Tax authorities are imposing stricter controls over the justifiability of expenses on intragroup services
Pepeliaev Group advises that a risk exists that the Federal Tax Service's Inter-regional Inspectorate No. 1 for major taxpayers may file claims with respect to expenses on intragroup services incurred by an entity.
Currently the Federal Tax Service's Inter-regional Inspectorate No. 1 for major taxpayers of (“IRI No. 1”) focuses on the administration of major companies controlled by foreign structures which are multinational companies.
As our current advisory practice shows, IRI No.1 has started to make requests to Russian-based companies with foreign members to provide documents (information) with respect to agreements for the provision of intragroup services.
Russian subsidiaries are required to provide detailed information and documents with respect to the said transactions, specifically:
- documents on establishing the price for the services and the procedure for calculating the costs, and calculations of the cost for each service;
- order requests for the provision of the services and the results of the services provided;
- documents confirming that the services have been accepted and paid for;
- documents confirming the actual expenditure related to the provision of the services;
- written explanations with respect to the content of the services provided, their specific features and what distinguishes the services in question from other similar services;
- the list of employees interacting within the framework of supplying services.
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That such a level of detail is being requested allows us to conclude that IRI No. 1 is focused on researching taxpayers that have been moved to its jurisdiction. Accordingly, if the tax authority is not satisfied with the responses this will highly likely give rise to a substantial risk that a subsequent field tax audit will be scheduled and that tax liability might then be imposed. The tax inspectorate’s claims may relate to the justifiability of the expenses and the documents supporting them as well as to the pricing procedure for intragroup services. |
What to think about and what to do
We advise that you analyse the agreements, source documents and other documents related to intragroup services to check whether the following can be confirmed:
- whether the services were genuinely supplied;
- whether the provided services were useful and necessary;
- whether the prices for the services correspond to their content.
Help from your adviser
Pepeliaev Group’s lawyers are ready to provide legal support with respect to all matters related to the provision of the responses to the requests of tax authorities with respect to agreements for the provision of intragroup services. We are also ready to provide support to our clients during tax audits and disputes with tax authorities on issues related to the justifiability of the expenses on intragroup services in both administrative and court proceedings.