VAT treatment of bonuses under supply contracts.


Legal Update No. 342

Goltsblat BLP advises that the Presidium of the Supreme Arbitration Court of the Russian Federation officially published the Resolution No 11637/11 dated 07 February 2012 on a case against OOO Leroy Merlin Vostok.

The Presidium of the Supreme Arbitration Court reviewed a dispute regarding the VAT treatment of marketing and incentive bonuses (hereinafter the bonuses) granted by suppliers of the goods, and decided in favour of the taxpayer, specifying that bonuses should not be treated as service fees.

However, the SAC Presidium did not stop there, and, in addition, outlined the VAT treatment of bonuses for the purpose of determining the VAT implications for both the suppliers and the buyers.

Building on the old conclusions in the SAC Presidium’s Resolution No 11175/09 dated 22 December 2009 (the Dirol Cadbury case), in this new Resolution the SAC Presidium clarified that bonuses that are closely associated with supplies of goods should be treated as discounts that reduce the price, thus adjusting the VAT base. This means that input VAT deductions that the buyer had declared earlier should also be reduced accordingly in the appropriate (ie prior) tax periods. Bonuses payable by suppliers under supply contracts should, therefore, reduce the price of the delivered goods, which requires the suppliers to adjust their VAT base and the buyers to adjust the amount of input VAT deductions.

Technically, the case considered the specific bonuses within the framework of a specific contract. Even so, we believe that the conclusions drawn by the SAC Presidium in this case may apply to other types of bonuses payable in connection with performance of any supply contract.

It appears that this court position imposes significant tax risks on the buyer. It is highly probable that the tax authorities may raise tax claims on this basis (eg to retailers), seeking to reduce input VAT deductions relating to bonuses.

It is obvious that the buyers, in case of such tax claims, would in their turn file civil lawsuits against the suppliers seeking to recover VAT as so called “unjust enrichment”, ie the difference between the initial price of the goods and the price adjusted for the paid bonus. At the same time, the supplier should then be entitled to recover the “excessive” VAT from (offset it against) the Russian treasury (provided the claim is made within three years after paying such “excess” VAT to the buyer and is supported by adjustment VAT invoices).

Based on the above, we believe that the above position taken by the Presidium of the Supreme Arbitration Court on the OOO Leroy Merlin Vostok case will require a review of the accounting policy for bonuses under supply contracts payable in future reporting periods, as well as development of mechanisms for mitigating tax and civil risks related to prior reporting periods.

For additional information, please contact:

to Evgeniy 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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