The Bottom Line

16 Schemes for evading taxes highlighted by Tax Service

The Federal Tax Service has sent to all its local offices instructional guidelines describing "16 Typical Schemes for Evading Taxes." Judging by this document, inspectors are most concerned with evasion of value-added tax (VAT) and profit tax.

These guidelines were issued "for internal use only", but Alinga Consulting was able to obtain information about all 16 schemes, captured from an Internal Document of the Federal Tax Service.

Scheme #1: Fictitious Activity through Interdependent Entities.

The Tax Service will challenge organizations that conduct financial operations exclusively through groups of interdependent entities.

Scheme #2: Closed Systems for Circulating Goods and Money.

In this situation inspectors will trace the supply chain up to the fourth level, uncovering fictitious contractual parties in the process.

Scheme #3: Money Transfers Through "Gray" Firms.

The Tax Service encourages denying export VAT refunds if the supply chain includes a "gray" (fly-by-night, suspicious) firm that transfers money received from a buyer to the account of its foreign partner and in the process does not pay VAT on the amount transferred. Similarly, extra attention is given if money is transferred under contract with a "gray" firm and the money is then returned via a private businessman.

Scheme #4: Using Cash Registers for Wholesale Transactions.

The Tax Service will actively repress attempts to use the preferential Unified Tax on Imputed Income for wholesale transactions.

Scheme #5: Reorganization with Subsequent Liquidation.

Scheme #6: Artificially Inflated Prices.

Export operations which use too many intermediaries, thereby increasing prices and the amount of VAT subject to reimbursement, will be considered suspicious by the tax inspectors. For example, prices may be considered artificially inflated if the production cost of export goods was significantly increased as a result of processing raw materials and the commissions paid to these processors.

Scheme #7: Internal Accounts Paid Using Contributions to Charter Capital.

The tax authorities will deny deductions of "internal" VAT between interdependent companies. In this scheme a company pays its suppliers with funds received from its parent company in the form of contributions to charter capital. However, the parent company itself has received the money from its founders, who turned out to be those very suppliers. The company thus pays its suppliers with their own money, says the Tax Service, so the Tax Service encourages denying reimbursement of VAT for such operations.

Scheme #8: Unjustified Use of Credits for the Disabled.

Inspectors will verify the conditions under which methods were implemented for using disability credits for VAT payments.

Scheme #9: Acquisition of Goods with Inflated Prices Using Borrowed Resources.

The FNS document describes a case where a logging company acquired equipment on credit obtained from an off-shore firm. Having gathered information from the Internet, the logging company decided the value of the equipment was six times greater than the market value of the equipment and thus borrowed too much. The loan was never repaid.

Scheme #10: Fictitious Leasing.

In another case described in the document, a company leased a combine, paying the lessor in advance. The lessor was affiliated with the client and the advance payment was not provided for in the agreement.

Scheme #11: Replacing Wages with "Medical Insurance."

The guidelines cite a case where a company concluded an agreement for voluntary medical insurance which included a provision covering employee meals.

Scheme #12: Using Civil Contracts in Place of Labor Contracts.

If the tax inspectors see that a civil contract is being used as a labor contract, it will be considered intentional tax evasion.

Scheme #13: Artificial Creation of Penalties through Contractual Obligations.

Knowingly creating unrealistic conditions for fulfilling a contract for the purpose of reducing taxes by the amount of financial sanctions is also considered to be considered intentional tax evasion.

Scheme #14: Personnel Leasing.

Documenting employees through organizations using preferential tax systems is regarded by the tax authorities as tax evasion.

Scheme #15: Splitting a Business for the Purpose of Using the Unified Tax on Imputed Income.

If two companies have practically identical names, are located at the same address, etc., then, says the Tax Service, this is evidence that the two firms are operating as one firm, split for the sole purpose of lowering taxes.

Scheme #16: Receipt of Losses by a Credit Organization due to Operations with a "Problem" Bank.

A company can expect numerous court battles and additional tax assessments if the inspectors begin denying reimbursement of VAT or tax reductions on profits using these guidelines, since many of the "schemes" are actually legal and have been used by businesses for some time.

Furthermore, in these guidelines the Tax Service urges automatically penalizing companies for certain operations, even if the tax for those operations was eventually paid into the budget. For example, companies periodically purchase products from their founders using resources received from them, but the founders themselves pay tax on the transaction. Furthermore, according to the Constitutional Court, denying VAT reimbursements on purchases paid with borrowed resources is allowed only if the tax authorities can prove that the company had no intention to repay the loan.

Proving criminal intent for many of these operations would be problematic. In fact, the Tax Service only refers to circumstances which, in the opinion of the High Court of Arbitration, cannot in and of themselves attest to a company’s receipt of unlawful tax benefits leading to sanctions against the company.

Antal International tops Moscow business poll

British-based global executive recruitment firm Antal International has come out on top in an influential business poll carried out by the Moscow-based business information service RBC.

Tremayne Elson, managing partner, Antal International Russia

Antal is ranked as the number one permanent mid-level quality recruitment company within Moscow, based on the volume of placements made in 2006. It is amongst the top five recruitment companies in Russia, providing highly-qualified managers across a wide range of industry sectors, including financial services, technology and engineering.

Commenting on the poll, Tremayne Elson, managing partner, of Antal International Russia said, “There’s been a seismic change in the way our clients are searching and recruiting mid-level talent by casting their net much wider in order to capture an ever decreasing pool of suitably qualified talent. In practice, what this means is that the majority of our most recent client assignments have involved taking an instruction in one territory, sourcing potential talent in several other territories and placing the candidate in a completely different territory from the one where the instruction emanated.

“Globalization of the workforce has therefore become a giant game of hopscotch for most of our clients. It’s certainly true of Russian multi-nationals that are desperate for Western-educated and experienced middle managers,” observes Elson.

As a result, Antal International was one of the first in the industry to create a suite of methodologies and business processes to cope with clients’ challenges in recruiting in the complex global marketplace.

Demand for Antal’s services in Russia has increased by over 80% over the past two years. The company is currently looking to expand its operations by employing over 150 consultants over the next six months to cope with increasing demand for its services.