On 20 September 2016 the Commercial Court of Moscow delivered a decision in case No. А40-13165/16-107-106.
In that case the court examined a dispute between TK Miratorg LLC and Federal Tax Service of Russia Inspectorate No. 24 for Moscow (hereinafter the “Inspectorate”). One of the episodes examined by the court concerned recognition for profits tax purposes of the taxpayer’s (seller’s) rebate amounts paid to a customer for volume of purchases.
According to the case file, in 2012-2013 TK Miratorg LLC sold its products to Miratorg-syrye LLC under a supply contract concluded in 2010. Then TK Miratorg LLC undertook on the basis of addenda, starting in 2012, to pay the customer quarterly bonuses for volume of purchases.
The specific amounts of the bonuses were determined in calculations that were approved by protocols signed by the parties. Sales volumes were determined in the calculation for a specific quarter with adjustments for past periods that were identified in the current period. Such a calculation procedure was clarified in an addendum executed in 2015 that covered the parties’ relationship as of 1 January 2010. Applying that addendum obviously resulted in an increase of TK Miratorg LLC’s expenses on bonuses in 2012-2013, which is why they were challenged by the Inspectorate.
The Inspectorate was of the opinion that calculating bonuses with adjustments for past periods identified in the current period contradicted Law No. 381-FZ “On the Fundamentals of State Regulation of Trade in the Russian Federation”.
The court disagreed with the Inspectorate's position and found its decision illegal, based on the following:
- The possibility of extending the terms of a contract to the parties’ past relationship is expressly provided for in Article 425(2) of the Russian Civil Code. Accordingly, retroactive setting of the payment terms and procedure for calculating bonuses is not an obstacle to recognizing expenses;
- The right to recognize as expenses bonuses paid to a customer for reaching certain purchasing volumes is expressly provided for in clause 1(19.1) of Article 265 of the Russian Tax Code;
- The Retail Law cited by the Inspectorate has its own industry-specific subject of regulation and, therefore, cannot regulate tax relations, including those related to the recognition of bonuses as expenses for tax purposes.
The taxpayer's successful defense of its position in court does not negate the fact that the tax authorities are paying very close attention to retroactive bonuses paid by taxpayers. And, if the very right to recognize such bonuses as expenses has been in less doubt in recent years, the procedure for calculating and documenting them is still scrutinized.
Worthy of separate note in this case is the taxpayer’s use of the civil-law mechanism for extending the effect of a contract to the parties’ past relationship. Per our experience this mechanism is often treated unfavorably by judges hearing tax disputes, so it should be used carefully.
Based on their considerable relevant experience of tax consulting and litigation, the lawyers of Dentons’ Tax practice are ready to provide manufacturers, wholesalers and retailers with tax support in various aspects of trade transactions: analyzing and elaborating terms for providing bonuses and rebates; documenting the arrangement of promotional and marketing events; elaborating methods of accounting for inventory losses and many other issues. By cooperating with Dentons, trading companies can look forward to effective management of their tax risks and optimal use of all legal mechanisms in the course of tax disputes resolution.