Why should you check the counterparty?

Recall that the first time the concept of «unreasonable tax benefit» and «proper prudence» in selecting contractors were introduced by the Resolution of the Plenum of the Russian Federation’s Supreme Arbitration Court No53 dated 12.10.2006. In the same Resolution, the criteria of dishonesty were outlined.

On August 19, 2017, article 54.1 of the Tax Code came into force, regulating the limits of the rights to calculate the tax base and the amounts of taxes and contributions. It was put into effect by Federal Law No. 163-FZ dd 18.07.2017.

Article 54.1 of the Russian Federation’s Tax Code prohibits the reduction of the tax base and the amount of tax payable by a taxpayer as a result of misrepresentation of information about the facts of economic life and taxable objects, that are subject to reflection in tax and accounting records or tax reports of a taxpayer.

According to the Federal Tax Service, the signs of such misrepresentation are the following:

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  • creation of a «business fragmentation» scheme aimed at the illegal use of special tax modes;
  • performing actions aimed at artificial creation of conditions for the use of reduced tax rates, tax benefits, and tax exemptions;
  • creation of a scheme aimed at the illegal application of the norms of international agreements on the avoidance of double taxation;
  • unreality of the transaction by the parties (absence of the fact of its commission).


In accordance with article 110 of the Tax Code of the Russian Federation, a tax offense is recognized as committed intentionally if the legal entity which committed it was aware of the illegal nature of its actions (inactions), wished or deliberately allowed the harmful consequences of such actions (inactions).

The established facts of the legal, economic, and other interrelations of the participants involved in the tax scheme may indicate the taxpayer’s deliberate actions.

For example, when a taxpayer interacts with formally independent entities and the consistency of the actions of participants in economic activity, the predetermined flow of money and product flows, the commission of non-random actions that are subordinate to a single goal — the possibility of reflecting deliberately false information about the facts of economic life, creating an artificial document flow and obtaining tax savings.

The tax benefit may also be recognized as unjustified if the tax authority proves that the taxpayer acted without due prudence and caution and should have been aware of the violations committed by the counterparty, particularly due to the relationship of interdependence or affiliation of the taxpayer with the counterparty.

At the same time, the tax authority must collect reliable evidence supporting the stated arguments about the applicant’s bad faith and his intention to obtain an unjustified tax benefit.

However, a failure to choose a reliable counterparty often causes a refusal to deduct VAT or expenses.
Failure to carry out measures to verify the counterparty, documents on its behalf, is the risk of the taxpayer itself. And only the legal entity itself is responsible for all the consequences of such improper organization of its activities.

If the Tax Service has any doubts about the reality of the transaction, they have the right to take the following actions:

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  • receiving explanations from people who have information about the circumstances of the conclusion and execution of the transaction;
  • conducting inspections of territories, documents, objects with the use of technical means;
  • comparison of the volume of goods delivered to the size of warehouses or territories;
  • inventory of property;
  • analysis and reconstruction of the full balance of the enterprise;
  • requiring documents or information, and, if necessary, carrying out the seizure of documents;
  • conducting expert examinations;
  • request for documents or information from customers and interrogations of the officials, persons performing technical supervision;
  • other activities.