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The Russian Supreme Commercial (Arbitration) Court provides explanations concerning VAT
Also published in Bloomberg BNA Tax Planning International, September 2014
On 30 May 2014 the Plenum of the Russian Supreme Commercial (Arbitration) Court adopted a Resolution concerning issues arising when VAT is being charged. With this explanation adopted significant changes will be introduced to the practice of implementing Chapter 21 "Value-Added Tax" of the Russian Tax Code. Taxand Russia highlights the 8 key provisions of the Resolution which will entail material risks or create fresh opportunities.
1. Any property disposed of as a result of embezzlement and other similar actions is not included in the taxable item
Clause 10 of the Resolution points out that when assessing the tax implications of property disposed of (or written off) further to events beyond the taxpayer's control such disposal is not treated as an operation to be included in the taxable item. It is also stated that a taxpayer must record such disposal and the fact that the relevant property was disposed of, without being transferred to third parties.
The Resolution sets out landmarks for assessing the accuracy and completeness of the documents that a taxpayer has submitted to confirm the fact that property has been disposed of and the circumstances of this. Therefore courts will have to take into consideration the following factors:
- The nature of the taxpayer's activities
- The business environment
- Whether the volume and frequency of property being disposed of corresponds to the standard indicators for such activities and other similar matters
In addition the Arbitration Court pointed out that courts should assess the objections of the tax authority regarding the likelihood that property will be disposed of for reasons stated by the taxpayer. In particular there should be an assessment of arguments that the relevant losses will be excessive. If it is not confirmed that the disposal occurred further to events beyond the taxpayer's control, courts should assume that the taxpayer has an obligation to calculate tax in accordance with rules set for property which is disposed of free of charge (article 154(2) of the Tax Code).
2. Particulars of taxing 'promotional' goods
Clause 12 of the Resolution sets out that the taxpayer transferring to the counterparty goods (work or services) in addition to the main goods (eg souvenirs, gifts or bonuses) without taking extra payment from the counterparty is taxable as a transfer of goods (completion of work or provision of services) free of charge - unless the taxpayer proves that the price of the main goods includes the value of the additional transferred goods and that the tax calculated for the principal operation also applies to the additional goods being transferred.
At the same time by virtue of article 149(3)(25) of the Tax Code, the goods being transferred for advertising purposes are taxable under the general regime if the expenses on buying (creating) a unit of such goods exceeds RUB 100. However if the property is intended for sale in its own right then it may not be considered as a separate taxable item.
3. If the seller has not expressly stated that the price does not include VAT, the agreed price should be treated as including the tax
Clause 17 of the Resolution states that the amount of tax charged to the buyer when goods are sold, or when property rights are transferred, should be taken into consideration when the final amount of the price as set out in the agreement is calculated. It should also be recorded separately in calculations, source records and VAT invoices. It will be incumbent on the seller to comply with these obligations, as they acts as the taxpayer so must record such sales when forming its tax base.
In this regard if the agreement does not expressly state that the price set in it does not include the amount of tax then the judges should assume that that the seller has removed the amount of tax charged to the buyer from the amount stated in the agreement ie the tax computation method is used.
4. Carriers providing services for the international transportation of goods are entitled to apply the zero tax rate at particular stages of transportation
Clause 18 of the Resolution reads as "When interpreting article 164(1)(2.1) of the Russian Tax Code courts should bear in mind that if such services are provided by several persons (joint service providers or third parties - subcontractors - engaged by the principal service provider), this does not prevent all the persons which participated in providing the services from applying the zero tax rate.”
In this regard the zero tax rate is also applied by carriers which provide services for the international transportation of goods at particular stages of transportation as well as by persons which the forwarder engaged to provide particular forwarding services.
At the same time this article applies to forwarding services provided in relation to goods which are subject to international transportation, irrespective of whether the forwarder itself, or the person which ordered the forwarding services or any other person is acting as the organiser of the international transportation.
The explanations of the Arbitration Court do not clarify whether the zero tax rate applies only to agreements with joint service providers or whether a taxpayer may apply this rate in relation to separate agreements entered into at each stage of the transportation of the exported goods.
