Outline of the case
When calculating the tax base for the ore and carbonate rocks on the basis of the estimated cost (article 340(4) of the Russian Tax Code) a company along with the cost of these minerals, also took into account the cost of crushed stone, which is valued for the purpose of calculating the tax base according to the sale price (article 340(3) of the Tax Code). When the value of ore and carbonate rocks was assessed, the total costs of extracting them was added to the costs of extracting the crushed stone, and then distributed among the above three minerals in proportion to the amount of each of the individual minerals against the total amount.
The tax inspectorate assessed additional MET against the company, believing that the expenses on extracting ore and carbonate rocks should be distributed only between these minerals. The courts of three levels supported the taxpayer and concluded that it was justified for the company to distribute the overall expenses among the three types of mineral. Further to the inspectorate’s appeal, the SAC’s panel of judges referred the case to the Presidium of the SAC owing to the commercial (‘arbitration’) courts’ lack of uniformity in interpreting and applying article 340(3) of the Tax Code.
The issue put before the SAC is at the root of serious inconsistences in court and administrative decisions:
- some taxpayers, guided by the regime for filling in an MET return, have determined the calculation value by allocating the total expenses for all types of minerals, irrespective of how the tax base for each of those minerals should have been determined;
- other taxpayers have determined the estimated value based on the expenses on extracting only those minerals in relation to which the tax base is determined under the transactional method.
When interpreting article 340(4) of the Tax Code, the courts have supported both legal positions.
Conclusions and recommendations
All subsoil users who use the estimated method to determine their tax base should pay attention to the outcome of the case. The SAC will arrive at its legal position and will indicate which approach is correct. These conclusions will directly affect court decisions and the approach of the tax authorities, which means that it will be prudent to bear it in mind when assessing a company’s tax risks as well as its unrealised tax potential.