Many people of business hold on to the “if it ain’t forbidden, do it” principle. The statement is great in theory, though in reality certain actions on tax optimization could have various legal consequences up to criminal liability. Dmitry Semashko and Elena Sapego, lawyers of Stepanovski, Papakul and Partners Attorneys-at-Law, dwell on the aspects of tax legislation and liability for its violation.
– Alleviating tax burden, as a common way of lowering costs, is what is called ‘tax optimization’ – a catch phrase of nowadays.
The term is used, though, to refer to different processes.
A patchy sure-fire cost-reducing ‘scheme’ may cost a lion’s share of a businessperson’s income, or even a term in jail. And the legitimate and economically sound concept of ‘tax optimization’ may be replaced with ‘tax evasion and ‘receipt of unjustified tax benefits’.
On the face of it, the difference is clear.
However, in practice, there is a very thin line between legitimate and illegitimate actions.
The taxpayer would often cross the line without noticing it, being completely convinced of the admissibility, justification and, most importantly, legitimacy of his/her actions.
Let us describe taxpayer’s liability in more detail.
Weak points
As we all know, an established fact of tax non-payment/late payment entails administrative or criminal liability depending on the circumstances (primarily, the amount).
Whose necks are stuck?
- The company, the chief executive and accounting officers
- Sometimes, liquidator, when he/she is responsible for non-payment; the founders, when the company goes bankrupt for tax defaults and the tax authority insists on subsidiary liability
Approaches to prosecution of companies and individuals differ:
An individual’s personal relation to the offense (deliberate or not) should be established in order to bring an individual to liability.
The fact of offense would suffice to prosecute legal entities. Key factors are compliance or non-compliance with laws, as well whether or not the company has taken all measures to ensure compliance.
Such circumstances as misunderstanding of the laws or absence of intentions to evade the tax would have no effect on the selection of penalty.
Things to keep in mind about administrative liability
Reasons for tax non-payment/late payment, that entail administrative liability for companies, may vary:
- Incorrect application of a benefit, incorrect tax calculation
- Incorrect estimation of the tax base
- Delayed payment
- Incorrect establishment of taxable items.
- Relationships with false entities
The taxpayer would pay penalties for delinquencies and late payment along with the administrative fee.
In some cases, laws specify situations, when tax non-payment does not constitute an administrative offense.
Two examples:
- The company has sent a tax payment voucher to a bank, while there was no money on its account. There will be no administrative offense in that case. Even though the actual tax was not paid to the budget, the company has taken all actions required to pay it.
- The payer him/herself established underpayment of taxes before the inspection, paid the missing amount, made corrections and completed the tax statement when it is established by the inspection.
Also, one could be relieved from liability, when the offense is insubstantial, or on other grounds, such as, when the offense is not related to profit generation, or when there are special circumstances.
Risk zone: sending an inquiry to the tax authority
In order to feel secure, many businesspersons send inquiries to tax agencies for explanations, how a certain regulation should be applied.
However, one should keep in mind that the status of a tax agency’s explanation and its evidentiary effect at prosecution have not been determined yet.
On the one hand, an explanation would spare the company wrong actions that could entail penalties on taxes, fees and duties. It would also provide legal safeguards to the taxpayer.
On the other hand, though, the fact of explanation does not relieve the taxpayer from administrative liability. It is true that a relevant explanation may be used as an extenuation, though not as a ground for relief from liability.
Key facts about criminal liability
It is incurred for deliberate tax evasion, such as tax base withholding/reduction, failure to submit tax declaration, misstatements in the latter.
The legislation sets forth the amounts of damages that entail criminal liability
A large amount is an amount 1,000 and more times exceeding the base unit. There are several alternative punishments: penalty, deprivation of the right to hold specific posts/conduct specific activity, arrest, restriction or deprivation of liberty for up to 3 years.
An extremely large amount is an amount 2,500 and more times exceeding the base unit. The punishment is restriction of liberty for up to 5 years or deprivation of liberty for 3-7 years with an option of property confiscation (at the same time, the person may lose the right to hold specific posts/conduct specific activity).
In other words, when the tax underpayment amounts to 1,000 and more base units, it will constitute a ground for criminal prosecution.
As differs from tax and criminal liability, a company may not be criminally liable.
The following individuals/residents may be brought to criminal liability:
- Sole proprietors (‘individual entrepreneurs’).
- Managers of payer organizations or persons authorized to sign tax documents and persons in charge of tax payment.
They could include executives, directors, and chief accountants
- One should keep in mind that the liability for illegal business operations (often in connection with false entities) is borne by persons who actually control the company, though they are not the founders or employees of the company.
These are the ‘éminence grises’ – the actual business owners. They are identified in the course of a preliminary investigation on the criminal case: the employees are asked questions about who hired them, who gave them strategic tasks, who they report about their work to, etc.
Duly acquired telephone call records and information from data media (Skype, e-mail, social networks) may be used as evidence.