5. VAT paid in excess may be refunded only if the seller provides evidence that they refunded the tax paid in excess to the buyer
Clause 21 of the Resolution stipulates that if a taxpayer claims for tax paid in excess to be refunded from the budget and supports this claim by argumenting that the relevant transaction was not taxable or should be taxed at a lower rate, then courts should check whether the amount paid to the state budget corresponds to the amount of tax which had been paid by the buyer in relation to the relevant transaction.
Since this clause was introduced declaring VAT means that tax is recorded separately in source documents and VAT invoices. The issue of whether VAT may be refunded from the state budget remains open, bearing in mind that the tax amount is not recorded separately when goods are sold to consumers for retail prices.
6. The right to deduct VAT in relation to future supplies arises if prepayment is made not only in cash but also in kind
Clause 23 of the Resolution deals with the resolution of disputes which involve tax deductions being made by a taxpayer who has paid for future supplies of goods and transfer of property rights. In such disputes courts should take into consideration that Chapter 21 of the Code does not specify that in this case the right to deduct tax arises only when the price of the goods and the property rights is paid in monetary form. Therefore a taxpayer may not be deprived of their right to a tax deduction if they has paid in a timely manner for the goods and the property rights in kind.
7. Procedure for lessors applying VAT deductions when making capital investment in leased property
Clause 26 of the Resolution clarifies the procedure for considering disputes involving lessors and lessees applying tax deductions. For instance the Arbitration Court clarified the matter as follows:
- If a lessee makes a capital investment in property being leased out and the investment takes the form of lease payments as agreed by the parties, then the lessee deducts the tax amounts charged to it on previously acquired goods and property rights, in accordance with the same procedure as the tax amounts that the lessors charge within the lease payments
- If the lessee makes capital investments in a facility being leased out, in addition to the lease payments being made to the lessor, the lessee may deduct the tax amounts charged to it, as per the standard procedure, since for the purposes of article 171 of the Tax Code it should be treated as a person acquiring goods for its own business activities
- If the lessor reimburses the capital investments made the relevant integral improvements in the leased property should be deemed transferred to the lessor, who has paid for them. However the lessee should charge the amounts of tax previously deducted to the lessor pursuant to article 168(1) of the Russian Tax Code
- For their part the lessor, in their capacity as the owner of the facility being leased out and which has assumed the burden of capital investment, may either deduct the tax amounts as charged by the lessee or expense them when calculating profit tax
8. Period in which tax deductions should be declared
Clause 27 of the Resolution construes article 173(2) of the Tax Code concerning the period in which tax deductions should be declared.
The Arbitration Court confirmed that since the above provision does not stipulate otherwise the taxpayer may record tax deductions in a tax return for any period which is part of the relevant 3year tax period. At the same time the court pointed out that a taxpayer should comply with the rule of article 173(2) of the Tax Code that a tax return must be filed within a 3year period, even if the taxpayer includes the relevant tax deductions in an updated tax return to be filed.
The Court did not clarify the period starting from which the applicable 3 year period should be counted (whether from the period in which transactions were performed or from the period in which all the conditions for making deductions were observed, the VAT invoices were received, the goods were booked, the relevant source documents were executed).
Pursuant to article 3(1) of Federal Constitutional Law No. 8-FKZ ‘On amending the Federal Constitutional Law On Commercial (Arbitration) Courts in the Russian Federation’ and article 2 of the Federal Constitutional Law 'On the Supreme Court of the Russian Federation', the clarifications issued by the Plenum of the Russian Supreme Commercial (Arbitration) Court concerning the practice of Commercial (Arbitration) Courts enforcing laws and other regulations, remain in force until the Plenum of the Russian Supreme Court adopts any relevant decisions.
Therefore the Resolution of the Plenum of the Russian Supreme Commercial (Arbitration) Court concerning VAT issues will remain in force until it is amended or overruled by the Plenum of the Russian Supreme Court. Multinationals and national corporations alike should further investigate these updates in order to remain compliant.
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