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Russian Supreme Arbitration Court Seeks To Make VAT Exemption Regarding Airport Services More Consistent
The Presidium of the Russian Supreme Arbitration Court will consider the value added tax exemption regarding aircraft servicing provided in airports and Russia's air space. Taxand Russia analyses the landmark case and its implications.
The company (Aero-Gruz) and the airport (Vladivostok International Airport) concluded a cooperation agreement with regard to organising and servicing cargo transportation. Under the agreement, the company provided comprehensive servicing of one-off charter trips by processing the relevant service cargo and passenger luggage arrived / sent in packages at the terminal.
The company issued invoices to the airport where the cost of services was specified as the rate per unit plus 18% VAT. With regard to some of the issued invoices, the airport paid VAT in full, while it failed to pay VAT with regard to the remaining invoices. The dispute arose with respect to different approaches to the VAT exemption for service-related transactions. The company filed a claim against the airport to recover the principal amount of debt under the agreement resulting from the incorrect invoicing of the cost of provided services as the "rate (including 18% VAT)", while under the terms and conditions of the agreement the cost of services was the "rate (excluding 18% VAT)". The company also claimed interest for using its funds. In turn, the airport filed a counter-claim to recover the debt under the agreement with regard to the unjustified inclusion of the 18% VAT in invoices.
In the first instance the court overturned the principal claim and upheld the counter-claim for the amount claimed. Based on provisions of articles 149, 170 and 171 of the Russian Tax Code, the court confirmed that the servicing of aircrafts was exempt from VAT. The airport's claims were upheld in full with a reference to unjustified invoicing of VAT in the course of the parties' existing legal relations.
The 5th Arbitration Court of Appeal in its ruling quashed the decision of the lower court, overturning the counter-claim in full and upholding the principal claim. The court of appeal, based on similar provisions of the Tax Code, official clarifications, as well as Order No. 110 of the Russian Ministry of Transport dated 2 October 2000 came to the opposite conclusion with regard to the application of VAT to these services. The court of cassation upheld the position of the court of appeal. The court of cassation noted that, when considering a dispute between two legal entities with regard to their obligations under a fee-based agreement for services, the lower courts erroneously followed tax legislation. Since legal relations at issue are of a civil law nature, the provisions of tax legislation do not apply to this dispute.
However, relying on sub-clause 22, clause 2, article 149 and sub-clause 2, clause 5, article 173 of the Tax Code, the court of cassation noted that based on provisions of the agreement the VAT amount was treated as a component of the cost of services and the payment of this amount comprised the airport's civil obligation to the company. As the airport failed to provide evidence that it had discharged its obligations under the agreement with regard to paying the cost of services under the terms agreed by both parties (rate per unit + 18% VAT), the company's claim should to be upheld. There were no legal grounds for upholding the airport's claim to refund VAT, as the amount of this tax was a part of services provided to the airport with regard to servicing aircrafts, the cost of these services had been set out in the agreement, while the legal relations in respect of paying VAT were public legal relations, in which the service buyer (airport) does not participate.
Conclusions of the panel of judges of the Russian Supreme Arbitration Court
In its ruling, the panel of judges noted that decisions over similar disputes showed that there was no uniformity in interpreting and applying sub-clause 22, clause 2, article 149 of the Tax Code with regard to services the rates for which had been set out in the List of Charges adopted by Order No. 110 of the Ministry of Transport dated 2 October 2000.
The panel of judges noted that in some cases local courts proceeded on the premise that the loading, unloading and transportation of luggage and cargo between the air terminal and the aircraft were exempt from VAT, while the servicing of aircraft at the airport was a single technological set of services aimed at preparing the aircraft for flight with passengers, cargo and luggage and at performing the air transfer. In other cases, however, it stated that only transactions relating to the direct servicing of aircraft are exempt from VAT, and therefore a service relating to passengers, mail, luggage, etc. is subject to VAT (i.e. only the services listed in sections 2 and 3 of the List of Charges are exempt from VAT).
To establish a uniform interpretation and application of sub-clause 22, clause 2, article 149 of the Tax Code, the case was referred to the Presidium of the Supreme Arbitration Court. According to information posted on the Court's official website, the hearing is scheduled for 7 June 2011.
Though the dispute is of a civil law nature, the Supreme Arbitration Court's position, if formed, may significantly affect the taxation of airport services. The recent court decisions actually show that a lot of disputes arise over the application of sub-clause 22, clause 2, article 149 of the Tax Code (both tax and civil disputes). The courts are guided by the same laws and regulations, but apply different approaches to determining what services are exempt from VAT. The Supreme Arbitration Court plans to introduce a uniform approach with regard to interpreting this provision.
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