Tax Connect Flash | Russia: VAT treatment of sales bonuses

Russia: VAT treatment of sales bonuses - perspectives of joint amended VAT-invoices

Following our April 2012 Tax Outlook on VAT treatment of sales bonuses (the Leroy Merlin case), the recently published Decision of the Supreme Arbitration Court of the Russian Federation (SAC) with respect to the joint appeal of reputable Russian corporate taxpayers seeking to introduce joint amended VAT-invoices, may be of further interest. 
 
The Leroy Merlin case was one of the most influential and controversial cases of 2012. Indeed, this court case won by the taxpayer de facto resulted in greater problems for the whole retail segment: in practice equalization of the treatment of discounts and bonuses based on volume of orders and / or presence of products in the stores distorted the mirror like principle of VAT. In particular the retail conglomerates who are buying the products and receiving the bonuses, are required to restore respective input VAT and pay it to the tax authorities as soon as they have any documentation confirming the amount of bonuses received (i.e. bonus calculation). At the same time the suppliers who are selling the products can not reduce their output VAT unless they issue a number of amended VAT-invoices supporting the price reduction (i.e. as a kind of discount).

Should the turnover of the selling company be significant and / or the bonuses be calculated for a number of reporting periods on a cumulative basis, issuance of such amended VAT-invoices may not be possible: current legislation requires issuance of amended VAT-invoices (with respect to change in the price of the goods) for each supply within 5 days from the date on which the seller is informed of such change of the price. Once the turnovers are big enough, the taxpayers need to deploy considerable efforts to prepare and issue such VAT invoices in time as well as to modify their accounting programs to enable such issuance.

Due to practical difficulties in following the current requirements (coupled with the high implementation costs), a group of large Russian corporate taxpayers (Volvo, Xerox, Jaguar Land Rover etc. among them) appealed to the SAC asserting that the current Russian rules for issuance of amended VAT-invoices violate the Russian Tax Code in the part preventing the taxpayers from issuing joint amended VAT-invoices in the above circumstances.

The key argument of the appeal was that the bonuses are usually calculated from the total value of supplied products and not with respect to specific individual products or their prices. Thus, it could be sensible to allow the issuance of joint amended VAT-invoices with respect to all goods supplied. As per the appeal this could be achieved by treating certain specific provisions of rules for issuance of amended VAT-invoices as violating the Russian Tax Code without challenging them as a whole.
 
The SAC refused this appeal, but its practical outcome is ambiguous: indeed, on the one hand, current rules of issuance of amended VAT-invoices were deemed to be consistent with the Tax Code whereas, on the other hand, the possibility to issue joint amended VAT-invoices was not prohibited. This seems to be a political decision to avoid a wave of similar appeals with respect to other parts of these rules (or indeed any other rules adopted by the Government).

Further, the SAC stated that the appealed Governmental Act should not anyhow apply to the issue with turnover bonuses since these bonuses are not stipulated by the Russian Tax code for VAT purposes.
 
The good news, nevertheless, is that SAC in fact reconfirmed that amended VAT-invoices could be used where the total value of the supplied products is amended and not the price or quantity of specific goods as the current wording of the rules for issuance of amended VAT-invoices provides. This is indeed logical as the value of goods is determined with reference to both price and quantity. 
 
The not so good news, however, is that issuance of joint amended VAT-invoices was not directly permitted, which makes the legitimacy of their future use questionable. In addition the SAC denied introduction of any additional special forms for the purpose of documentation supporting the above mentioned bonuses. This, however, does not mean that joint amended VAT-invoices are forbidden, as they do not fall within additional forms.
 
The one message that is crystal clear from the SAC decision is that the issue could only be resolved by amendments to the Tax Code. In the absence of such amendments, issuance of joint amended VAT-invoices will still be risky. 
 
How can CMS help you in this respect?

• Review the current VAT methodology, particularly the process for issuance of amended VAT-invoices;
• Assess the possibility of implementation of the current tax requirements;
• Work out an alternative procedure for the issuance of amended VAT-invoices and assist with the implementation of such procedure.