On 25 September 2012, the Federal Commercial Court of the Central District (the "FCC") considered a case concerning the period in which a taxpayer can allocate to expenses sums of interest accrued.
According to the case materials, in 2007 the company concluded a loan agreement as borrower. The loan was to be repaid in 2010. Pursuant to the agreement, interest was payable to the lender along with the principal amount of the loan.
During a field tax audit, the tax inspectorate established that the company had allocated the sums of interest (accrued but not paid) during 2007-2009 to non-sale expenses. The tax inspectorate regarded this as incorrect and assessed additional profit tax. The company applied to court.
The courts, including the FCC, came to the conclusion that the company did not have any obligation to pay interest under the given agreement until 2010. The FCC rejected the argument of the company that accounting for interest is connected not with the actual payment of interest, but with its accrual. For the FCC, the company’s interpretation contradicts legislation, which is supported by a ruling of the Presidium of the Supreme Commercial Court of the Russian Federation dated 24 November 2009. Issuing a decision in favour of the tax inspectorate, the FCC stipulated that the tax inspectorate had legal grounds for assessing profit tax as well as penalties and fines.
It is noteworthy that the Ministry of Finance of the Russian Federation (the "Ministry") takes the opposite position. According to the Ministry, interest on any type of debt instruments that are valid for more than one reporting period must be allocated to expenses for the purposes of profit tax regularly at the end of the month of the respective period, regardless of the date of actual payment of such interest provided in the agreement. The Ministry considers that accounting for interest after repayment of the principal debt amount does not conform to the procedure of accounting for expenses under the accrual method.
Taking into consideration the court practice, in the case of a dispute with the tax inspectorate, taxpayers accounting for interest in accordance with the procedure for payment of interest set out in the relevant agreement, have a real chance of defending their position in court.
[Ruling No. А36-758/2011 of the Federal Commercial Court of the Central District, dated 25 September 2012; Ruling No. 11200/09 of the Presidium of the Supreme Commercial Court of the Russian Federation, dated 24 November 2009; Letter No. 03-03-06/1/523 of the Ministry of Finance of the Russian Federation, dated 26 August 2011; Letter No. 03-03-06/1/345 of the Ministry of Finance of the Russian Federation, dated 15 June 2011; Letter No. 03-03-06/1/122 of the Ministry of Finance of the Russian Federation, dated 5 March 2011]