Tax Impact of Commercial Miscalculations and Failures

Based on the principle of freedom of economic activity, an entrepreneur has the right to independently make business decisions and assess their consequences. This constitutional principle is reflected in the risky nature of entrepreneurial activity, which is characterized by business miscalculations and commercial failures. The Constitutional Court of the Russian Federation has repeatedly recognized the right of an entrepreneur to make a planning error, i.e. “business miscalculation”. However, neither doctrine nor court practice has formed a precise definition of business miscalculation and there have been no attempts to develop a test that would distinguish it from commercial failure. Because of this, there are controversial situations when subjects of economic relations shift commercial risks to the budget, which actually finances their business at the expense of other taxpayers (i.e. bad faith disguised as a normal entrepreneurial risk). On the contrary, bona fide taxpayers suffer unfavorable tax consequences caused by the fact that they miscalculated and allegedly unreasonably imposed a part of the economic burden on the budget. For example, in the dispute of Lukoil group of companies, the court did not recognize the expenses written off for an unsuccessful investment project as justified, because “unrealized projects were assessed by themselves as insufficiently developed, inefficient, too slowly implemented, lost relevance, i.e. indicating the presence of ‘business miscalculations’ . Consequently, recognizing any failure in economic relations as a business miscalculation does not unambiguously indicate that the taxpayer will retain tax preferences and will not suffer negative tax consequences. In turn, this suggests that both business miscalculation and commercial failure are synonymous: they may be in the sphere of control of the taxpayer or depend on external circumstances. This means that in order to qualify a particular transaction, the controlling authorities must assess the degree of reasonableness and good faith of the merchant, which will help to find a balance between the interests of private and public subjects of tax relations. In view of this, the study of problems arising in the qualification of business miscalculations in tax relations is of particular practical importance.