The Constitutional Court has restricted the Russian Federal Tax Service’s right to audit controlled transactions

Pepeliaev Group advises that, by Resolution No. 41-P dated 14 July 2023 which was adopted further to an appeal of VimpelCom PJSC, the Russian Constitutional Court (the ‘Constitutional Court’) held that provisions of the Russian Tax Code (the ‘Tax Code’) are inconsistent with the Constitution which relate to the calculation of the period for a controlled transaction to be audited where an updated notification has been submitted but where information regarding the transaction has already been included in the original notification.

Pepeliaev Group’s lawyers represented the claimant before state commercial courts and in applying to the Constitutional Court.

Facts of the case

The Federal Tax Service may adopt a resolution for an audit to be conducted into the full amounts of taxes being assessed and paid in relation to the transactions that have been closed between related parties. Pursuant to article 105.17(2)(1) of the Tax Code, such resolution may be issued not later than 2 years after a notification of controlled transactions has been received.

In 2018, the company submitted a notification to the tax authority of controlled transactions made in 2017. Several months later it submitted an updated notification which contained additional information about certain controlled transactions. The updated notification also repeated information about controlled transactions from the original notification, the information about those transactions having not changed.

The Federal Tax Service presumed that the updated notification of controlled transactions cancels the original notification. Therefore, the tax authority assessed the 2-year period for an audit to be scheduled for the controlled transaction after the taxpayer submitted the updated notification. As a result, transactions that were closed in 2017 were covered by the audited period, although more than 2 years had passed after the date of the original notification.

State commercial courts and the Russian Supreme Court (the ‘Supreme Court’) upheld the above approach and found it legal that the audit was scheduled within 2 years of the date on which the updated notification was submitted, including with respect to the transactions regarding which information was already included in the original notification and remained unchanged.

The company appealed to the Constitutional Court against the rule of the Tax Code which allowed such interpretation.

Position of the Constitutional Court

The Constitutional Court has made the following conclusions:

1. Tax authorities must avoid a formalist approach when deciding whether an audit should be scheduled and conducted. When they schedule audits tax authorities should take into account the scope, content and nature of the information that is being updated.
   

2. The Federal Tax Service may schedule audits based on updated notifications without any substantiation only in cases when information regarding a transaction was first included in the updated notification.

3. An updated notification may contain updated information about controlled transactions that were included in the original notification which is not relevant for the purposes of the tax authority adopting a resolution to audit such transactions.

4. If an updated notification does not contain new information regarding a specific transaction, the 2-year period for a resolution to be adopted to audit such transaction should be calculated from the date on which the tax authority received the original notification.

5. The claimant’s case should be reconsidered based on the positions set out in the Resolution.
   

6. Until amendments are made, the period for scheduling an audit should be calculated in accordance with legal positions expressed in the Resolution.

What to think about and what to do

If a taxpayer is facing audits of controlled transactions which were scheduled beyond the 2-year period from the date on which the original notification was submitted, the taxpayer may take advantage of the above position of the Constitutional Court to safeguard its rights and legitimate interests.

Help from your adviser

Pepeliaev Group’s specialists provide full-fledged legal support in relation to tax disputes, including support during audits of controlled transactions.

We are ready to provide you with legal assistance when the results of tax audits are contested and to defend a taxpayer’s position up to before the Supreme Court and the Constitutional Court.