Nothing is Hidden That will Not be Disclosed: On Tax Scoring

The topic of tax scoring is widely discussed by the expert community. For the Russian tax field, it is a novelty. In compliance with Federal Law No. 134-FZ on Amendment of Article 102 of Part 1 of the Tax Code of the Russian Federation, a portion of the information which used to be solely at disposal of the tax authorities will cease to be a tax secret and be made public. Initially, it was planned to do so starting from the end of July 2017, however, later the date of implementation of that provision was changed for June 1, 2018 by Order No. MM-7-14/582@ of July 27, 2017.

What Type of the Information is Meant?

The following information on taxpayers will be made public:
• outstanding amounts / arrears on penalties and fines (on each tax and duty);
• tax violations and sanctions envisaged for them;
• special tax regimes applicable to taxpayers;
• taxpayer’s participation in a consolidated group of taxpayers;
• average staffing number of the entity’s workers in a calendar year;
• The amounts of incomes and expenditures in accordance the data of the accounting (financial) reporting for the year ended;
• the amounts of taxes and duties paid by the entity in a calendar year (on each tax and duty) without amounts of taxes and duties paid for imports of goods to the customs territory of the Eurasian Economic Union and tax amounts paid to fiscal agents taken into account.
The Federal Tax Service has announced its intension to carry out tax scoring of legal entities: as the data on companies’ taxes payable is made public, legal entities will be assigned the red, yellow and green ratings which correspond to high, medium and low risks of tax violations, respectively. That will help companies take better advised decisions in selecting counterparties.

At present, as the definition of tax scoring has not found its way into statutory acts so far, it is used unofficially by analogy with the credit scoring which is widely used in the financial sector and represents a set of measures to evaluate credit risks. In credit scoring, credit risks (a possibility of non-return of a loan) are calculated based on the quantitative data analysis, that is, processing of specified information on a large number of customers. The criteria which are subject to the analysis supposedly correlate with the likelihood of the debt return, so, a certain rating of borrowers is formed based on the results of processing of the information in terms of potential credit risks. Proceeding from the available information, in carrying out a tax scoring the Federal Tax Service is planning to operate in a similar way: assuming that the information which became available as a result of amendment of the legislation correlates with tax risks of the relevant taxpayer, by means of the quantitative analysis of such data the tax authorities will be forming a rating of taxpayers based on the extent of likelihood of nonpayment of taxes.

A Possible Effect of Changes

The issue of weight of risks identified as a result of tax scoring to determine the integrity of a partner has not been settled yet. It means that the information will sooner be used by taxpayers in addition to other measures to check a company’s repute.

Apart from the fight against fly-by-night companies, the legislator’s goal was undoubtedly aimed at promoting social responsibility of the business: public disclosure of the specified data is meant to diminish the asymmetry of the information between the company and its counterparties. If such information is hidden, a company has a motivation to do window-dressing and not to inform the counterparty of its business problems. If the reliable information can be found by any user within five minutes in the Internet, it excludes not only the possibility of distortion thereof, but also stimulates companies to take efforts to improve their business performance: the better it is, the more attractive the company’s profile will be for potential partners and investors. Such enforced honesty may be good for the business: behavioral economics suggests that people take decisions the other way round if they know that implications become inevitably known to everybody.

However, for some taxpayers changes may create problems. It is commonly known that tax litigations in courts of law are normally lengthy and may involve huge amounts of money. However, as long as litigations proceed (unless otherwise is proved), a company is deemed as the one with tax arrears and, consequently, included in the list of legal entities associated with tax violation risks. This may affect a company’s repute and involve additional financial costs and a loss of opportunities.

Natalia Pushkareva, Researcher of the Tax System Development Laboratory