The reality of the transaction: what documents can confirm it and protect your company from the claims of tax inspectors.

The reality of the transaction is a key factor of protection during tax audits.

You can confirm the reality of the transaction with documents that will confirm the execution of the contract, active due diligence when choosing a supplier.

Taxpayers do not pay due attention to confirm the reality of the transaction both before the conclusion of the contract and during its execution.

According to most business entities, to confirm the reality of the transaction, it is enough to sign a contract, draw up an invoice and send an invoice and an act of work performed to the counterparty, but judicial practice gives an unambiguous answer – the named list is not enough for the following reasons:

the tax authorities will check whether the facts about economic activity were distorted, whether the parties intended to pay taxes at the conclusion of the contract, who executed the transaction: the party to the contract or a third party. The last factor, regarding the execution by a third party, raises more questions from the tax authorities and, therefore, the requirement of documentary confirmation of the reality of the transaction.

If a taxpayer intentionally distorted data about a real contractor for tax optimization purposes, but submitted documents confirming the reality of incurring expenses, then the business entity may avoid adverse consequences in the form of additional tax payments.

By preparing documents confirming the reality of the transaction, the taxpayer will protect himself at the stages:

1. Protection during the tax check audit.

2. Protection during the trial.

Forming an evidence base to confirm their bona fide actions, taxpayers quite rarely resort to business correspondence with the supplier, or advertisements that were the reason for contacting a certain service provider. We recommend saving documents confirming the reality of the transaction at the time of its conclusion: advertising (ads) on the Internet, framework agreements posted on the website, etc. as practice shows, most taxpayers do not have such information, which will clearly complicate defending their position in court if necessary.

The head of the company can use the methods of the Federal Tax Service to intimidate taxpayers to adjust their tax obligations.

For example, a taxpayer may be summoned to the commission on countering the legalization of an unreasonable tax burden, where documents will be requested that can confirm the reality of the executed transaction. The employees of the Federal Tax Service will inform the taxpayer of the data that, in their opinion, may indicate the flaws of the transaction, however, in turn, the business entity has the right to present arguments in its favor, which will go against the opinion of the tax inspectorate, in the form of making entries in the commission’s puncture.

It is permissible to submit a copy of business correspondence, advertising brochures. The ideal option in this case is a package of documents prepared in advance, which confirms due diligence when choosing a supplier, it can be applied in court, and will influence the final decision of the tax authorities.

To confirm what has been said, you can refer to judicial statistics, in the first half of 2021, only 20 percent of cases are won by taxpayers. In many ways, the successful outcome of the trial was influenced by active actions on due diligence of taxpayers when choosing suppliers.

Studying judicial practice, we can conclude that the required list of documents that would unequivocally confirm the reality of the transaction does not exist. Many tax consultants agree that in the future the tax authorities will study the reality of transactions even more carefully and the requirements for paperwork will also grow.

However, do not forget that each check is of an individual nature, and following the basic principles of ensuring protection will make it possible to minimize the consequences of additional tax payments.

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