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Should Trade Bonuses be VAT Taxed?

Russia

The Supreme Arbitration Court of Russia is going to decide in the case of "Leroy Merlin", who claimed a tax authority decision about charging VAT on trade bonuses. The issue concerns contractors of Leroy Merlin paying bonuses for placing their goods in Leroy Merlin's trade stores. They also paid further bonuses to encourage Leroy Merlin to sell the goods quickly and therefore order more goods from the contractors. The bonuses reduced the payments for the goods from the Leroy Merlin, thereby reducing the VAT base. Taxand Russia discusses this issue with a look at a previous case decided on in 2009.

The tax authority thought that bonuses for placing goods and stimulating bonuses shouldn't reduce the VAT base because they were paid for separate services of the trading network of Leroy Merlin. The contractors had to pay the bonuses because there was an agreement's term signed which would affect the agreement otherwise. In other words these bonuses were paid for an opportunity to sell goods in a trading network of Leroy Merlin.

It is worth noting that the Supreme Arbitration Court decided on the same question about trade bonuses in the "Dirol Cadbary case" in 2009. That time the court concluded that this kind of bonus was not unusual in the retail business field and that it was closely connected with the main business purpose - selling more goods to get a higher profit. The court's conclusion is based on a part of the Russian Tax Code, which says, that the price for VAT purposes must be determinate with regards to all changes (bonuses, discounts, premiums, etc.).

It appears the SAC's position is close to changing.

Taxand's Take


If the SAC supports the tax authority position that the bonuses were payments for separate services this can cause problems and additional tax charges for retailers. This way, these payments will not reduce the VAT base and will form a separate VAT base of such services. Moreover, the court's doctrine isn't a law in Russia, so it can be applied retrospectively. It means that the tax authority will charge VAT on these "separate services" and will not deduct the sum of bonuses from the general VAT base not only for future periods but for past periods (although no more than in 3 years), which weren't controlled either.

Your Taxand contacts for further queries are:

Andrey Tereschenko
T. +7 495 967 00 07
E. a.tereschenko@pgplaw.ru

Ivan Zelenin
T. +7 495 967 00 07
E. i.zelenin@pgplaw.ru

Taxand's Take Author