On April 7, 2014, a draft Resolution of the Plenum "On some issues arising from the arbitration courts in cases related to the levying of value added tax" was published on the website of the Supreme Arbitration Court of the Russian Federation (the “SAC”).
On April 24, 2014, the draft was considered at a meeting of the Presidium of the SAC of the Russian Federation. It is expected that in case it is approved by the Presidium, the draft may be submitted for consideration by the Plenum of the SAC in the near future.
Conceptually, the project aims to summarize the judicial practice formed by the Presidium of the SACin the last few years in the supervision hearing.
We turn our attention to the key provisions of the draft.
The definition of the basic terms: goods, service, labour, realization of goods
It is explained in the draft that such definitions of the general part of the Tax Code as "good" (sec. 3 art. 38 Tax Code), "labour" (sec. 4 art. 38 of the Tax Code), "good" (sec. 5 art. 38 of the Tax Code) and "realization of goods and services" (sec.1 art. 39 of the Tax Code) for purposes of collection of the VAT may be provided with the specific (also wider) content.
Thus, in particular, from the content of Art. 148 of the Tax Code it follows that for the purposes of collecting the VAT, there are certain operations that cannot be classified as a service on the basis of Section 5, Art. 38 of the Tax Code, including lease, assignment and granting of patents, licenses, trademarks, copyrights, and a number of other civil obligations. Thus, the taxation of the above-mentioned operations should be carried out according to the same rules that are set in relation to the "classical" services.
Payment for goods (works, services, property rights)
For the purposes of the determination of the tax base "at the moment of payment" (sub-sec. 2 sec. 1 art. 167 of the Tax Code) the payment should be considered made (1) when paid, as in the case of payment of the corresponding amount in cash, and (2) when performed, in cases of performing an obligations to pay in non-cash, including the termination of a monetary obligation by the offset of uniform counter claims.
The current tax legislation allows tax authorities to request documents, which are claimed as grounds for tax exemptions, during off-site tax inspections (sec. 6 of Art. 88 of the Tax Code).
In practice, on this basis the tax authorities try to require from the taxpayers fairly significant amounts of documents, such as invoices from all suppliers of the taxpayer, as well as all the primary documents from suppliers, considering their right to use any tax deduction as the tax exemption.
Moreover, frequently the tax authorities demand documents even regarding operations that do not form the taxable item for the VAT (sec. 2 art. 146 of the Tax Code), and also the documents regarding any claimed tax-free operations (art. 149 of the Tax Code), because the tax exemption of such operations is also a tax benefit according to the tax authorities. In some cases, the courts support the tax authorities’ position. Such approach lets the tax authorities change any off-site value added tax inspection into the on-site value added tax inspection.
As it is explained in the draft, the tax exemption means the advantage given to the limited group of the taxpayers as compared to the other taxpayers (e.g. the religious and other non-profit organizations’ exemption from the VAT).
Conversely, a release of certain transactions from the VAT requirement on the basis of Art. 149 of the Tax Code cannot be a tax exemption if such release does not intend to grant an advantage to specific categories of persons in comparison with other persons accomplishing the same operation. A tax exemption may be described as a special tax rule for some transactions (e.g., the exemption can be used by any taxpayer who performs the appropriate operations).
We also note that the Presidium of the SAC remarked that the exclusion of a number of operations from the list of the VAT taxable items (sec. 2 of Art. 146 of the Tax Code) is not a tax exemption.
The VAT as part of the contract price
The draft clarifies what the amount of the VAT should be if the contract contains the price, but does not clarify whether it includes the VAT or not.
The authors of the draft propose that the Plenum of the SAC select one of the two options:
1) in case it does not obviously follow from the wording of the contract whether the final price includes the VAT, the seller can add the VAT to the contract price (a presumption of "the VAT over price"). Moreover, in case the seller did not add the VAT to the price initially, he can make claim for the VAT during the period of time allowed for filling a claim;
2) the amount of the tax should be separated from the price by the seller and he should use a calculation method set forth in sec. 4 art 164 of the Tax Code, unless the contract has an express condition that the contract price includes the VAT and it follows from the other provisions of the contract or from the circumstances surrounding the making of the contract (a presumption of "the VAT inside").
The first approach was formulated by the Presidium of the SAC in sec. 15 of the Informational Letter №51, and also in some Decisions made in the exercise of supervisory powers.
At the same time the Presidium of the SAC has adopted some exceptions to the first approach. Thus it mentioned in one of the cases that "the provisions of the Informational Letter №51 set aside the situation when the seller abuses its rights under the law and declares its right to tax exemptions as against a purchaser believing in good faith that no VAT is payable under the contract.
It does not matter which option the Plenum of the SAC supports, but it is obvious that the consequences of this choice will sufficiently affect the future contractual practice in Russia. Taking into account that the draft does not limit retroactive operation of this proposed resolution, it may give rise to lawsuits whereby the suppliers will try to collect "forgotten" taxes from their buyers (if the first approach is chosen) or buyers make a claim for sellers’ unjust enrichment (if the second approach is chosen).
