RF Supreme Arbitration Court is considering its first ever tax case against the Russian Government. The claimants under what amounts to a virtual class action are represented by Goltsblat BLP lawyers
In the 2009 Dirol Cadbury and February 2012 Leroy Merlin Vostok cases, the Supreme Arbitration Court of the Russian Federation ruled that bonuses paid by suppliers to buyers relating to the supply of goods, including for quantities purchased during a certain period, constituted discounts, i.e., a change to the price of the goods supplied.
As of 1 October 2011, such bonuses constitute a basis for suppliers to recover VAT paid on the “excess” part of the price and for this same sum to be assessed on the buyer. The recovery right is subject to the availability of an adjustment VAT invoice. It was anticipated that such a VAT invoice would state the aggregate details of the supply the bonus applies to (the initial figures and those after the bonus has been deducted), as well as the difference, including the recovery amount.
On 1 April 2012, the format of such an adjustment VAT invoice and the rules for completing it, which had been approved by Resolution of the Government of the Russian Federation of 26 December 2011 No. 1137, came into effect. These rules require a separate adjustment VAT invoice to be drawn up for each initial VAT invoice issued during a reporting period, including all lines on the original VAT invoice, plus an additional two.
This procedure has virtually paralysed suppliers’ rights to recover VAT, since the number of adjustment VAT invoices needing to be issued at any one time runs sometimes into the millions and it is extremely difficult to calculate the changes to each line of the original VAT invoice. It is technically impossible to meet these requirements, which are seen as pointless and merely complicating tax control.
Goltsblat BLP lawyers, in addition to participating in the business community’s proposals to draft a law making bonuses retroactively VAT neutral (ideally), have recommended that clients protect their recovery rights by challenging the format and rules for completing adjustment VAT invoices insofar as they impede the issue of a single adjustment VAT invoice per bonus, indicating only aggregate figures.
As a result, an action has been filed on behalf of a number of clients, making it a virtual class action: Goltsblat BLP lawyers are currently acting for Jaguar Land Rover, Avtoframos, Xerox (CIS), Philips, Volvo Cars and Alliance Healthcare Rus.
The first court session at the Supreme Arbitration Court of the Russian Federation was on 9 November.
Evgeny Timofeev, Partner and Head of the Goltsblat BLP Tax Practice, commented on the session: “We stated our claims and explained the problems encountered by wholesalers in all industries. We also suggested that the Russian Government consider the possibility of concluding an amicable settlement, recognising that the rules do not preclude issuing a single adjustment VAT invoice - all we need is a practical result. This approach was also supported by the court.”
The next hearing is scheduled for 14 December. Goltsblat BLP will keep you informed about developments.
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