Loan agreement interest for calculating the ratio of VATable to non-VATable turnover.

02.12.2011

Legal Update No. 292

Goltsblat BLP advises that ruling of Supreme Arbitration Court No. VAS-12760/11 dated 13 October 2011 refuses to refer to the Presidium of the Russian Supreme Arbitration Court an application requesting supervisory review of judicial acts of three instances on case No. A58-2974/2010, where the Arbitration Court of the Republic of Sakha (Yakutia), the Fourth Arbitration Court of Appeal and the Federal Arbitration Court for the Eastern Siberian Circuit agreed with a tax authority decision to charge additional VAT on a company that failed to include loan agreement interest in the aggregate value of shipped goods (works, services), when calculating a unified ratio for determining tax deductions upon VATable and non-VATable transactions (including ones relating to interest-bearing loans in monetary form).

In this case, according to the tax authority, the company incorrectly failed to include the interest earned on the loan agreements in the aggregate value of shipped goods (works, services) when determining the said ratio, so the tax arrears, default interest, and tax penalties were reassessed upwards.

The courts supported the tax authority, stating that extension of loans was not a financial service, whereas an organisation loan agreement interest income should be booked in the same way as payment for financial services (provision of cash loans). This means that loan agreement interest should be included in the aggregate value of goods (works, services) shipped during the tax period for the purpose of calculating a unified ratio for determining deductible VAT.

The courts also dismissed the company's argument that, not being service revenue, loan agreement interest should not be taken into consideration for determining the VAT distribution ratio.

According to the evolving judicial practice on this matter, failure to include loan agreement interest in the aggregate value of goods (works, services) when determining the ratio of VATable to non-VATable turnover entails significant tax risks, so this must be taken into consideration in developing a tax accounting policy.

For additional information, please contact:

to Evgeniy Timofeev
Partner, Head of Tax Practice for Russia/CIS,
Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

to Andrey Shpak,
Partner,Tax consulting/ tax litigation,
Goltsblat BLP,
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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