Application of the tax deduction
The tax period during which a tax deduction can be applied for
The SAC intends to finally resolve the two current competing approaches to the question of the period during which the taxpayer may apply for the VAT deduction: (1) only in the tax period during which the transactions giving rise to the right to deduct occurred, or (2) in any tax period within three years thereafter. It is proposed to choose one of these options.
Note that this is a very old problem for the Russian practice. In 2005, the Presidium of the SAC spoke in favor of the first point of view, but in 2010 it revised its approach and recognized as legitimate the application of tax deduction in any tax period within three years. Despite this, today, some lower
courts recognize as illegal the application by a taxpayer of the deduction in the period other than the period when a corresponding right accrued.
Nowadays, most taxpayers use the second approach, and an unexpected return to the practice of 2005 could have a negative impact on a very wide range of entrepreneurs.
The period during which a tax deduction may be applied
The draft suggests supporting an already formed judicial practice. According to such practice, the right to apply for the tax deduction may be realized (i.e, the tax deduction can de declared) during the period not exceeding 3 years from the end of the tax period during which the right to use the tax deduction appeared.
Note that this period is not mentioned in Chapter 21 of the Tax Code. The draft proposes to justify an existence of such period by the provisions of sec. 2 art. 173 of the Tax Code, which set up a three-year period for the applying a tax deduction, and by sec. 1 art 3 of the Tax Code, which provides the principle of the equality of taxation. The view of the authors of the draft is that if the right on a tax deduction may be applied during the 3 year period, then the tax deduction could be applied during the same period.
The right on the tax deduction with violation of non-tax legislation
The violation of non-tax legislation (either private or public) while performing taxable transactions does not entail negative tax consequences. It does not deprive a taxpayer of its right to apply for a tax deduction, unless it is otherwise expressly stipulated in the Tax Code.
Particularly, the taxpayer may use a tax deduction under an unregistered contract in case it acquires services requiring a license from an unlicensed contractor and in other similar cases, unless it is otherwise stipulated in the Tax Code.
The right to apply for a tax deduction while performing a non-taxable transaction or engaging in non–taxable business
According to sub-sec. 2 sec. 5 art. 173 of the Tax Code, a taxpayer (supplier of goods or services) can claim the VAT from the buyer on its own initiative for the
operations which are generally free from the VAT. The draft gives following explanations of this provision:
1) if the supplier is a VAT taxpayer and it has voluntary imposed tax on a non-taxable operation, such supplier can apply for a tax deduction in respect of acquired goods or services in order to perform such operation;
2) at the same time if the supplier is not a VAT taxpayer (e.g., it uses special tax regimes), it can not apply for the tax deduction.
Right to deduct from advance payments
A tax deduction on an advance payment may be granted to a taxpayer, whether such payment was in cash or not (by means of provision of goods and services) on the basis of sec. 12 art. 171 of the Tax Code.
The VAT refund and reimbursement
The concept of tax shifting as a requirement for its refund
In case a taxpayer by mistake has imposed the VAT on a VAT-free operation or used a higher tax rate and makes a claim for overpayment, the court shall examine the following circumstances:
1) whether the VAT sum was presented to the taxpayer's counterparty – the buyer;
2) if it was – whether the taxpayer has refunded unnecessarily presented sums to the buyer (or at least whether the buyer has already made a claim for refund of such sums from the supplier).
If the second requirement is not satisfied, then the taxpayer cannot receive a refund of the VAT, because it is recognized as unjust enrichment for it: it obtains the same sums both from the budget and from the buyer.
Note that such opinion has already been expressed by the Presidium of the SAC.
Tax legislation of many countries contains provisions, according to which if an indirect tax was in fact "shifted" by the taxpayer onto the buyer, then the taxpayer cannot consider it as an overpaid.
However, the Russian tax legislation (art. 78 of the Tax Code) does not limit a taxpayer's right to refund of an overpayment of the indirect tax when the tax was shifted onto the buyer. An adoption of such reasons for rejection of tax imbursement by the Plenum of the SAC seems to be wrong. Furthermore, the resolution proposed in the draft addresses only part of the problem.
In particular, a claim from the buyer to the supplier who has overpaid the tax is in the nature of the civil suit. The statutory period for filing the claim is 3 years. Such period can be tolled, interrupted or re–established, thus under certain circumstances the buyer may get a tax refund upon expiry of 3 years from the moment of payment; however the tax refund from the budget can be claimed only during the 3 years period. (sec. 7 art. 78 of the Tax Code). Therefore, a situation may arise when a taxpayer-seller, in principle, is precluded from receiving a refund of the overpaid VAT.
Interest accrual in case the VAT refund is improperly refused
In case the tax authority has made a decision to refuse a VAT refund VAT and in the future this decision was annulled by the court, then the interest provided for by sec. 10 art 176 of the Tax Code (sec. 10 art. 176.1 of the Tax Code) is to be calculated from the moment when the VAT sum should have been refunded by the operation of law, i.e. beginning from the 12th day after the finishing of the off-site tax inspection.
Such position was also expressed by the Presidium of the SAC.
