Company’s audit – minimizing penalty risks
Our Client, operating as a Group of companies, imports goods from the Group’s yeast factory in the CIS region to Russia for further distribution. The wide geographical spread of the Group’s operations and the increasingly complex nature of local tax requirements in different jurisdictions increased the risk of misstating tax charges and created challenges in determining losses. The newly-appointed chief accountant needed to make a number of difficult judgements regarding tax exposure, and requested SCHNEIDER GROUP experts perform a Tax & Accounting Review of the commercial structure and individual contracts.
The Company had adopted simplified tax and accounting rules for entities in the category of “small and medium businesses”, but the company was not registered as such. SCHNEIDER GROUP reviewed the tax position of the Group to ensure that tax rate, tax provisions, and recognition of deferred tax assets and liabilities were relevant.
Considerations were given to the recognition of operating expenses as deferred expenses and write-off expenses as fixed assets. SCHNEIDER GROUP experts reviewed the reasonableness of judgements made regarding the adequacy of bad debt provisions and estimated liabilities. Following outlined deviations from the actual accounting and taxation framework, SCHNEIDER GROUP experts identified and assessed the understatement of expenses for the period and tax risk exposure in local currency terms. Regarding tax issues, SCHNEIDER GROUP revealed the Company fell under disposal standards and was obliged to report and pay the ecology levy. In addition to the issues considered, the Company was recognized as a tax agent and obliged to report on tax calculations of amounts paid to foreign entities’ income and taxes withheld, along with being obliged to with withhold and pay taxes, unless the income is non-taxable.
Separately, SCHNEIDER GROUP undertook a review of controllable transactions under currency control regulations and suggested certain improvements. The Company handled related party loan and interest payments and import and sale of services transactions, which are controllable transactions required to be reported to tax authorities. As part of a documentation check, the tax residency certificate was absent along with proof of eligibility for income. SCHNEIDER GROUP broadened the overview to the Company’s adherence to labor law and personal data protection principles and recommended the development of a corporate policy and internal regulation procedures.
Some weaknesses identified during the review and the need for a systematic approach to be taken for managing financial, tax, and compliance risks resulted in providing the Company with wider assurance in financial and tax reporting. The evaluation prepared by SCHNEIDER GROUP revealed potential fines and penalties varying from RUB 100,000 – 120,000 per executive and RUB 300,000 – 450,000 per legal entity.