Additional profit tax charged under Article 40 of the Tax Code based on the weighted average price.


Legal Update No. 231.

Goltsblat BLP advises that Ruling of the Supreme Arbitration Court of the Russian Federation No. VAS-2087/11 dated 4 March 2011 “On refusal to transfer a case to the Presidium of the Supreme Arbitration Court of the Russian Federation" (hereinafter - the Ruling), which confirmed the legitimacy of additional profit tax charged under Article 40 of the Russian Tax Code based on the weighted average price applied by a tax authority.

The taxpayer exported iron ore to a mutually dependent entity at a price lower than that at which the specified goods were sold on the domestic market. The price deviation was more than 20%.

By comparing data on sales of the concentrate on the domestic and foreign markets, the tax authority concluded that the concentrate shipped to the domestic and foreign markets were identical goods.

Since there were no official sources of information or stock-exchange quotations for the iron ore concentrate, the tax authority assessed additional profit tax for the taxpayer by calculating the weighted average price.

The courts of three instances supported the position taken by the tax authority. The Supreme Arbitration Court of the RF (hereinafter the SAC) agreed with the position of the lower courts, proceeding from the following:

  • in the absence of official sources of information, the tax authority lawfully applied the weighted average price method;
    the methods of subsequent sale and the cost plus method were reasonably not applied because they would not have allowed the market price to be determined accurately;
  • even though the weighted average price method is not statutory, the court was entitled to take into account any circumstances relevant to the outcome of the transaction;
  • the taxpayer did not provide evidence that the price set by the tax authority did not comply with the market price.

Thus, the SAC Ruling in fact recognised the additional profit tax charged on the basis of the estimated market price as justified, even if the tax authorities apply a different method for calculating such a price than proposed by Article 40 of the Russian Tax Code.

This SAC position has a negative impact for taxpayers.

It is no longer out of the question that, during disputes of tax claims, courts will attach less importance to arguments that the tax authorities failed to observe the correct procedure for calculating the market price. Taxpayers should be ready to prove that the applied prices essentially comply with the market level.

For additional information, please contact:

Andrey Shpak,
Partner,Tax consulting/ tax litigation, Goltsblat BLP,
T: +7 (495) 287 44 44,

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