Supreme Arbitration Court supports recovery of input VAT on general production costs.


Legal Update No. 317

Goltsblat BLP advises of publication of Supreme Arbitration Court Resolution No. 3844/11 dated 25 October 2011 on the case of OOO Tulatsement. The Resolution confirms the possibility to recover input VAT on repairs to another person’s property, even if the taxpayer has no right to such property and other people or entities may also use such repair results. 

The taxpayer was building a cement plant and was, of course, concerned to ensure road access for construction material delivery and finished product transportation after commissioning of the plant.   The optimal road to the federal highway coincided with the regional one, which was in a condition that did not permit its use by heavy vehicles.   Since the Region did not repair the road, the company itself engaged contractors to perform such works, paid for them and claimed recovery of the invoiced VAT. 

The case was referred to the Russian SAC on the grounds that the input VAT recovery did not relate to the VATable operations.  The taxable sale of cement seemed to the tax authority and lower courts to be too remote from the road repair.  Yet the judicial acts obviously demonstrate that the key reason for refusal of the claimed deductions was that the company did not have any specific rights to the repaired road (or any obligations to repair it), and any interested persons had free access to it.  Consequently, the repair, in the meaning of the court decisions, was performed for the benefit of the Region and of the general public.

The Presidium of the Russian SAC decided in favour of the taxpayer and acknowledged that, in this situation, all Russian Tax Code requirements for recovery of input VAT had been met.  The court recognised the taxpayer's argument that the road repair was necessary for construction of the plant and for sale of the finished products, meaning that there was an operational need for such works and that they were connected to VATable operations. Lack of title to the road and of agreements with entities responsible for its maintenance, as well as the possibility for the road to be used by any interested persons, does not affect this conclusion.  

The Russian SAC Resolution concludes that recovery of input VAT is permitted if the costs are industrial (business) in nature and have been incurred in order to achieve an economically feasible result.  This instruction makes the VAT recovery procedure closer to that of cost deductibility for profit tax purposes.  An association between expenses and profit-orientated activities (though expense expedience is not subject to assessment) is sufficient for them to be recognised as economically justifiable.  As for VAT, an association between expenses and VATable operations (without assessment of expense expedience) means the recovery of associated input VAT should be available.

This decision is also important for profit tax purposes since it means that existence of potential benefits for other persons does not prevent the expenses being recognised as economically justifiable. 

This Russian SAC position may be used for future tax claim defence and for recalculation of tax liabilities for previous periods if, under similar actual circumstances, no deductions (recovery of input VAT) or expenses had been claimed.

For additional information, please contact:

to Evgeny Timofeev
Partner, Head of Tax Practice for Russia/CIS,
Goltsblat BLP
T: +7 (495) 287 44 44,

to Andrey Shpak
Partner,Tax Practice
Goltsblat BLP
T: +7 (495) 287 44 44,

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