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. Please note the most important provisions of the Resolution which entail material risks or create fresh opportunities.
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, by virtue of article 146(1) of the Tax Code, when assessing the tax implications of property disposed of (or written off) further to events beyond the taxpayer's control (e.g. loss of property owing to spoilage, hostilities, embezzlement, natural disaster and other similar events), such disposal is not treated as an operation to be included in the taxable item.
It is also stated that, by virtue of article 54(1) of the Tax Code, a taxpayer must record such disposal and the fact that the relevant property was disposed of on the above grounds, 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. Thus, according to the Resolution, courts will have to take into consideration the following factors:
- the nature of the taxpayer's activities,
- its business environment,
- whether the volume and frequency of property being disposed of correspond to the standard indicators for such activities, and other similar matters.
In addition, the Plenum of the Russian Supreme Commercial ('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).
To this end, we recommend that relevant provisions be developed or revised (corporate policies, and other internal documents) which relate to facts and circumstances when the disposal of property is identified and recorded. This should be done in such a way that the provisions specify the procedure for investigating the above facts and circumstances, set out the particulars of maintaining business activities and the nature of such activities, and indicate the level of losses common for such activities. We believe that in order to establish the level of losses for particular activities, the relevant markets may be researched and analysed.
Particulars of taxing 'promotional' goods
Clause 12 of the Resolution sets out that, by virtue of article 146(1) of the Tax Code, the taxpayer transferring to the counterparty goods (work, or services) in addition to the main goods (e.g. 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 additionally transferred goods (work, or services) and that the tax calculated for the principal operation also applies to the additional goods (work, or services) being transferred.
At the same time, as pointed out by the Plenum of the Supreme Commercial ('Arbitration') Court, by virtue of article 149(3)(25) of the Tax Code, the goods (work, or services) being transferred for advertising purposes are taxable under the general regime if the expenses on buying (creating) a unit of such goods (work, or services) exceed RUB 100.
On the other hand, the distribution of advertising materials which represent part of the taxpayer's activities in order to promote on the market the goods (work, or services) it manufactures and/or sells, with a view to increasing the sales volume, such distribution may not be considered as an operation which constitutes a separate taxable item if the above advertising materials do not qualify as goods, i.e. property intended for sale in its own right.
The wording of the clause in question does not point to the conclusion that the Plenum of the Supreme Commercial ('Arbitration') Court has provided clear and comprehensive explanations regarding the taxation of promotional goods.
For instance, it remains unclear what is meant by 'addition to the main goods': whether this notion encompasses any incentive for the buyer subject to the main goods being purchased (e.g. prizes or gains), or whether the explanation refers to souvenirs, gifts, and bonuses listed in clause 12(2) of the Resolution.
It is also unclear what criteria a taxpayer and the tax authority (or a court, in the event of a dispute) should use in order to prove that "the price of the main goods includes the value of the additionally transferred goods (work, or services) and that the tax calculated for the principal operation also applies to the additional goods (work, or services) being transferred." Previously, courts assumed that a taxpayer should only prove that advertising costs were expensed for the purpose of calculating profit tax. A literal reading of the explanations provided by the Plenum of the Supreme Commercial ('Arbitration') Court, however, suggests that it is necessary to take into consideration the pricing procedure for selling the 'main' goods. In such a case, there is a risk that VAT will be additionally charged on the value of the 'additional' goods when goods (work, or services) are sold at a loss.
No less vague is the wording of clause 12(3) of the Resolution concerning the transfer of goods (work, or services) for advertising purposes if the expenses on buying (creating) a unit of such goods (work, or services) exceed RUB 100. It remains unclear whether cases are covered when goods, work, or services are transferred for advertising purposes, and a taxpayer has not proved in relation to such goods, work or services that VAT was included in the cost of the 'main' goods, or whether all the advertising goods (work, or services) are referred to. The Plenum of the Supreme Commercial ('Arbitration') Court probably meant the first option. Otherwise, the explanation of the Plenum of the Supreme Commercial ('Arbitration') Court provided in the previous paragraph would have been senseless since 'additional' goods are mostly transferred for advertising purposes.
In any case, taxpayers should update their marketing policies which determine pricing in relation to the 'main' goods, work, or services, taking into account the position of the Plenum of the Supreme Commercial ('Arbitration') Court.
