Supreme Arbitration Court Presidium delivers on VAT deductions on costs limited for profit tax purposes.
Legal Update No. 164.
Goltsblat BLP advises of adoption of Resolution No. 2604/10 of the Presidium of the Supreme Arbitration Court (SAC) of the Russian Federation of 6 July 2010 highlighting the Court's approach to VAT deductions on costs limited for profit tax purposes.
Para. 1, Clause 1, Article 171 of the Russian Tax Code allows deductions of VAT paid on business trip and hospitality costs. At the same time, Para. 2 of the same clause provides general guidelines that, where the costs are assessed for profit tax purposes according to a specific limit, VAT may be deducted only to an appropriate extent.
In its clarifications, the RF Finance Ministry (see Finance Ministry Letters No. 03-07-11/02 of 11 January 2008, No. 03-07-11/134 of 9 April 2008, No. 03-07-07/105 of 10 October 2008) has consistently emphasised that, in the case of any costs limited for profit tax purposes (not only business trip or hospitality costs), VAT is deducted to a limited extent. This approach has been supported by some courts.
Other courts would interpret this as a restriction on full VAT deduction with respect to limited business trip and hospitality costs only.
This is the position upheld by the Presidium of the RF SAC. The Presidium explained that Para. 2, Clause 7, Article 171 of the Russian Tax Code was not meant as a standalone rule, so full VAT deductions are allowed on any costs limited for profit tax purposes other than business trip and hospitality costs.
This position is advantageous for taxpayers, as it allows full deduction of VAT claimed on, for example, promotional expenses.
This Resolution of the SAC Presidium also makes it possible to raise the issue of deducting VAT that is not reimbursed with respect to above-limit costs other than business trip or hospitality costs. According to the amended Para. 3, Clause 1, Article 54 of the Russian Tax Code, these deductions may be claimed within the current period.
Should a tax authority seek to charge additional taxes and assess relevant default interest and penalties on a taxpayer applying the implications of this Resolution, the taxpayer is highly likely to succeed in proving its right in court, especially since the Presidium’s resolution expressly states that the given interpretation is universally binding and must apply to similar cases considered by arbitration courts.
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