December 18, 2023

Desk tax audits

Table of contents

1. When a desk tax audit is carried out.

2.  The procedure for organizing and conducting a desk tax audit.

3. Proceedings for tax offenses identified as a result of a desk tax audit.

Chapter 1.When a desk tax audit is carried out.

Grounds for conducting a desk tax audit.

According to para. 21 of Annex No. 2 “On the Procedure for Conducting Tax Audits” to the Resolution of the Cabinet of Ministers No. 1 of 07.01.2021 “On the management of tax risks, identification of taxpayers (tax agents) with tax risks, and the organization and conduct of tax audits” (hereinafter the “Resolution No. 1”), there are 5 reasons for conducting a desk tax audit.

I. A desk tax audit is conducted if the taxpayer does not submit the updated tax report or clarifications within 10 days from the receipt of a notification sent by the tax authority to the taxpayer regarding discrepancies identified in the results of the pre-verification analysis.

Pre-verification analysis is an automated analysis of the submitted tax reporting and other information about the taxpayer’s activities conducted by the tax authorities using information systems, without the involvement of the taxpayer.

II. A desk tax audit is conducted if there is a risk of violating tax legislation identified based on the tax risk management system. In this case, the tax authorities conduct a desk tax audit to prevent possible violations that may occur on the part of the taxpayer.

The definition of “tax risk” is provided in Appendix No. 1 to Resolution No. 1 “Regulation on the procedure for managing tax risks, identifying taxpayers (tax agents) with tax risks, and their segmentation according to levels of tax risk”. According to this regulation, tax risk is defined as the possibility of a taxpayer (tax agent) failing to fulfill or partially fulfilling tax obligations, which may lead to non-payment of taxes and fees into the budgetary system.

In the Republic of Uzbekistan, tax risks are determined based on information from the following sources:

– Tax and financial reports submitted by taxpayers, as well as information reflected in taxpayers’ files;

– In accordance with the Tax Code of the Republic of Uzbekistan, Decree of the President of the Republic of Uzbekistan of 30.10.2020 No.6098 “On organizational measures to reduce the shadow economy and increase the efficiency of the activities of the state tax authorities,” as well as the Resolution of the President of the Republic of Uzbekistan of 30.10.2012 No.1843 “On measures to further improve the efficiency of the functioning of the information and communication system of the State Tax Service of the Republic of Uzbekistan” – information provided to the tax authorities by state bodies, institutions, and organizations, as well as information provided by competent authorities of foreign states within the framework of concluded agreements on mutual exchange of information;

– Information from the mass media;

– Information contained in the materials of conducted tax audits;

– Information on tax offenses established by courts and law enforcement agencies (verdict, ruling, determination, decision, and other documents);

– Appeals of individuals and legal entities regarding facts of tax offenses;

– Data from statistical authorities;

– Information from other sources not prohibited by law. (para. 7 of Annex No. 2).

Levels of tax risk are classified as low, medium, and high. (para. 8 of Annex No. 2).

The criteria for determining the level of tax risk are confidential information. Open sources for determining tax risk include:

– Tax burden;

– Making changes and additions to previously submitted tax reporting (3 or more times within one reporting period);

– Reflecting losses in the tax return for several tax periods (2 or more);

– Repeated change of location and subsequent re-registration of the taxpayer (2 or more times);

– Transactions with entities whose value-added tax certificates have been revoked or liquidated, inactive, or declared bankrupt;

– Low level of profitability, defined as the ratio of net profit to expenses;

– Inconsistencies in the information on transactions in the value-added tax return provided by the taxpayer compared to the information on these transactions in the tax return provided by another taxpayer;

– Submission of tax reporting per which for several years, the turnover approaches an amount of less than one billion sum, which entitles the application of special tax regimes;

– Results of tax audits. (para. 9 of the Resolution No.1 dated 07.01.2021).

The level of a taxpayer’s tax risk is determined once every 6 months based on the tax risk management system (para. 15 of Resolution No. 1).

In the case of non-payment of tax debts by taxpayers with a low level of tax risk for more than 30 calendar days, the level of tax risk must be determined once a quarter (para. 16 of Resolution No. 1).