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, under the meaning of article 168(1) and 168(4) of the Russian Tax Code, the amount of tax charged to the buyer when goods (work, or services) 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 it acts as a taxpayer so must record such sale when forming its tax base and calculating the tax payable to the state budget as at the end of the relevant tax period.
In this regard, if the agreement does not expressly state that the price set in it does not include the amount of tax and that the contrary does not follow from the circumstances which preceded the agreement being signed, or from any other terms and conditions of the agreement, then the judges should assume that the the seller singles out of the price stated in the agreement the amount of tax charged to the buyer; to this end, the tax computation method is used (article 164(4) of the Russian Tax Code).
This circumstance should be given special attention when agreements are drafted, and taken into account when disputes arise as to whether certain transactions are subject to VAT.
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 follows: 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 (paragraph 1 and 2 of article 164(1)(2.1) of the Tax Code), as well as by persons which the forwarder engaged to provide particular forwarding services (paragraph 5 of article 164(1)(2.1) of the Tax Code).
At the same time, as the Plenum of the Russian Supreme Commercial ('Arbitration') Court pointed out, the meaning of the above article 164(1)(2.1) of the Russian Tax Code is that 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 Plenum of the Russian Commercial ('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.
VAT paid in excess may be refunded only if a taxpayer provides evidence that it refunded to the buyer the tax paid in excess
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.
The Court pointed out that in this case, the tax paid in excess and refunded to the taxpayer should not result in unjust enrichment for the taxpayer. Therefore, such refund is only possible if the taxpayer provides evidence that it refunded to the buyer tax paid in excess.
Since the Plenum of the Supreme Commercial ('Arbitration') Court concluded that the tax amounts paid in excess should be refunded, and (according to the sense of articles 168(1) and 196(4) of the Tax Code) declaring VAT means that tax is recorded separately in the source documents and VAT invoices (see clause 17 of the above Resolution), The issue of whether VAT may be refunded from the state budget thus remains open, bearing in mind that, according to article 168(6) of the Tax Code, the tax amount is not recorded separately when goods (work, or services) are sold to consumers for retail prices.
A taxpaying investor’s rights to deduct depend neither on the settlement procedure for contractual work, nor on who claimed the relevant amounts to be paid: whether this was the contractor itself or the developer (the technical client).
Clause 22 of the Resolution states that, by virtue of paragraph 1, article 171(6) of the Tax Code, the amounts of tax are subject to deduction if, for instance, contracting companies (developers or technical clients) have claimed such amounts from the taxpayer when conducting capital construction of fixed assets.
According to the Plenum of the Russian Supreme Commercial ('Arbitration') Court, when interpreting this provision, courts should bear in mind that, based on its content, the right to a tax deduction which arises for an investing taxpayer does not depend on the settlement procedure for the contractual work being completed and, accordingly, nor does it depend on which person claimed payment of the relevant amount, whether this is the contractual organisation itself or the developer (the technical client).
At the same time, for the purposes of implementing the provisions of chapter 21 of the Code while interacting with an investor, the developer (the technical client) should, if it is not acting as a contractor, be classified as an intermediary and become subject to the provisions of article 156(1) of the Russian Tax Code.
Thus, the Resolution stipulates that the technical client has the status of an agent, i.e. a person which performs legal and actual actions in the investor's interests. Accordingly, it should not calculate VAT on the transfer to the investor of a completed construction. At the same time, the investor may deduct VAT claimed from it by the developer (the technical client) in relation to construction work and materials based on an aggregate VAT invoice.
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 virtue of article 171(12) of the Russian Tax Code by a taxpayer which has paid for future supplies of goods (work, or services) 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 (work, or services) and the property rights is paid in monetary form. Therefore, a taxpayer may not be deprived of its right to a tax deduction if it has paid in a timely manner for the goods (work, or services) and the property rights in kind.
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 Plenum of the Russian Supreme Commercial ('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 (work, or services) 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 (work, or services) 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, which has paid for them. However, the lessee should charge the amounts of tax previously deducted by it, to the lessor pursuant to article 168(1) of the Russian Tax Code.
For its part, the lessor in its capacity as the owner of the facility being leased out, which has assumed the burden of capital investment, may either deduct the tax amounts, as charged by the lessee, in accordance with article 171 of the Tax Code, or expense them when calculating profit tax in accordance with article 170 of the Tax Code.
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 Plenum of the Supreme Commercial ('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 three-year 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 three-year 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 three-years 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 (work, or services) were booked, the relevant source documents were executed).
Legal scope of the clarifications
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.
Thus, 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.