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Interest On A Late Refund Of VAT
On 24 April 2011, the Russian Supreme Arbitration Court published Resolution No. 14233/10 of the Court's Presidium dated 17 March 2011. The Resolution considered the issue of the payment of interest on a late refund of VAT (clause 10, article 176 of the Russian Tax Code) in cases in which a taxpayer who has submitted a tax return declaring an amount of VAT to be refunded has not applied to the tax authority for the tax in question to be refunded. Taxand Russia examines some of the above cases where courts of three different levels held that interest on an amount of VAT which had not been returned to a taxpayer (but was liable to be refunded following a desk tax audit) should be assessed disregarding the date on which the taxpayer applied for a refund of the tax in question.
The SAC's panel of judges noted that until the tax authority has no obligation to pay back tax which should be refunded until it receives a written application from a taxpayer for a VAT refund. The SAC's panel of judges, in addition, was guided by the line of authority developed in the Presidium of the SAC's Resolutions (No. 5351/04 dated 5 October 2004, No. 10848/04 dated 21 December 2004, No. 7528/05 dated 29 November 2005 and No. 13584/06 dated 27 February 2007). According to these cases, the tax authority is obliged to pay interest when the time period is breached for a refund as long as there are grounds for refunding the amounts of tax and only after the taxpayer has submitted an application for a tax refund.
Having examined the case, the Presidium of the SAC left the decisions of the lower courts unamended. It held that their conclusions were justified and noted that article 176 of the Tax Code, in the form in which it has been in force since 1 January 2007, does not tie a tax refund with the taxpayer submitting an application for a refund. In other words, the new approach to assessing interest has nothing to do with a change in the SAC's position; rather, it reflects changes to tax law on this issue.
Moreover, the Presidium of the SAC interpreted clause 6, article 176 of the Tax Code, which makes reference to a taxpayer's application for a VAT refund, as meaning that an application is necessary if the refund is to be made to a specific bank account. Without such an application, the tax authority may make the refund to any settlement account of the taxpayer of which the authority is aware. The Presidium therefore rejected, and viewed as unjustified under current legislation, the tax authority's approach that it had no obligation to pay back a refundable amount of VAT until it had received an application for the refund from the taxpayer.
It is important to pay attention to the particular nature of the case which was under consideration:
- In this case, there was no dispute over the taxpayer's entitlement to a refund of VAT - the outcome of the desk tax audit was a decision from the tax authority that an amount of VAT should be refunded. Therefore, further analysis is required of the issue of to what extent the Presidium of the SAC's Resolution No. 14233/10 dated 17 March 2011 is applicable to a situation in which the tax authority has initially refused to refund VAT and the taxpayer has had to go to court to protect a right that has been breached
- In examining the case, the courts proceeded on the basis that the tax authority should have refunded the value added tax upon the expiry of a period of 3 months plus 12 days after the tax return was filed. This represents the 3 month duration of the desk tax audit under article 88 of the Tax Code plus the period established by clause 10, article 176 of the Tax Code. To this end, the courts did not consider the issue of when the tax audit was actually completed, instead focusing on the time limit for the audit to be held as established by law
- The Presidium of the SAC's Resolution No. 14233/10 dated 17 March 2011 contains no reference to the fact that the interpretation of legal rules contained in such Resolution is of general application or that it should be applied when arbitration courts hear similar cases. Nevertheless, the Resolution itself does not specifically deal with the issue of what is down to the actual circumstances of the case and is therefore not to be applied in similar situations.
The new Resolution of the Presidium of the Supreme Arbitration Court may change the practice for refunding VAT under article 176 of the Tax Code and for resolving disputes relating to it:
- Firstly, the tax authority is obliged to reimburse VAT without the taxpayer applying for a VAT refund
- Secondly, the tax authorities may, if they do not receive an application, refund the VAT to any account they know of, leading to potential problems when funds from this account are used
- Thirdly, it cannot be excluded that there will be a new approach taken to calculating time periods for protecting a taxpayer's rights to a VAT refund.
It is recommended that taxpayers ensure their applications for a VAT refund reach the tax authority in good time as this will guard against the risk of VAT being refunded, for example, to an account which the taxpayer does not use. In our opinion, if the taxpayer needs to substitute a different account to receive the VAT refund after it has submitted the application, then, before the tax authority takes a decision to refund the tax and sends the appropriate payment instruction, the taxpayer has the right to revoke an application it has previously made instead submitting a new one specifying a different account. For tax returns which indicate that VAT is to be refunded and when, moreover, there are no grounds for it to be offset, it should be borne in mind that it is necessary to ensure court protection of the right to the VAT refund after the expiry of the time period for an audit to be conducted.
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