News › Taxand’s Take Article
Accelerated Depreciation of Fixed Assets
On 5 July 2011, the Federal Arbitration Court for the Far Eastern Circuit rendered a decision setting a new precedent, namely, that companies operating in the Sakhalin Region are entitled to apply a special coefficient for accelerated depreciation on their fixed assets (not exceeding 2 ie no more than two times the relevant depreciation rate).
The Court's conclusions may also apply to companies operating in other regions in the Far North and areas equivalent to the Far North. Taxand Russia explains how companies operating in the Sakhalin Region and in a number of other regions can now benefit from the accelerated depreciation of their fixed assets.
In a recent court case, brought while the tax office was examining objections to the audit report, a taxpayer filed an adjusted profit tax return along with documents confirming the right to apply the special accelerated depreciation coefficient. The taxpayer also argued that it had previously overpaid tax to the treasury (state budget) and sought to have this overpayment taken into account by the tax authority when it rendered its decision.
The taxpayer cited Article 259(7) of the Tax Code (as worded before Federal Law No. 224-FZ was passed on 26 November 2008, and currently Article 259.3(1) of the Tax Code). Under this Article, in order to apply the special coefficient (not exceeding 2) to the basic depreciation rate, it is necessary to show that the equipment is being operated in a hostile environment, assuming that the depreciation is being charged under the straight-line method. If depreciation is charged other than under the straight-line method, the fixed assets should be classified under depreciation groups, with the exception of the first, second and third groups.
The Arbitration Court for the Sakhalin Region and the Federal Arbitration Court for the Far Eastern Circuit acknowledged in their decisions dated 15 February 2011 and 5 July 2011 in case No. ?59-3598/2010, respectively, that a higher depreciation coefficient should be used for fixed assets operated in the environmental conditions of the Sakhalin Region.
This conclusion was based on: Resolution No. 1029 dated 10 November 1967 of the USSR's Council of Ministers; Russian Law No. 4520-1 dated 19 February 1993 "on state guarantees and compensation for people who work and live in the Far North and areas equivalent to the Far North"; Resolutions of Russia's State Construction Committee (Gosstroy) No. 81 dated 17 December 1999, No. 25 dated 27 February 2003, and No. 5 dated 12 January 2004; the Guidelines for Comprehensive Technical Inspection of Isothermic Reservoirs RD 03-410-01 approved by Resolution No. 32 dated 20 July 2001 of the Russian Federal Supervisory Committee for Mining and Industry (Gosgortekhnadzor); and Selected Assessment Standards for Geological Exploration Work (SSN-92) approved by Order No. 8 dated 20 July 2000 of the Russian Ministry of Natural Resources.
The Courts also relied on the opinion of the State R&D Institute for Commercial Aviation included in the case file and noted the following:
- the atmosphere of the Sakhalin Region is hostile to metal equipment;
- from 2001 to 2010 extreme climatic conditions were registered in the Sakhalin Region that had a negative impact on equipment and caused its rapid wear;
Following the Courts' conclusions and taking into account the significance of such court practice, taxpayers in the Sakhalin Region that use fixed assets in this territory are entitled to use accelerated depreciation coefficients for such assets. The Courts' conclusions allow a high coefficient not exceeding 2 to be used by taxpayers even in the absence of an expert opinion (from an expert company, etc.).
As the Courts' conclusions are based on an analysis of the regulations made by governmental agencies that are equally relevant to the Sakhalin region and to other regions of the Far North and areas equivalent to the far North, such regulations may be cited by companies operating in those areas.
The case may be used by companies to reduce their current tax payments and to create tax potential in the form of excess profit tax that may be recovered from the treasury (state budget).
To recover the overpaid tax, it is advisable to analyse the structure of the fixed assets, ascertain whether the requisite documents are available, and prepare them if there are not. The results will depend on the company's operational specifics and the types of fixed assets on which accelerated depreciation can be charged.
Your Taxand contact for further queries is:
T. +7 495 967 00 07
We are interested to hear your opinion on this key piece of tax news. Join our LinkedIn Group and share your ideas. With tax professionals in nearly 50 countries you can understand the impact of tax issues affecting multinationals today.