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Development of Tax Case Law in 2010:

Development of Tax Case Law in 2010:. Evgeny Timofeev Partner, Co-Head of Global Tax Practice Salans October 6, 2010. Procedural Issues 1. Transmil [SAC #VAS-4281 / 10 - 2 8 . 05 .2010 ]

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Development of Tax Case Law in 2010:

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  1. Development of Tax Case Law in 2010: Evgeny Timofeev Partner, Co-Head of Global Tax Practice Salans October 6, 2010

  2. Procedural Issues 1 • Transmil [SAC #VAS-4281/10 - 28.05.2010] • Tax authorities under no obligation to provide the taxpayer with all the materials of the tax audit with the audit act • Are they obliged to provide access to such materials upon requested? – No answer so far

  3. Procedural Issues 2 • Avtotraktorsbyt [PSAC #4903/10 - 21.09.2010] – wording expected • Decision of higher tax authority is valid even if: • taxpayer was not invited to consideration of his claim • (what if taxpayer requested such invitation?) • Unimilk [PSAC #4903/10 - 29.09.2010] – wording expected • Decision on tax audit is invalid if signed by the official who did not take part in the consideration of the tax audit materials

  4. Varm – The New Reading:One Cannot Challenge the Launch of the Repeat Audit • Varm (CC 2009) – literally the tax authorities are not allowed to launch the repeat field tax audit in case the results of the first have been checked by a court, but • CC ruling to deny Varm explanation[CC 138-O-P]: in fact explained that the tax authorities could not question the legal relations as established by the court • Hence, it is not about the launch anymore • Titan[PSAC #14585/09] and Zoloto Inykchana[PSAC #17099/09]: Varm inapplicable in case the court did not assess the evidence and factual circumstances and the conclusions of the tax authorities • But these factors only become known after the audit, hence no link to the launch

  5. Varm – The Only Win:Court Conclusions on the Merits of Field Audit Obligatory • Dirol Cadbury [PSAC #8163/09]: • Repeat audit always possible if a correction tax return is filed (however limited to the audit of the corrections) • Tax authorities may not make conclusions including on qualification of transactions deviating from those of the court as regards the challenged episodes (not just as regards facts!) • Izmailova[CC 441-O]:prior court decision on the desk audit decision irrelevant for the field tax audit at least as regards new episodes • Not a word on new facts in the “old” episodes • SFAT[PSAC #3103/09] considers that:alsoirrelevant as regards the “old” episodes due to the deeper scope of the audit • Hence, the court rulings still only obligatory as regards facts

  6. Bad Suppliers: The Ultimate Truth Uncovered… • Muromskiy Strelochniy Zavod [PSAC #18162/09 – 20.04.2010] • Lizingovaya Kompaniya Malogo Biznesa [PSAC #15574/09 - 09.03.2010] • Kotov[PSAC #17684/09 – 08.06.2010]: • False signatures are not the end of the day • Tax benefits to be denied if additionally proven: • Transaction unreal, or • The taxpayer knew or must have known that the signatures were false • Also the reasonability of contracting the particular supplier has to be assessed

  7. A Perfect Case of Complete Tax Disregard • Molochny Zavod Syktykvkarsky [PSAC #17152/09 – 06.07.2010] • A factory established an entity to purchase raw materials, contract the factory to process them, and to sell the finished goods FOR TAX REASONS • Tax authorities and courts just added sales of the “artificial” company to those of the factory • PSAC (also to VAT): • (1) yes, add the sales BUT • (2) also add the purchase costs, and • (3) ignore the processing fee.

  8. VAT: Bonuses to Customers • Dirol Cadbury [PSAC #11175/09 - 22.12.2009] • Bonuses alongside discounts do affect VAT tax base • Ministry of Finance and Federal Tax Service ignore this case • Courts do apply it: • PK Korona [SZO #А44-2914/2009]; • TEKS/Alteks[DO#Ф03-2636/2009,SAC #ВАС-10748/09 - 24.02.2010] • including when the right to the bonus arises by issuing negative VAT invoices (ruling from before Dirol but found by SAC after Dirol in line with it – amendments not necessarily in the supply period)

  9. Transfer of Investment Rights on Non-Residential Property • Novostroi [PSAC #13640/09 - 25.02.2010] • The mark-up only is subject to VAT (as with the residential property rights) • The previously applied regional case law (in question after the introduction of the rule on the residential property rights into the law) effectively quashed: • That case law suggested that resale of investment rights not subject to VAT as the investment activities themselves are not

  10. Assets Liquidation – VAT Recoverable • Granit-Kuznechnoe [PSAC #17969/09 - 20.04.2010] • VAT incurred on assets liquidation services (like building demolition) is recoverable • If the asset was used in VATable activities and • If there is a need to liquidate • (Additional ground for fighting off claims for restatement of VAT on residual value)

  11. VAT Recovery: When and How Much? • Kalachevsky Morskoi Port [PSAC #2217/10 -15.06.2010] • VAT recovery can be claimed in any period after all conditions are met – but within 3 years • Directly abandons the opposite position taken in Pertsev in 2005 • Assume 3 years relate to the actual claim, not the return period • Belozernyi Gasopererabatyvayushiy Zavod [PSAC #2604/10 – 06.07.2010] • Limitation of VAT recovery on limited deductibility expenses only applies to business trips and entertainment • Hence, not to advertising!