Characteristic of imposing VAT on some operations
For purposes of the VAT, the activity of a tenant builder and a technical customer during the construction should be considered as that of an intermediary
Currently, the Tax Code’s regulation of taxation of construction activities is very incomplete. That is why clarifications of the authorities and the judicial practice, including practice on related non-tax cases, play a significant role.
The judicial practice prior to 2011 considered a project manager–developer as an intermediary who did not account for construction expenditures as his own funds and did not deduct the VAT from the payments to its contractors.
In 2011, the Plenum of the SAC adopted Resolution № 54, where issues relating to the construction activity and real property purchase were addressed. Moreover, Resolution №54 stated that the courts shall consider contracts relating to investment activities in the area of financing of construction or renovation of real estate as contracts of the sale of future immovables. It means that the project manager–developer is considered to be
the buyer in its relations with an investor, i.e. the project manager–developer has to consider the cost of construction as its own expense and to deduct the VAT from the payments to contractors.
Adoption of the Resolution has provoked a huge amount of disputes between the developers and the tax authorities regarding the VAT calculation. Note that in most cases the courts upheld the position that the Resolution № 54 is devoted to civil law issues and its conclusions cannot be automatically applied to tax legal matters. The project manager’s–developer's activity after the adoption of Resolution № 54 is also usually considered by the courts as that of the intermediary.
It is proposed to confirm this approach in the draft: the builder (as well as its technical customer) should be considered only as an intermediary for the purposes of the VAT.
This means in particular that the VAT charged by contractors during construction should not be deductible by the developer and the customer, and should instead be passed along to the investor/owner of the construction. In turn, both the technical customer and the developer are subject to the VAT only in respect to their own services in connection with the construction.
Taxation of the transfer of goods for advertising purposes
The draft contains provisions aimed at streamlining the VAT taxation of the transactions involving the transfer of goods and other similar products for advertising purposes.
The basic rule included in the draft assumes that if a taxpayer transfers such goods, which do not meet the criteria for taxable products (apparently because they do not have an exchange value), such transfer is not subject to the VAT.
However, in the case of souvenirs, bonuses and presents being transferred for advertising purposes but otherwise meeting the criteria of taxable products, then such transfer is subject to the VAT (unless the taxpayer transfers such goods in addition to its main products and the price of the additionally transferred advertising goods is already included in the price of the product).
Payment of the VAT when goods are lost
The draft attempts to solve the question of tax consequences of the loss of goods by the taxpayer as a result of theft, damage and other similar circumstances. Such loss removes the obligation to pay the VAT if the taxpayer can prove that the goods were lost and their value has not been realized upon by the taxpayer.
The draft creates a legal presumption of the sale of goods: If goods were purchased by the taxpayer and are absent, it is assumed that they were sold
by the taxpayer for value unless it is proven by the taxpayer that they were lost and no value was realized.
This approach seems to be rather uncertain and disputable. In particular, the draft says nothing about the standard of proof with respect to the circumstances of loss of goods (in particular, whether internal acts compiled by the taxpayer are enough for such purposes).
The draft allows law enforcers to determine whether the evidence is sufficient. In practice, it can produce a number of disputes involving taxpayers who often face theft or spoilage of goods (especially retailers).
We note that the issue of documentary proof of loss of goods for the purposes of application of the tax legislation regarding organizations' profits has been recently explored by the SAC.
The judges of the SAC concluded that the provisions of the Tax Code do not prevent the taxpayer in question from showing the legitimacy of cost accounting in the form of lost goods. It means that it is not necessary to have filed a criminal complaint for the purposes of accounting for such costs. However, in case the draft is adopted in this version, it is possible that formation of a new judicial practice concerning the standard of documentary proof of shortage of goods for the purposes of the VAT may develop. Such judicial practice will be formed without participation of the SAC.
Tax deductions for capital investments by the lessee
The draft clarifies under what conditions a tax deduction can be claimed for capital investments in leased property (for example, when creating fixtures).
The draft provides the following rules:
1) if capital investments take a form of agreed by the parties contract rent charge, then the lessee has the right to claim the tax deduction for such capital expenditures. This tax deduction is claimed in the same way as the deduction for rental services rendered by lessor;
2) if capital investments are made in addition to the rent payments, then:
- If the lease agreement provides for reimbursement of the lessee's cost of making capital expenditures, then the lessee who had already deducted the VAT when making capital expenditures, must submit it to the lessor and the lessor is entitled to take a deduction at the time of reimbursement of the VAT;
- If the lease agreement does not provide for reimbursement of the lessee's cost of making capital expenditures, then the lessee has the right to apply the tax deduction . The amount of the VAT is not passed along to the lessor.
Some other issues
A provision of guarantees and compensation stipulated by labor legislation to workers by a taxpayer (for example, in connection with harmful and (or) dangerous working conditions) is not subject to the VAT.
Assignment of claims for return of a prepayment to the from the buyer supplier shall not be subject to the VAT. However, a subsequent assignment of such claim to the new assignee is subject to the VAT on the basis of sec. 2 art. 155 of the Tax Code.