Spring Tax Escalation: Strategy developed to protect against tax claims for coffee franchise
In late April, our tax practice was approached by the owner of a coffee franchise. This franchise consists of hundreds of coffee shops and several service companies. The franchise has always had strict quality standards, and one of its benefits is the option for contractors to outsource services such as accounting, document management, strategic marketing, and IT support. Additionally, the owner has created a methodology for choosing the best location for a coffee shop. The services were not provided by him, but by reputable companies that have been tested over time. The network has developed over a period of ten years. The total turnover for the franchise exceeded one billion rubles.
In the beginning of April, the owner was bombarded with numerous requests from the tax office. Initially, they requested details regarding how the organization, which holds the trademark, handles transactions with coffee shop service providers. Additionally, suppliers of coffee beans reported receiving inquiries about the franchise. Lastly, the owner was personally summoned for a meeting with the tax office.
Understanding that this spring, in numerous companies and fast food chains throughout the country there were unplanned inspection, and that the mentioned actions typically indicate the impending commencement of an on-site tax audit due to suspected tax evasion, he opted to devise a plan to protect against potential claims and additional tax penalties.
We have created a two-step protection plan based on our extensive experience.
- The initial phase involves providing the tax inspectorate with a comprehensive understanding of the business and its organization, as well as the taxpayer's relationships with business partners. The audit focuses on identifying tax errors and risks. Subsequently, a “protection file” is created, which is essentially a detailed record of the risks and issues discovered during the audit. These issues often stem from outdated business structures, where the distribution of functions, labor resources, and assets among companies no longer aligns with current business realities. Changes in the nature of activities, sources of income, and the acquisition of valuable assets may have occurred, while the structure itself remains old and ill-suited to present-day challenges. For instance, although the business founder may own a website, it is actually being utilized by multiple companies within the group. Marketers or IT specialists are currently spread across different legal entities, but it would be more efficient to consolidate them into one company. On the other hand, there are cases where one legal entity handles both logistics and retail trade, even though these are independent activities. This can lead to one activity being unprofitable while the other is highly profitable, requiring different tax regimes for each. From a formal standpoint, these situations may appear as a fragmentation of the business or an attempt to gain unjustifiable tax benefits or evade taxes. However, in many cases, these circumstances arise naturally as the company grows. To address these risks, a detailed explanation is prepared in a “protection file” to demonstrate that they are not tax offenses but rather necessary costs for the business structure. This explanation is supported by relevant case law and explanations from the Federal Tax Service, where similar circumstances have been found innocent of tax liability. Ultimately, the “protection file” serves as a foundation for efficient and effective communication with tax authorities, enabling the company to demonstrate the absence of fragmentation and unjustifiable tax benefits.
- The second phase. Once a taxpayer has come under the scrutiny of the tax authorities, it is highly likely that they will continue to be monitored and audited annually, as the authorities are aware of their vulnerabilities. Simply engaging in passive defense, such as exchanging letters and dealing with field inspections, is insufficient. Active defense is necessary, which involves restructuring the relationships and transactions within a group of companies and redistributing assets among core companies. This can effectively resolve a significant portion of future tax issues. A structuring roadmap was created based on the audit and the “protection file,” resulting in the development of at least two different options for restructuring that would legitimately reduce the tax base and address the risks that triggered the tax audit.