  12. VAT: Recovery Procedure and Corrections • Tabak Trade [PSAC #11822/09 - 19.01.2010] • Simultaneous positive and negative corrections of VAT returns are not safe: • The tax office may first check those it likes more and claim VAT in arrears, interest (and as it follows penalties by the way) • (Why not get back and claim these penalties and interest back later?)

  13. VAT Withholding at Own Expense • Orelcord [PSAC #16907/09 -18.05.2010] • VAT credit available irrespective of whether the invoice or contract mention the VAT or not – including when applied on top of the invoice price • Now safe!

  14. Merchandising Expenses and Unpaid Debts • Dirol Cadbury [PSAC #11175/09 - 22.12.2009] • Merchandise expenses deductible irrespective of the title to the goods sold by the retailer • Popov Ostrov [PSAC #17462/09 – 08.06.2010]: • Debt has to be recognized as income by the debtor upon expiry of the statute of limitations irrespective of the documentation on the write off of the debt • Directly changes position of Balakovskoye montazhnoye upravleniye spezialisirovannoye (2008) • Nevo Tabak [PSAC #1574/10 – 15.06.2010] • But interruptions under (Art. 203 CC RF) should be considered [decision on expenses but also should apply to income]

  15. Interest – the Case of the Century (1/3) • SaNiVa [PSAC #11200/09 - 24.11.2009] • Interest recognized when payable under agreement, not in the period of accrual • MinFin and Federal Tax Service: business as usual • Courts: the life has changed! • Application to income: recognize when payable • Niva Ryazani [20AAC #А54-892/2010] • Kazenergo [Tatarstan #А65-34405/2009-SА1-23] • TEK Mistral [Novosibirskaya Oblast #А45-8330/2010]

  16. Interest – the Case of the Century (2/3) • SaNiVa [PSAC #11200/09 - 24.11.2009] • Application to expenses: two trends • Recognize when payable (in line with SaNiVa) – against the borrowers: • PO Vodokanal of Rostov on Don [15AAC #А53-1490/2010]; • Marteks [9AAC 09АП-17217/2010-АК]; • Logopark Mejdurech’e [12AAC #А12-580/2010]; • CNIIM [13AAC #А56-89182/2009]; • Berezovskoe [Hanty-Mansyiskyi avtonomnyi okrug Ugra # А75-7028/2010]; • Vernyi Sibir [Omskaya oblast #A46-3692/2010]

  17. Interest – the Case of the Century (2/3) • SaNiVa [PSAC #11200/09 - 24.11.2009] • Application to expenses: two trends • Courts try to avoid applying SaNiVa case (favorable to borrowers): • Hydromashservice [MO #КА-А40/7211-10] – as the contract directly provided that interest accrues monthly • Yasnogorskyi Mashinostroitelnyi zavod [20AAC #А68-9661/2008] – as in SaNiVa there was a foreign lender so a “scheme” could take place • Severnyi Kuzbass [Kemerovskaya Oblast #A27-7455/2010] – a mess of statements that interest had to accrue monthly (no such quotes from the contract) before the repayment term was delayed (quotes suggest the prolongation took place before the due date)

  18. Break Fees and Pricing Corridor for Securities • Novostroi [PSAC #13640 -25.02.2010] • Break fees deductible – irrespective of that the contract does not provide for them • Citibank [PSAC #14965/09 – 09.03.2010] • The pricing corridor for the listed securities exists also if just one transaction takes place • Lost opportunity to confirm applicability of CC in Niva-7: no adjustments possible if clearly no attempt to artificially decrease the tax base present

  19. Late Payment Interest • Corus-Ufa [PSAC #14977/09 -06.04.2010] • Failure to withhold profit tax from payments to non-residents leads to late payment interest • Confirmed what was previously stated as regards the personal income tax • For how long? • Supposedly rulings in Tomsk Federal Registration Service (2008) and Plastic (2009) should apply – till the tax itself seizes to be collectible (which moment in itself is very unclear in foreign taxpayer situations)

  20. Production sharing agreements: compulsory for third parties? • Sakhalin-Shelf-Service [PSAC # 1674/10 - 29.09.2010]– wording expected • 32% Profit tax rate under SPA is not applicable to (sub)contractors of PSA party • Does it apply to the parties to the SPA?

  21. ALMATY BAKU BARCELONA BEIJING BERLIN BRATISLAVA BRUSSELS BUCHAREST BUDAPEST FRANKFURT HONG KONG ISTANBUL KYIV LONDON MADRID MOSCOW NEW YORK PARIS PRAGUE SHANGHAI ST PETERSBURG WARSAW CONTACT INFORMATIONEvgeny TimofeevPartnerCo-Head of Global Tax Practice T: +7 495 644 0506 (office)E: etimofeev@salans.com Balchug Plaza, Ul. Balchug, 7 115035 Moscow

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