Comments made by lawyer Mikhail Ilyin to an article titled "Tax experts shall disclose secrets of debtors" published in the Finans Magazine.

1 February 2011

Security. The existence of a tax debt isn't a secret anymore. The Supreme Arbitration Court has obliged tax administration to inform any interested person of tax debts.
The Supreme Arbitration Court of the Russian Federation (SAC) has confirmed that every person wishing to find out whether a separate company has tax debts is entitled to do so. This being said, the outstanding amount shall remain unrevealed to the inquirer, and that, according to experts, defeats the purpose of gathering such information about one’s contract partner.

The Supreme Arbitration Court is empowered to state. The most heated discussion was whether the information on the existence of debt should be qualified as a tax secret. In fact, the law forbids the taxmen to disclose any data concerning tax payers. Exception to this rule applies where such data pertain to violations of law and to sanctions for these violations. Courts do not interpret this concept unambiguously: Mikhail Ilyin, a lawyer from the law firm S&K Vertical reminded about the decision adopted by the arbitration court in 2007, where data on non-fulfilment of tax obligations by a specific person were declared secret tax information.

Now practice has changed: these data are declared public information by effective decisions, including the decisions adopted by the Supreme Arbitration Court. Citing the same norms as almost four years ago, the court arrived at the conclusion that the state agency is obliged to provide any requested information which is not confidential. 

Experts interviewed by “F” pointed out that no liability of tax authorities to provide such data is expressly provided by the legislation, consequently, the procedure to be used when disclosing such data is not specified in detail. “In this case, general rules regulating the procedure for individual informing of tax bearers should be applied, – believes Nina Kutsova, the business practice lawyer of Rightmark group. – In particular, a written inquiry should be responded to within 30 calendar days”

It seems that tax experts ever made no secret of information on tax dodging. For instance, during the last few years, the so called black lists (the list of entities and citizens with debts exceeding a certain amount) were regularly published on the websites of regional offices of tax administration. Such limits are established locally and no uniform federal standard exists. At the same time the tax administration was skeptical about disclosure of information (issuance of statements) on existence of debts upon request. “We’ll think before issuing  such statements, – said Tatyana Smirnova, the head of Office for the Settlement of Indebtedness and the Support of Bankruptcy Procedures of the Leningrad Region Administration of the Federal Tax Service. –Information on tax payers owing more than 100 thousand roubles is published on our site every month. We can extend the site by publishing lists of companies having debts of 50, 20 or 10 thousand roubles, even of 1 rouble”.

A bolt from the blue – a friend failed you. Who needs the information on tax deficiency? According to Nina Kuptsova, one may require such information when considering a party to contract, to determine whether they are reliable. Besides, the existence of debt may be used to prove the necessity of interim measures when entertaining a civil law action. The claimant who has succeeded in making the court deliver case judgements applied this principle as well: «When claiming information as to whether another party has paid the tax liabilities, the applicant has acted with due care and circumspection», –concluded the Supreme Arbitration Court.

Nikolay Vilchur, Head of Vilchur & Partners, the international consulting company, pointed out that banks, investors, shareholders, etc. can be interested in obtaining information on debts from an independent source. “However, certainly, the mere fact of its existence on customer accounts of tax authorities is not enough– everybody knows how untimely new entries are made. It is the extremely important to know the precise amount: the effects of a debt of some hundreds roubles and a debt of ten millions roubles are widely different. Of course, it is entirely possible that this agency is used unfairly, however, the idea as such appears quite sound  – still, one'd like to know financial situation of one’s future contract partner”, – pointed out the expert.

The Federal Tax Service, among others, deem it beneficial to disclose information on existence of tax debts, and it has been running an awareness campaign “Ensure that your business isn’t at risk” for several years. Prior to make contracts tax experts recommend market players to check up their partners, though methods of control suggested by tax administration are very limited. For instance, it is recommended to obtain information from the USRLE, even though only general information about registered legal persons is on open access. To acquire complete information (including data pertaining to executive authorized to close transactions) one should obtain an extract, i.e. not only to pay a fee (200–400 roubles), but also to visit the inspectorate, to queue, to wait (from one to three days), etc.

Moreover, tax experts do not recommend messing with companies run by declassified directors (there are very few such entities in Russia). Dubious organizations include entities whose location coincides with the so called mass registration addresses of legal persons. Actually, some flats supposedly admit tens or even hundreds of companies officially registered at the same address. At the same time an even greater number of quite reputable companies can be registered, for instance, at the same business center or business incubator. However, tax experts do not explain how to separate flies from cutlets in this case.

Not on the lists. By publishing databases of various kinds, tax agencies are trying to catch companies at unfairness, rather than to help business: short-lived businesses are used to commit diverse tax frauds. Supply of export products allegedly purchased from such firms and claim for VAT recovery (VAT refund claim) by the exporter became common practice. In accordance with taxmen’s logic, should a company pay the same VAT to Roga & Kopyta LLC without checking the latter for security, the tax recovery shall not be necessary. “Keeping in mind the practice of tax authorities which deny the buyer their right to deduct input VAT referring to buyer’s partner showing signs of a “short-lived business”, the buyer is interested to ensure that his partner is a conscientious taxpayer”, – believes Sergey Kalinin, the Senior Associate in Goltsblat BLP.

Still, experts are persuaded of illegality of this approach: “Legislation neither obliges the tax payer to check the contract partner for the signs of a short-lived business, nor relates the right to deduct input VAT to contract partner’s observance of laws, – explained Sergey Kalinin. Put this another way, auditing of tax reports of potential contract partner can only be carried out on a voluntary basis”. Mikhail Ilyin agrees with him and reminds of decisions adopted by highest courts: “They confirmed that violation of tax liabilities by the contract partner as such is not an evidence of an unjustified tax benefit derived by the tax payer”, – pointed out the lawyer.

However, in reality the taxmen only succeed in putting into practice the following principle: pay taxes for the swindler. For instance, Murmansk company Severneft ended up in such situation upon making contract for the supply of diesel fuel with Vertikal LLC, St.-Petersburg. Later on it has been found that this firm was registered by unknown persons who have submitted some other person’s passport and indicated a non-existent address. Tax authorities declared false the documents supporting expenses incidental to purchase of oil products, and ordered to collect taxes, fines and penalties from Severneft amounting to 13.4 million roubles. And such “initiative” of tax authorities was supported by arbitration court.

According to Nikolay Vilchur, a diligent tax payer shall hardly be protected from harm should he know that a contract partner has debts: “The existence of a debt is not necessarily indicative of company’s inability to fulfill the obligations that is why any decision to enter into a contract with this company cannot be declared unjustified ab initio. Speaking about really shady operators, as a rule, formally they have no tax debts as of the time of conducting transactions. Otherwise operations on their accounts should be suspended”.

Pavel Netupsky

Finans Magazine no. 3 (382) 31.01. - 06.02.2011

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