Auchan et al vs. the Russian Ministry of Finance: Supreme Commercial Court (SCC) decision resolves the problem of retail losses


Legal Update No. 443, 24 December 2013

Goltsblat BLP advises that the full text has been published of an SCC decision invalidating part of Letter of the Ministry of Finance No. 03-03-6/1/630 dated 06 December 2012. The part in question prescribes that self-service retail organisations include in their costs goods shortages for which no guilty party is established only if an Internal Affairs investigator resolves to suspend or terminate a criminal case on this basis.

The question repeatedly raised, including in the Constitutional Court, concerning the documentary evidence of goods shortages required for deducting the taxpayer’s losses from its profit tax base may now be deemed resolved.

When the Ministry of Finance letter determined the tax accounting procedure for thefts from self service organisations, it referred to subclause 5, clause 2, article 265 of the RF Tax Code as the basis for its statement that such losses may be deducted only if a relevant criminal case is suspended by the preliminary investigation or is terminated because no guilty party has been identified.

The court analysed expert opinions and copies of resolutions not to initiate criminal cases submitted for the case files and came to the conclusion that, since it is impossible to identify who is responsible for shortages revealed during stock-taking at self-service organisations, there is no need to initiate a criminal case.

The SCC Decision goes on to say that clause 2, article 265 of the Tax Code does not provide an exhaustive list of losses and, since there is no special regulation in the Tax Code relating to tax accounting of goods shortages resulting from unidentified thefts by consumers in self-service stores at an unknown time, tax accounting of such losses should be based on clause 2, article 265 of the Tax Code in compliance with clause 1, article 252 thereof.

We believe the court’s conclusion concerning absence of any special regulation was based on subclause 5, clause 2, article 265 of the Tax Code distinguishing between expenditures relating to goods shortages in retail organisations and losses from theft. The first type of costs is recognised in the absence of guilty parties and the second if such parties exist but are not identified. What happens in self-service stores is specifically theft, so it is losses from theft rather than costs of shortages that are to be deducted, whereas confirmation of the absence of guilty parties is required only for shortage costs.

The SCC statements prompt the conclusion that goods shortage losses in self-service stores may be deducted on the basis of the general clause 2, article 265 of the Tax Code as another type of loss not expressly named therein, so no Internal Affairs documents are required at all.

Even so, a more conservative reading of this given Decision is possible: to deduct such costs, a refusal to initiate a criminal case is required. Yet, in any case, the preliminary investigation resolution to suspend a criminal case or a resolution terminating it, which the tax authorities previously demanded, is no longer needed.

Our information is that the work on bill No. 254686-6 setting the maximum shortage deduction at 0.75% revenues was suspended in the summer. Its revival may, however, be expected as it is now the state that needs it.

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