VAT Check: Counterparty Status and Tax Authority Audits

How to check whether a counterparty is a VAT payer

Information about the tax regime applied and about registration as a VAT payer is not a tax secret (Article 29 of the Tax Code) — it can be checked by the counterparty's TIN in the tax authorities' public online services. This matters for the input credit: VAT is creditable only if the supplier is registered as a VAT payer and the tax amount is shown separately in the invoice (Article 266).

How the tax authority checks VAT

• the desk audit on a VAT refund is the only desk audit during which entry onto the premises, inspection and requests for documents are allowed (Article 138);
• matching suppliers' and buyers' e-invoices (ESF): breaks in the chain give rise to questions;
• disallowance of the credit if the conditions of Article 266 are not met or the goods were used in non-taxable transactions.

Why VAT is checked more often than other taxes

Value added tax is administered by matching data: the system compares the seller's and the buyer's transactions. If the supplier has not reported a sale but the buyer has claimed a credit, the discrepancy is flagged automatically.

The second factor is the amounts. Credits and refunds of this tax are usually significant, so the cost of an error is high for both the company and the budget. Hence the tax authority's heightened attention.

What is analysed in an audit

The first area is the completeness of reporting of taxable transactions. The inspector checks whether all sales are included in the base and whether the time of their recognition is determined correctly.

The second is the validity of the credits: properly drawn-up documents, the link between the purchase and taxable activity, and whether the transaction actually took place. The third is the correct application of exemptions and special procedures, if the company uses them.

• completeness of reported sales
• the time of recognition of taxable transactions
• documentary support for credits
• the link between purchases and taxable activity
• whether transactions with suppliers are genuine
• correct application of exemptions

Why credits are disallowed

Formal grounds are defects in documents: missing mandatory details, data inconsistent with the contract, discrepancies in names and quantities. These issues are resolved by correcting the documents, as long as the counterparty is reachable.

Substantive grounds are more serious. If the tax authority considers a transaction not genuine — the goods were not actually delivered, the service was not rendered, the supplier has no resources to perform — correcting the paperwork will not help. Here you need evidence of the actual movement of goods and the results of work.

• defects in documents
• discrepancies with the counterparty's data
• signs that a transaction is not genuine
• no link between the purchase and the business
• a supplier with problematic status

How to prepare for an audit

The main work is done in advance. A company that reconciles with counterparties every quarter and keeps complete documents for every material transaction goes through an audit far more calmly.

For major transactions, we recommend keeping not only the contract and invoice but also confirmation of actual performance: transport documents, correspondence, reports and, where necessary, photographs. This is what proves that a transaction was genuine.

Transactions within a group of related companies are a separate area of attention. Where goods and services move between entities with common owners, the tax authority scrutinizes the business purpose of such transactions and the prices applied particularly closely. Properly drawn-up documents are not enough here: you need to understand why the transaction was made and what economic result it produced. We recommend that companies formulate and record the business purpose of intra-group transactions in advance — not retrospectively, but at the time they are made, while the circumstances are fresh and supported by correspondence.

• regular reconciliation with counterparties
• complete documents for each transaction
• confirmation of actual performance
• supplier files
• internal control over documentation
• preliminary diagnostics of credits

VAT refunds and heightened scrutiny

When a company claims a refund, the depth of the audit increases. This is normal practice: the budget is returning money and checks the grounds particularly carefully.

Leader Audit specializes in this area: we have helped clients recover more than UZS 200 billion of value added tax. The key to success is preparing the document package before filing, not after receiving a request.

What to do if a refund or credit is refused

The first step is to understand the grounds. A formal defect and a finding that a transaction is not genuine require different defences, and there is no universal answer here.

Next, objections are prepared with documents supporting the company's position. It is important to follow the prescribed procedure and not lose the right of appeal by missing a step.

It is also useful to assess the consequences for cash planning. If a significant share of the credits turns out to be disputable, the company risks not only an additional assessment but also a cash gap: the liability arises all at once while the money is tied up in operations. That is why diagnostics of credits should be seen not only as a tax task but also as part of financial planning. Knowing what share of the amounts claimed is defensible allows a reserve to be built in advance, so you are not forced to look for funds urgently.

• analysis of the grounds for refusal
• collection of additional evidence
• preparation of reasoned objections
• support during the review
• assessment of prospects for further appeal

How Leader Audit helps

We carry out preliminary diagnostics of credits, identify weak points before the tax authority finds them, and prepare the documentary basis for a refund.

Over 13 years of practice and more than 220 audits we have dealt with hundreds of contentious situations involving this tax. This allows us to assess in advance which part of the credits is defensible and where the position needs strengthening.

• diagnostics of value added tax risks
• checking the completeness of documents
• preparation for a refund
• support during the audit
• preparation of objections in case of refusal