About the Author
|Alexei Filatov, |
Alexei Filatov graduated from Moscow State University of Economics, Statistics, and Informatics with a degree in economics in 2008. Since 2011 Alexei has been a full member of the Institute of Chartered Accountants of Russia. Prior to joining Alinga, Alexei worked as an accountant in the public sector. Currently he serves as a senior accountant with Alinga Consulting Group.
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When it comes to taxation, Russian legislation is unfortunately not always clear-cut. Courts of different levels do not agree with one another’s reasoning, and the Ministry of Finance and the Tax Service sometimes have completely opposing viewpoints on the same situations that taxpayers often run into, which of course does not make life any easier for the latter.
A prime example of this would be the question of including bonuses (incentives) for buying a certain amount of goods, as stipulated by the conditions of an agreement, in the VAT tax base. Trade houses often receive various bonuses or incentives from suppliers for selling a certain amount of goods, for ensuring top priority when it comes to displaying the goods, or simply for placing the goods in a certain store. Accountants are faced with additional questions related to the bonuses and incentives since the procedure for levying value-added tax on them has thus far not been regulated. The issue is further complicated by the fact that neither civil legislation nor tax legislation contains an exact definition of the concepts of the “discount” or “bonus” being offered to buyers for fulfilling certain conditions of an agreement. This article will cover these topics on the basis of explanations from officials and judicial practice.
There are actually two opposing positions on the situation at hand:
First position: Payments, bonuses and incentives for purchasing a certain amount of goods are not subject to VAT
The Ministry of Finance has already stated its position on levying VAT on bonuses (incentives) on several occasions. In particular, the Ministry of Finance considers the relations pertaining to purchasing a certain amount of goods to be the subject of a specific supply agreement and is not a fee-based service. Accordingly, when a buyer of such goods receives compensation for buying a certain amount, VAT is not levied.
Furthermore, Article 162, Point 1, Subpoint 2 of the Russian Federation’s Tax Code stipulates that the VAT tax base increases by the amount of funds received toward increasing income or otherwise related to payment for goods (work, services) sold. Therefore, funds not related to payment for goods (work, services) sold are not included in the VAT tax base.
When bonus payments are in cash form, the sale of goods, work or services does not occur and the seller does not have a VAT-taxable base (Article 146, Point 1, Subpoint 1 of the Tax Code). If offering bonuses does not involve changes to the prices in the sale and purchase agreement (supply contract), then the seller determines sales revenue without factoring in bonuses. Since receiving the incentives is not contingent upon the purchaser rendering services for the benefit of the seller, then the purchaser’s bonus is not subject to VAT.
Specifically, similar conclusions can be found in recent explanations from officials; for example, in Ministry of Finance Letters N 03-07-11/16 dated 31.05.2012, N 03-07-14/52 dated 17.05.2012, N 03-07-07/78 dated 14.12.2010 and N 03-07-11/436 dated 13.11.2010.
It should be noted that in one of the letters, the Federal Tax Service supported the taxpayers’ position, but this is probably the exception to the rule (Letter N 16-15/035737 dated 06.04.2010 from the Moscow FTS Inspectorate).
However, in the majority of cases, judicial practice favors the taxpayers’ position. For example, the Moscow Region’s Federal Arbitration Court Ruling from 27.02.2012 on case N А40-55887/11-99-250, the Central Region’s Federal Arbitration Court Ruling from 26.07.2011 on case N А68-8136/2010, and the Moscow Region’s Federal Arbitration Court Ruling N КА-А40/10235-10-2 from 10.09.2010 on case N А40-136470/09-118-1170.
However, insofar as the stated reasoning is concerned, courts’ decisions also point to the fact that bonuses (incentives) are not related to payment for goods supplied or services rendered, therefore they are not subject to taxation.
From general practice, one high-profile resolution from the Supreme Arbitration Court stands out on the case of Leroy Merlin Vostok, LLC (№11637/11 dated 07.02.2012). The court ruled that bonuses paid out by the sellers and directly related to the goods’ suppliers, along with discounts directly stipulated by supply agreements as such, are also a form of trade discount applied to the cost of goods and affect the value-added tax base. In other words, the courts supported the second position (which is discussed below), as well as caused quite a stir in the professional and business communities in the process.
Second position: Payments, bonuses and incentives for purchasing a certain amount of goods are subject to VAT
The tax authorities act consistently in their attitude toward taxation of bonuses (incentives).
In their opinion, if the corporate customer (seller of goods) has grounds to suppose that the executor’s (purchaser of goods, retailer) targeted actions stipulated in the contract help draw attention to certain items that the seller is offering, or similar services are explicitly indicated in the agreement between the seller and purchaser, then such actions are regarded as services (for example, advertising services, promotion, and so forth).
In such situations, the services indicated are subject to VAT from the buyer of the goods and the amount of tax should be deducted from the seller according to the standard procedure.
In particular, a similar position can be found in FTS Letter N ММ-8-03/207@ dated 21.03.2007, FTS Inspectorate of the Moscow Region’s Letter N 19-11/99884 dated 13.11.2006, as well as in the Federal Arbitration Court of the Moscow Region’s Resolution N КА-А40/4206-11-2 dated 26.05.2011 on case N А40-53783/10-114-296.
As is apparent from the material reviewed, there is a lack of unity on levying VAT on bonuses (incentives).
It is the author’s opinion that, considering the complicated judicial practice and recent explanations from the financial authorities, it is logical to support the first position.
In conclusion, it should be noted that it may be possible to resolve this long dispute in the near future. On 22 March 2013, Bill # 79859-6 was introduced to the State Duma, clarifying whether or not there should be taxes on bonuses. Chapter 21, Article 154 of the Tax Code added some amendments to the bill which essentially formalizes the first position summarized above; in particular, the fact that the payment made by the seller of the goods (work, services) to the buyer, incentives for the buyer fulfilling certain conditions in the agreement for supplying goods (performing work, rendering services), including acquiring a certain amount of goods (work, services) does not reduce the seller’s tax base for purposes of calculation (nor does it reduce the tax deductions applied by their purchaser) or the cost of goods shipped (work performed, services rendered), with the exception of situations when reducing the amount of goods shipped (work performed, services rendered) by the amount of the incentive paid (offered) is specified by the agreement in question.
As of 1 April 2013, the bill has been approved by the Federation Council, Russia’s upper house of parliament, and sent to the President of the Russian Federation for signature. We expect that the bill will soon become law.
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