According to Article 140 of the Tax Code of the Republic of Uzbekistan (hereinafter the “TC”), a tax audit is carried out in relation to a taxpayer (tax agent) belonging to the category of taxpayers (tax agents) with a high level of tax risk.

According to the Instructions for the elimination of deficiencies identified through the interactive service “Check My Status” of the State Tax Committee, there are 13 criteria determining the level of tax risk for a taxpayer. In accordance with the Guidelines, taxpayers can be classified as having a high level of risk if they have at least one of the following criteria:

1) The identity of the organization’s leader or the person performing the duties of the leader is not established, or employment contracts with the persons specified in the application are not confirmed in the Unified National Labor System;

2) Information about the founders of the organization is not available in the database of the tax authorities;

3) The taxpayer is absent at the place of state registration address;

4) There is no owned, leased, or gratuitously used real estate at the location, and if the premise is less than 18 square meters;

5) The taxpayer’s location address is not in the address bureau database;

6) The taxpayer’s address coincides with the nominal location address;

7) Incoming and outgoing operations and the goods’ nomenclature do not correspond to the information obtained based on electronic invoices;

8) The taxpayer did not submit tax reporting;

9) The taxpayer or a founder with a stake in the authorized capital exceeding 50% has a tax debt, which is overdue for more than 2 months as of the application date;

10) The merger of 2 or more legal entities with tax debt or assigned a high level of tax risk;

11) The head of the taxpayer-applicant is simultaneously the leader of another taxpayer (legal entity) with tax debt or unsubmitted tax reporting;

12) The head or founder previously served as the head or founder in an organization declared bankrupt and was previously held accountable for intentional tax evasion (this requirement is considered when the founder’s stake is 50% or more);

13) The head or founder of the organization with a stake of 50% or more in the authorized capital has a high level of tax non-payment risk and was held accountable for intentional tax evasion.

III. A desk tax audit is conducted if inconsistencies or errors in the tax report provided by the taxpayer are identified.

IV. The basis for conducting a desk tax audit may be requested from individuals and legal persons regarding cases of violations of tax legislation requirements.

V. A desk tax audit is also conducted when a taxpayer submits an amended tax report, reducing the amount of tax payable compared to the previously submitted tax report or increasing the amount of incurred losses.

Chapter 2. The procedure for organizing and conducting a desk tax audit.

When conducting a desk tax audit, the tax authority follows the following steps.

Step 1.

First and foremost, the tax authority must have grounds for conducting a desk tax audit (para. 21 of Appendix No. 2 to Resolution No.1).

Step 2.

Before commencing a desk tax audit, the tax authority may conduct a pre-verification analysis based on the reports provided by the taxpayer or other information available in the tax authorities’ information system, without the order of the head (deputy’s head) of the tax authority and without the taxpayer’s participation (Art. 138 Clause 3 of the TC, para. 21-1 and para. 21-2 of Resolution No.1).

Step 3.

If discrepancies are found between the taxpayer’s reports and the information available to the tax authority, or errors are discovered, the taxpayer will be notified through their personal taxpayer account to make the necessary adjustments to their tax reporting.

Within 10 days of receiving the notification, the taxpayer must submit the amended tax reports to the tax authority. Failure to comply with this requirement will initiate a desk tax audit (Art. 138 Clauses 5, 6 of the TC, para. 21-3 of Resolution No.1).

Step 4.

The basis for conducting a desk tax audit is a resolution from the head of the tax authority. One order is issued for one subject of the audit (para. 25, 26 of Resolution No.1).

The resolution must include the taxpayer’s name, their TIN, the name, surname, patronymic of the inspecting officer, the duration, and period of the audit, and the type of taxes and duties being audited (para. 27 of Resolution No.1).

If multiple inspecting officers are appointed by the tax authority, the person mentioned first in the list of inspecting officers is responsible for managing the process and summarizing the audit results (para. 28 of Resolution No.1).

Step 5.

After issuing the order, the tax authority requests the taxpayer to provide accounting documents, explanations for the submitted tax reports and accounting documents, and any other information related to the calculation and payment of taxes and duties (Art. 138 Clause 10, para. 30 of Resolution No.1).

