Low”-risk companies only have to provide 40 percent of supporting documents for transaction codes that involved previous tax violations, and not more than 10 percent for transactions to which tax benefits are applied for the first time.

At least 50 percent of supporting documents must support the largest sums of transactions to which tax benefits are applied, the FTS said in the letter.

Less Burden for Firms?

The FTS expects the measure to reduce the amount of business-to-government paperwork and decrease the administrative burden on bona fide taxpayers.

However, this is unlikely given that the register is a new type of form, which is arbitrarily established by the Federal Tax Service and requires time to fill out, Dmitri Kostalgin, managing partner at Taxadvisor law firm, told Bloomberg BNA by phone on Jan. 30.

If the taxpayer declines to file the register, they are more likely to be required to provide supporting documents to the full extent, he said.

To contact the reporter on this story: Natalia Suvorova at

To contact the editor responsible for this story: Penny Sukhraj at

For More Information

The FTS letter from Jan. 26, No. ED-4-15/1281@, in Russian, is available at:

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