For the attention of: chief accountants, chief financial officers, and heads of companies’ tax departments

Pepeliaev Group reports that the Presidium of the Supreme Russian Arbitration Court has published its Resolution No. 2676/12, dated 21 June 2012, which permits all taxpayers, irrespective of their economic activities, not to account separately for input VAT if the share of non-VATable operations completed before October 2011 is insignificant (para. 9, article 170(4) of the Russian Tax Code of Russia).

Case summary

Until now, whether para. 9, article 170(4) of the Tax Code could be applied by taxpayers who did not produce goods (or provide works or services) before 1 October 2011, has been controversial in judicial practice. For instance, the Resolution of the Federal Arbitration Court of the Central District concerning Case No. А48-3912/07-2, dated 31 October 2008, concludes that the taxpayer must conduct manufacturing activities in order to apply the provisions of para. 9, article 170(4) of the Tax Code. However, there is another approach to resolving this issue. As set out in Resolution of the Federal Arbitration Court of the Volgo-Vyatsky District concerning Case No. А29-6207/2008, dated 4 March 2009, the court concluded that the Company had lawfully claimed the disputed VAT amount for deduction, although the Company did not manufacture goods (or provide works or services) in the period at issue. In the case considered by the Presidium of the Supreme Arbitration Court the trial court and the appeal and cassation courts agreed with the tax authority that the company had not been engaged in producing and selling products (works, or services) but in selling consumer goods, and that it had neither incurred any non-VATable expenses on the production of goods (works, or services), nor maintained separate accounting. Therefore, the company does not fall within para. 9, but para. 8 of article 170(4) of the Tax Code, according to which, if the taxpayer does not maintain separate accounting, input VAT related to goods (works, or services) is not subject to tax deduction and are not included in VAT expenses. The Presidium of the Supreme Arbitration Court concluded that the provisions of para. 9, article 170(4) of the Tax Code apply to all taxpayers, irrespective of their economic activities (whether manufacturing or trading). This conclusion of the Court is based on a consistent interpretation of article 170 of the Tax Code, taking into account the principles of taxation set out in article 3 of the Tax Code. For instance, the Court pointed out that applying the provisions of para. 9, article 170(4) of the Tax Code to manufacturers of goods (providers of works, or services) does not serve the purpose of the regulation adopted. That purpose is to grant taxpayers the opportunity not to carry out redundant accounting for figures that do not materially affect the taxpayers’ tax liabilities. PG comment. It should be noted that the Resolution has practical importance only if tax liabilities are assessed that arose before 1 October 2011, since at that date amendments entered into force which changed the controversial provision so that it could be applied by all taxpayers irrespective of the type of their activities.

To think about, to do

If the share of expenses incurred by a trading company on non-VATable activities does not exceed 5% of its total expenses, such a taxpayer should pay attention to the above Resolution. The Resolution specifies that cases with similar factual circumstances may be reconsidered by virtue of clause 5, article 311(3) of the Russian Arbitration Procedure Code, i.e. if new facts have been discovered. Consequently, the taxpayers may have negative judicial decisions re-examined by filing a relevant request with the arbitration court that considered the case, within 3 months from the date on which the Resolution of the Presidium of the Supreme Arbitration Court of Russia was published (11 August 2012), and recover excess amounts of tax paid (charged by the tax authority).