Goltsblat BLP lawyers lift the suppliers’ obligation to issue thousands of corrective VAT invoices upon bonuses’ accrual

14.01.2013

The full text of the decision of the Supreme Arbitration Court of the Russian Federation on Avtoframos et al. v. Government of the Russian Federation (Decision of 11 January 2013 on case No. 13825/12) became available last weekend. The issue that the number of corrective VAT invoices issued to buyers in the event of bonus accrual should be equal to that of original VAT invoices and contain triple line-by-line reiteration thereof (Resolution No. 1137 of 26 December 2011) was contested during the case.  For the first time ever, the Supreme Arbitration Court examined whether a tax-related Resolution of the Russian Government complied with the law pursuant to a lawsuit filed by Goltsblat BLP on behalf of a group of claimants: Avtoframos, Alliance Healthcare Rus, Jaguar Land Rover, Philips, Volvo Cars, and Xerox (CIS).

In addition to legal arguments, Goltsblat BLP's lawyers emphasised that it would be impossible to draft dozens, hundreds of thousands or even millions of corrective VAT invoices and they substantiated acceptability, upon bonus accrual, of issuing a single corrective VAT invoice with just three lines: prior to accrual, after accrual and the difference.

Since the clients alongside most of their peers were interested in a practical result, one of the solutions to the court suggested by Goltsblat BLP was to deny the claim and to indicate that the Resolution did not preclude issue of such a single corrective VAT invoice.  This was indeed the solution adopted.

The court document states that, in the context of Chapter 21 of the Russian Tax Code, the concepts of “value” and “price” differ from each other, with value reflecting revenues and price being determined per product item, so it is the latter that may be changed by agreement between the parties.  Value may be modified owing to a change in either the price or the quantity of goods or otherwise but only the concepts of “price” and “quantity” are defined.

In this connection, the mechanism for adjusting VAT invoices is designated for situations relating to change of value owing to an alteration of the price per item or the quantity of goods and not for bonus accrual. Since Chapter 21 of the Russian Tax Code does not contain any special rules relating to bonuses, the Government did not have to establish any rules for drafting corrective VAT invoices relating to bonuses and indeed did not do so. This is why the rules are not in conflict with the law.
So the format of corrective VAT invoices and the rules for drafting them do not apply to bonus accrual.

The literal interpretation of the decision prompts the conclusion that it restores the position that existed before the corrective VAT invoice mechanism was introduced and that the result of bonus accrual should be a reduction in the supplier's tax base, with a simultaneous cut in the buyer's deductions (as specified in the famous Resolution of the Presidium of the Supreme Arbitration Court on the Leroy Merlin Vostok case).  This is permitted during the accrual period (on the basis of another resolution - on the Equant case).

At the same time, the mechanism for documenting the grounds for VAT re-assessment was not disclosed within Leroy Merlin Vostok. This might be done through so-called negative VAT invoices, which were not then recognised by the code and which, in essence, are today called corrective VAT invoices.  That is why Goltsblat BLP's tax lawyers recommend issuing corrective VAT invoices — one per bonus — consisting of three lines (as specified above).

So, for now, the issue relating to corrective VAT invoices has been settled and bonuses may continue to be used without improper documentary burden.

At your request, we may provide you with a unified corrective VAT invoice sample developed and submitted to the court during the court proceedings and, if required, assist in its implementation.

Goltsblat BLP Partner and Head of Tax Evgeny Timofeev, who acted in the class action in court, says: "As I see it, there have been two highly resonant court actions in 2012: the Leroy Merlin Vostok case, which was won by the taxpayer but virtually plunged into a stupor every industry that makes use of bonuses to buyers, and this case, formally lost but putting an end to the stupor. Of course, ideally, bonuses should be VAT neutral but, until this is achieved, the current verdict seems to be the optimum solution. I am deeply satisfied with the court decision.”

The litigation was supported by the Goltsblat BLP Tax Practice led by Evgeny Timofeev, Senior Partner and Head of the Practice.

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