Failure by an eligible company to timely submit a complete set of documents confirming exemption from value added taxes ("VAT") will not cause a company to have VAT arrears, but will serve as a basis for imposing a penalty on the company for a delay in making VAT payments.
On May 16, 2006, the RF Supreme Arbitration (Commercial) Court adopted an unprecedented ruling,1 which is expected to significantly affect the existing judicial practice with regard to disputes arising from the application of VAT in the RF and the procedures governing the right to apply a 0% VAT rate. (Companies are exempt from VAT in certain cases, often in connection with export transactions.)
A company filed a VAT declaration to the Tax Inspectorate seeking to confirm the right to apply the 0% VAT rate, but submitted the declaration late.2 Having considered the declaration, the Tax Inspectorate issued a ruling to impose a penalty on the taxpayer for its failure to timely submit a complete set of documents confirming the right to apply the 0% VAT rate. This penalty accrued for the period starting from the date when the duty to pay VAT had arisen (181st day) and until the date when the tax declaration and a complete set of documents confirming the right to apply the 0% VAT rate were submitted. The Tax Inspectorate subsequently confirmed the company’s right to the exemption. The company brought suit, challenging this penalty.
Having considered the case, the arbitration courts of the first and second instance granted the company’s claim, basing its decision on the fact that the tax authorities had subsequently confirmed the tax exemption. Thus, the court reasoned, the company had no accumulation of VAT arrears, and could not be penalized. This conclusion was based on the judicial practice of the RF Constitutional Court3 and the RF Supreme Arbitration Court,4 stating that "a penalty shall be deemed compensation of damages incurred by the State with regard to the delay in tax payments" and "the taxpayer shall pay a penalty when it accumulates VAT arrears, i.e., tax payments which were not paid on the due date." It should be noted that until recently, Russian courts dealing with tax disputes assumed that a penalty should not be imposed on the taxpayer provided that the taxpayer avoids any VAT arrears.
Supreme Court Reversal
On appeal by the Tax Inspectorate, the Presidium of the RF Supreme Arbitration Court reversed the lower courts’ decision, concluding the following: Since the VAT declaration and the complete set of documents were submitted after the expiration of the 180 day period required by Article 165 (1) of the RF Tax Code (the "Tax Code"), the Company was liable for paying VAT at the pre-exemption rate of 10% or 18%, as applicable. The company’s failure to fulfill this obligation resulted in arrears of the VAT imposed on the exported products and, subsequently, in the imposition of a penalty.
Under Article 174 (1) of the Tax Code, payment of VAT for a previous tax period must occur no later than the 20th day of the month following the end of the tax period, unless otherwise stipulated by Chapter 21 "Value Added Tax" of the Tax Code. Also, Article 165 (9) of the Tax Code sets out that in certain instances, the duty to pay VAT arises on the 181st day from the date when the customs authorities cleared the goods for export.
The RF Supreme Arbitration Court thus concluded that a penalty shall accrue for the period starting from the 181st day until the date when the tax declaration and a complete set of documents confirming the right to apply the 0% VAT rate were submitted. Thus, whereas previously a late submission for the tax exemption essentially had no repercussions, this case demonstrates that late filers will now incur significant penalties for this delay. /R. Kurmaev
1 No. 15326/05.
2 The Tax Inspectorate considers any declaration made after 180 days from the date when goods were exported as being late.
3 e.g., Resolution of the RF Constitutional Court No 11-P, dated July 15, 1999.
4 e.g., Resolution of the Presidium of the RF Supreme Arbitration Court No. 5, dated February 28, 2001, in which the RF Supreme Court summarized recommendations granted to the lower courts pursuant to its application of the Tax Code Part One.
The content of this article is intended to provide a general guide
to the subject matter. Specialist advice should be sought about your
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Under Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories ("EMIR")...
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).