The taxpayer must provide the requested documents within 5 days. This period can be extended upon the taxpayer’s request, which must be submitted the day after receiving the request (para. 31 of Resolution No.1).

If it is necessary to request documents related to the activities of the audited person from their counterparts, the tax authority can instruct another tax authority, based on the counterpart’s location, to request these documents. The second tax authority must send a request to the counterpart of the audited person within 3 days, including the instruction from the first tax authority. The counterpart of the audited person must provide the necessary documents within 5 days unless the tax authority approves their request for an extension of the document submission period (para. 32, 163, 164, 165 of Resolution No.1).

The taxpayer provides copies of the requested documents, and if necessary, the tax authority may review the original documents (para. 33 of Resolution No.1).

Step 6.

As a result of the tax audit, the responsible official compiles a conclusion (para. 35 of Resolution No.1).

The conclusion shall include:

– Information that was the basis for conducting a desk tax audit;

– Information about identified violations or the absence of tax violations;

– Information about discrepancies in tax reporting or errors;

– Results of document study and analysis (para. 35 of Resolution No.1).

Step 7.

The conclusion prepared based on a desk tax audit is reviewed and approved by the head of the tax authority within 2 days (para. 36 of Resolution No.1).

Step 8.

If discrepancies or errors are identified in the submitted tax reporting, the tax authority sends a request to amend the tax reporting. The desk tax audit is considered completed from the date of sending the request to amend the tax reporting, as well as if no discrepancies or errors are found in the tax reporting (Art. 138, Clause 14, TC, para. 38 of Resolution No. 1).

Step 9.

All materials of the desk tax audit must be registered at the tax authority at the taxpayer’s place of registration no later than the next working day after its completion (Art. 135, Clause 6 of the TC).

Attention!

A desk tax audit can be carried out concerning tax periods for which the statute of limitations has not expired, in accordance with Art. 88 of the TC (Clause 9, Article 138 of the TC).

During the desk tax audit, the tax authority may inspect the territories and premises of the taxpayer to verify the compliance of the provided documents with reality (para. 23 of Resolution No. 1).

After receiving the request to amend the tax reporting, the taxpayer must submit the corrected version of the tax reporting or an explanation of the identified discrepancies within 5 days, accompanied by supporting documents (Art. 138, Clause 15 of the TC, para. 39 of Resolution No. 1).

As an explanation of identified discrepancies, the taxpayer is entitled to present the conclusion of a tax consulting organization. Such justification, on behalf of the taxpayer, may be presented by the tax consulting organization independently based on an agreement with the taxpayer (Art. 138, Clause 16 of the TC, para. 40 of Resolution No. 1).

The justifications presented by the taxpayer are reviewed by the head (deputy head) of the tax authority within 15 days from the date of receiving the relevant documents (justifications) (Art. 138, Clause 17 of the TC, para. 41 of Resolution No. 1).

If the tax authority fully or partially agrees with the presented justifications, within 3 days, it sends a notification to the taxpayer of canceling the previously sent demand or an amended demand for corrections in the tax reporting (Art. 138, Clause 18 of the TC, para. 42 of Resolution No. 1).

If the taxpayer has not submitted the amended tax reporting (including after the amended demand) or has not provided explanations for the identified discrepancies, or the explanations provided by them are considered insufficient, the tax authority has the right to appoint a tax audit of the taxpayer (Art. 138, Clause 19 of the TC, para. 43 of  Resolution No. 1).

Chapter 3. Proceedings for tax offenses identified as a result of a desk tax audit.

Proceedings for tax offenses.

Proceedings for tax offenses consist of the following stages:

1. Preparation of an act.

First and foremost, when identifying tax offenses provided for in Chapter 28 of the Tax Code during the desk tax audit, the inspecting official prepares an act recording the violation. The act must be drawn up within 3 days after detecting the offense but no later than the completion of the desk tax audit, as well as before drawing up the conclusion based on the results of the desk tax audit (Clause 1, Art. 165 of the TC, para. 44, 45 of Resolution No. 1).

