SAC Presidium disallows VAT offset on non-VATable transaction general business expenses.
Legal Update No. 275.
Goltsblat BLP advises of publication of Resolution No. 1407/11 of the Presidium of the Supreme Arbitration Court (the “SAC”) of the Russian Federation of 05 July 2011 regarding offset of input VAT on general business expenses related to non-VATable transactions.
According to the facts of the case, the taxpayer (CJSC Kaspersky Laboratory) performed three types of transactions: VATable transactions; VAT-exempt transactions; non-VATable transactions (executed other than on the territory of the Russian Federation). The taxpayer offset VAT on general business expenses related to non-VATable transactions, since it believed that paragraphs 2 and 4 of Article 170 of the Tax Code of the Russian Federation, which provide for inclusion of input VAT in the cost of goods (works, services) and the obligation to maintain separate accounting, were not applicable to general business expenses and did not apply to non-VATable transactions.
On the basis of the results of a tax audit, the tax authority refused VAT deduction on non-VATable transaction general business expenses. The taxpayer appealed against the decision of the tax authority in court. Courts of all three instances supported the taxpayer.
However, the SAC Presidium overthrew the rulings of the lower courts, stating that VAT paid on general business expenses related to non-VATable transactions were not subject to offset, but were to be included in the cost of goods (works, services). The obligation to maintain separate accounting also applies to non-VATable transactions. Moreover, in the opinion of the SAC Presidium, since the tax is not paid to the budget on execution of the non-VATable transactions, its refund in the form of a tax deduction is in conflict with the tax legislation.
In the case in question, therefore, the SAC Presidium actually found that a procedure similar to that provided for by Article 170 of the Tax Code in respect of transactions exempt from VAT should be applied to non-VATable transactions. In view of the above, we recommend that taxpayers check their accounting policy and consider the need of bringing it in line with the position stated by the SAC Presidium.
For additional information, please contact:
Partner, Head of Russian/CIS Tax Practice, Goltsblat BLP
T: +7 (495) 287 44 44,
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