налоговые последствия

The tax implications of formal document flow

The tax implications of formal document flow

PUBLICATIONS \ 19.01.2021

For many years, the tax authorities have been countering companies that evade the payment of taxes. Schemes to reduce the tax burden are becoming more refined and progressive. One of the most common methods in tax practice to intentionally reduce the deductions claimed by a company is to maintain formal document flow. What is meant by formal document flow? How can one determine that a company has signs of formal document flow? What should a good-faith taxpayer do if his company’s document flow is recognized as formal? Nadezhda Galkina, Acsour’s Accountant, has answered these and other questions in detail for “Raschet” magazine.


Before proceeding to formal document flow, it is worth familiarizing oneself with the concept of “preferential tax terms” in more detail.

Preferential tax terms are a reduction in the amount of a tax liability. This can be achieved by reducing the tax base or receiving a tax deduction/benefit. The amount of taxes paid will also be reduced if the company applies a lower tax rate, or it is entitled to a refund (offset) or reimbursement of tax from the state budget.

Consequently, an unjustified tax benefit arises in a situation where a company reduces its tax burden without solid grounds, with the help of forged documents and fictitious transactions. Formal document flow creates the possibility of such preferences.

Therefore, formal document flow is an organization’s document flow that is not confirmed by actual business transactions and is organized in order to obtain an unjustified tax benefit.


In order not to arouse suspicions among supervisory authorities, companies should check themselves to ensure that they exhibit no signs formal document flow. Listed below are “symptoms” that point to an artificial reduction in the amount of a company’s tax obligations:

  • The creation of an organization shortly before a business transaction is completed;
  • The participants of transactions being related parties;
  • Business transactions being irregular in nature;
  • A violation of tax legislation in the past;
  • A transaction having a one-time nature;
  • A transaction being implemented other than at the location of the taxpayer;
  • Payments being made using one bank;
  • Transit payments being implemented between participants of interdependent business transactions;
  • The use of intermediaries in the implementation of business transactions.

However, it is worth noting that the presence of one of the above signs in a company does not necessarily mean that there is fraudulent intent and an offense. In order to reach a conclusion that a company has used an “aggressive” tax avoidance scheme, such as formal document flow, it is necessary for the inspecting authorities to study each specific case separately.


As such, there is no settled legal framework that establishes formal document flow. It is possible to consider this concept from the legal perspective through an unjustified tax benefit. The main legislative acts regulating the concept of an “unjustified tax benefit” and schemes for obtaining this, including formal document flow, are the Plenum’s resolution No. 53 and article 54.1 of the Tax Code of the Russian Federation.

The latter establishes that organizations do not have the right to reduce their tax base and the amount of tax payable by distorting information about the economic life of the company and its processes.

This article of the Tax Code of the Russian Federation prevents the creation of tax schemes aimed at illegally reducing tax liabilities, including by not taking into account the taxable items, illegally declared benefits and other preferential tax terms provided for by law.

This rule applies to past tax periods, namely, the three years preceding a tax audit. When an on-site tax audit was scheduled in 2020, the tax period of 2017 could also be checked (article 89 of the Tax Code of the Russian Federation, and Ruling No. 1152-O of the Constitutional Court of the Russian Federation dated May 29, 2018).

In addition to the above-mentioned documents, there are a considerable number of court rulings on cases associated with formal document flow, and letters of explanation from the inspecting authorities, which we will discuss later.


Based on the existing legislative framework and litigation practice, when checking organizations for formal document flow and the possibility of obtaining an unjustified tax benefit, supervisory authorities pay attention to the following criteria:

The impossibility of actually carrying out the operations being checked, taking into account the time, the location of property or the amount of material resources economically necessary for the production of goods, performance of works or provision of services.

This criterion is fundamental for determining the fact of a tax offense, since the entire array of work performed should answer the question of whether the contractor in question could deliver the goods (provide the service, perform the work).

The transaction participants being related parties and coordinating their actions

In the interaction of taxpayer with independent parties, in a number of cases the actions of participants of a business transaction are coordinated, the movement of money and commodity flows are predetermined, a number of non-accidental actions are performed, aimed at a common goal – namely the ability to reflect  information known to be false about the facts of the economic life of the company. This can evidence the premeditation of actions.

Defects in basic source documents

During the check of basic source documents, the following data is analysed:

  • The person’s powers to sign the document – the current general director or there being a power of attorney.
  • The correlation of the dates of basic source documents and the contract.
  • The place where the document was signed – whether the signatory was on a business trip, the distance between the cities, the actual possibility of signing the documents.
  • An analysis of civil law contracts for the presence of fundamental conditions and rules of business practice – market prices for the transaction, the correlation of the type of activity with what the core business is, the “real” period of payment for services, a specific description of the services provided by the service provider, etc.

Witness testimony

Working with witnesses is one of the most important factors in proving that a taxpayer’s actions are premeditated. The “human factor” and the set of the information provided can allow the inspecting authorities and, subsequently, the court to form a picture of the offense committed and can directly or indirectly confirm that the parties to the transaction aimed to reduce the payment of taxes to the state budget.

The evasion of taxes with the participation of foreign companies

Interaction with non-resident companies in itself causes increased attention from tax authorities. Cases are commonplace of the formal use of a number of foreign jurisdictions to obtain the advantages of international double taxation treaties.

The tax authority has a highly impressive arsenal of opportunities for a comprehensive inspection of a company’s activities. A decision as to whether document flow is formal and a tax benefit is unjustified is made based, as a rule, on the above-mentioned signs in the aggregate or, in certain cases, separately.


A company caught using a formal document flow scheme to obtain an unjustified tax benefit will have to pay additional taxes, fines and penalties accrued by the inspecting authorities. Often, such penalties are higher than the preferential tax terms received from tax fraud.

In this case, fines and penalties are accrued in accordance with article 122 of the Tax Code of the Russian Federation, namely, the amount of the penalties will be 40 percent of the unpaid tax amount.


Given that a decision to recognize document flow as formal is influenced by the human factor, there is a possibility of an error or an incorrect interpretation of the facts.

If a company’s document flow is recognized as formal but the company considers itself a good-faith taxpayer and does not agree with the decision, it is possible to prove a lack of fault on its part by making a complaint to the court of cassation.


Each transaction planned by the company should be analysed from the viewpoint of making a profit, taking into account various potential risks. When entering into a business relationship with a contractor, it is necessary to take all possible measures to minimize negative consequences in the future.

It is important to take into account that the provisions of the Tax Code of the Russian Federation, specifically article 54.1, do not limit the rights of taxpayers to conduct their business transactions so as to entail the minimum tax implications, but the option for a transaction that the taxpayer has chosen should not have any sign of artificiality, and should not be devoid of economic sense. In addition, the tax authority does not have the right to persist in saying that the taxpayer should have chosen a certain option for building its business activities.

The tax security system is designed to meet modern challenges and the trends in inspections carried out by tax and law enforcement authorities. Companies that are taxpayers should focus on working to prevent the occurrence of negative consequences, should carry out timely risk assessments and should study the legal consequences that have occurred, taking into account current legislation and litigation practice.

Nadezhda Galkina