2. Consideration of the act and other materials by the head of the tax authority.

The head of the tax authority reviews the act identifying the tax offense and materials from the desk tax audit within 10 to 15 days (para. 46, Resolution No. 1). The act on the tax offense includes photographs, videos, and other materials obtained during the tax audit by the tax authority’s officials (Clause 2, Art. 165 of the TC, para. 47 of Resolution No. 1).

3. Handing over the act.

The act is handed over to the person who committed the tax offense, either by acknowledgment or by other means that confirm the date of receipt. If the specified person avoids receiving the act, the tax authority official makes a corresponding note in the act. In such cases, the act is sent to this person by registered mail. When sending the act by registered mail, the fifth day from the date of dispatch is considered the date of its delivery (Clause 5, Art. 165 of the TC).

4. Submitting an Objection

If a taxpayer disagrees with the act, they have the right to provide written objections to the tax authority within 10 days. Suppose objections from the taxpayer are not provided. In that case, the head of the tax authority considers the act with the person who committed the offense or their representative (the tax authority notifies the taxpayer of the date, time, and place two days in advance) (Clause 6, 7, 8, Art. 165 of the TC).

If the taxpayer informs the tax authority of their inability to attend, the tax authority may decide to postpone the hearing to another time (up to 3 days) in case of valid reasons. In case of non-appearance of the duly notified person, it does not prevent the head of the tax authority from considering the act without the participation of that person (Clause 9, Art. 165 of the TC).

5. Consideration of the act with the person who committed the offense.

During the consideration of the act, a protocol is kept, and the use of evidence obtained in violation of the law is not allowed. Documents (information) presented by the person responsible can be considered even if they were submitted to the tax authority after the deadline. During the consideration of the act and other case materials, a witness, expert, or specialist can be involved (Clauses 14, 15, 16, 17, Art. 165 of the TC).

During the consideration of the act and other case materials, the head of the tax authority establishes:

1) Whether the person against whom the act was drawn up violated tax legislation;

2) Whether the identified violations constitute a tax offense;

3) Whether there are grounds to hold the person against whom the act was drawn up accountable for committing a tax offense (Clause 18, Art. 165 of the TC).

In the presence of a tax offense, the head (deputy head) of the tax authority identifies circumstances that either exclude the person’s guilt in committing the tax offense or mitigate/aggravate the responsibility for committing the tax offense (Clause 19, Art. 165 of the TC).

6. Decision-making.

Following the review of materials regarding the tax offense, a decision is made, which includes:

1) Additional tax and penalties or refusal thereof;

2) Holding the taxpayer accountable for committing the tax offense or refusal thereof.

The decision regarding additional tax and penalties or refusal thereof is made within 5 days after the act’s consideration.

The decision to hold the taxpayer accountable for the tax offense should include:

– Circumstances of the committed offense;

– Documents and other information confirming these circumstances;

– Arguments presented by the person held accountable;

– Results of verifying these arguments;

– Articles of the Tax Code stipulating these offenses and the measures of responsibility applied;

– the period within which the person can appeal this decision and the procedure for appealing the decision to the higher tax authority (Clauses 1, 2, 3, 4, Art. 166 of the TC).

For identified tax offenses, for which individuals are subject to administrative liability, an authorized official of the tax authority draws up a protocol on the administrative offense. The consideration of cases related to these offenses and the application of administrative sanctions against individuals guilty of committing them are conducted in accordance with legislation on administrative responsibility (Clause 5, Art. 166 of the TC).

7. Execution of the decision.

The execution of the tax authority’s decision is carried out by the tax authority and the taxpayer after one month from the date of receiving the tax authority’s decision (para. 52 of Resolution No. 1).

In case of non-execution of the tax authority’s decision by the taxpayer voluntarily, the tax authority has the right to recover the debt from the taxpayer according to Articles 120-124 of the Tax Code.

The decision of the tax authority made following the desk tax audit can be appealed to the higher authority or the court. Decisions of the State Tax Committee can only be appealed in court (para. 55 of Resolution No. 1).

Attention!

Invalidation of a tax authority’s decision based on the results of a desk tax audit is subject to the jurisdiction of the administrative court. (Chapter 23 of the Code of the Republic of Uzbekistan “On administrative court proceedings”).