Business Tax Risks: What Mistakes Lead to Additional Tax Assessments and How to Prevent Them

Companies face tax claims not only due to direct violations of the law but also due to a formal approach to business organization, counterparty due diligence, and reporting. Business fragmentation, improper application of tax benefits, and errors in VAT and foreign entities can lead to additional tax assessments, penalties, and fines.

In a digital audit environment, tax authorities analyze not individual documents, but a set of circumstances: ownership structure, cash and goods flows, the actual functions of companies, and the economic substance of transactions. Therefore, tax risks must be assessed before a dispute arises.

Business fragmentation

One of the common risks remains the artificial division of a single business between several organizations and individual entrepreneurs in order to maintain a special tax regime or reduce the tax burden.

When assessing the structure, tax authorities take into account:

• common employees and property;
• financial and commodity flows;
• matching counterparties;
• unified management system;
• distribution of functions between companies;
• the presence of an independent business goal.

Registering a new legal entity does not in itself indicate the creation of an independent business. As long as the same contractors, employees, assets, and management model remain in place, a formal change of organization does not preclude claims.

Before reorganizing or changing a business model, it is necessary to analyze the group structure, delineate the functions of the participants, and document the business goals of creating new companies.

Errors when working with VAT

A change in the tax regime or reaching a certain income threshold may trigger the obligation to calculate and pay VAT. During this period, companies often commit the following violations:

• do not submit declarations or violate deadlines;
• tax rates are applied incorrectly;
• declare deductions without supporting documents;
• make mistakes in invoices and purchase and sales books;
• incorrectly determine the moment of VAT accrual;
• incorrectly classify exempt operations.

Particular attention should be paid to continuing contracts concluded prior to the rate change. It is necessary to determine whether the final price increases or whether the tax is paid within the previously agreed upon amount.

Companies that are becoming VAT payers for the first time should conduct an audit of their accounting system and provide additional control over their first declarations.

Checking counterparties

A formal due diligence of a counterparty does not always confirm the validity of a transaction. If an organization lacks the employees, assets, and resources to fulfill its obligations, tax authorities may question expenses and tax deductions.

When checking, it is necessary to evaluate:

• the actual ability of the counterparty to perform the contract;
• availability of necessary resources;
• compliance of documents with the actual movement of goods, works and funds;
• information about the actual performer;
• economic sense of the operation.

A contract, invoice, and certificate alone may not be sufficient. For significant transactions, it’s important to preserve correspondence, commercial proposals, settlements, product transfer documents, and completed work.

Working with foreign structures

Cross-border transactions pose additional tax, currency, and transfer risks. In particular, problems may arise with long-term overdue debt, dividend, interest, and royalty payments, and the use of intermediaries.

If a Russian company fails to take action to collect a debt from a foreign counterparty, this may result in tax consequences. Therefore, it is important to document claims processing and evaluate possible options for terminating the obligation.

When making payments to foreign organizations, formally obtaining a tax residency certificate is not enough. It is necessary to verify the recipient’s right to income, economic presence, and independent activity.

It is also necessary to monitor the requirements for CFCs, transfer pricing and relevant tax reporting.

Tax benefits and reporting

Eligibility for the tax benefit must be confirmed in each tax period. Risks arise from incorrect income classification, loss of the required status, or failure to meet the requirements for the share of taxable revenue.

Companies should regularly review the terms of application of preferences, take into account all types of income, and monitor changes in legislation and law enforcement practices.

Failure to file declarations and reporting errors can be identified using digital analytics even before an on-site audit. Therefore, tax authority requests and clarifications should be considered as grounds for internal investigation.

How to reduce tax risks

To prevent tax claims, it is recommended:

• check the business structure before registering new companies;
• control the calculation and payment of VAT;
• establish a procedure for verifying counterparties taking into account the amount and risk of the transaction;
• analyze foreign transactions before making payments;
• regularly confirm the right to benefits;
• conduct additional verification of reports before submission;
• Assess in advance the tax implications of major transactions and business model changes.

A tax assessment should not be delayed until a dispute arises. A preliminary review of the business structure, contracts, counterparties, and benefits allows for early identification of problems and the reduction of the likelihood of additional assessments, penalties, and fines.