Companies that operate in Sakhalin Region and a number of other regions are entitled to use accelerated depreciation of fixed assets and deduct larger amounts as expenses for tax purposes
Pepeliaev Group advises: on 5 July 2011, the Federal arbitration Court for the Far Eastern Circuit issued its precedent forming resolution No. F03-2566/2011 which states that companies operating in Sakhalin Region are entitled to apply a special coefficient for their fixed assets depreciation (but not more than 2). The court’s conclusions may also apply to companies operating in other regions of the Far North and areas equivalent to the Far North.
Pepeliaev Group lawyers won a court case by proving that the company may increase its expenses for profit tax purposes by adding depreciation amounts that result from applying a coefficient of 2 to the basic depreciation rate for fixed assets.
While the tax office was examining objections to the audit report the taxpayer filed an adjusted profit tax return along with documents confirming the right to apply the accelerated depreciation coefficient. The taxpayer also claimed that it had overpaid tax to the budget earlier and applied for this overpayment to be taken into account by the tax authority when it issued its decision.
The company cited article 259(7) of the Tax Code (in the version in force before Federal Law No. 224-FZ was adopted on 26 November 2008, in the current version article 259.3(1) of the Tax Code). Under this article, in order to apply the special coefficient (no more than 2) to the basic depreciation rate it should be established that the equipment is operated in a hostile environment, provided the depreciation is accrued under the linear method. If depreciation is accrued under the non-linear method, the fixed assets should be classified under depreciation groups, with the exception of the first, the second and the third groups.
The Arbitration Court of Sakhalin Region and the Federal Arbitration Court for the Far Eastern Circuit in the decision dated 15 February 2011 and resolution dated 5 July 2011 in case No. А59-3598/2010 respectively, acknowledged that a higher depreciation coefficient should be used for fixed assets operated in the environmental conditions of Sakhalin Region.
This conclusion was based on: Resolution No. 1029 dated 10 November 1967 of the USSR’s Council of Ministers; Russian Law No. 4520-1 dated 19 February 1993 “On state guarantees and compensations for people who work and live in the Far North and areas equivalent to the Far North”; Resolutions of Russia’s State Construction Committee (Gosstroy) No. 81 dated 17 December 1999, No. 25 dated 27 February 2003 and No. 5 dated 12 January 2004; the Guidelines for Comprehensive Technical Inspection of Isothermic Reservoirs RD 03-410-01 approved by Resolution No. 32 dated 20 July 2001 of the Russian Federal Supervisory Committee for Mining and Industry (Gosgortekhnadzor); and Selected Assessment Standards for Geological Exploration Work (SSN-92) approved by Order No. 8 dated 20 July 2000 of Russian Ministry of Natural Resources.
Courts also relied on the opinion of State R&D Institute for Commercial Aviation that was provided in the case file and noted as follows:
- the atmosphere of Sakhalin Region is hostile for metal equipment;
- from 2001 to 2010 extreme climatic conditions were registered in the Sakhalin Region that had a negative impact on equipment and caused its rapid wear.
Following the courts’ conclusions and taking into account the significance of such court practice, taxpayers of Sakhalin Region that use fixed assets in this territory are entitled to apply accelerated depreciation coefficients for such assets. The courts’ conclusions allow a high coefficient of not more than 2 be applied by taxpayers even in absence of an expert opinion (from an expert company etc.).
As the courts’ conclusions are based on the analysis of regulations issued by governmental agencies that are equally relevant for the Sakhalin region and other regions of the Far North and areas equivalent to the far North, such regulations may be cited by companies operating in said areas [1].
The case may be used by companies to reduce their current tax payments and to create tax potential in the form of excess profit tax that may be recovered from the budget.
Please note that in the interests of tax efficiency and to recover the overpaid tax it is advisable to analyse the structure of fixed assets, find out whether the requisite documents are available and prepare them if not. The results will depend on the company’s operational specifics and types of fixed assets to which accelerated depreciation applies. Depending on such specifics and types of assets companies may also determine whether they need to engage an expert or a specialised company to obtain an additional proof of the taxpayer’s right.
Pepeliaev Group lawyers are ready to assist you with such analysis and selection of documents, as well as to advise you subsequently on related issues and, if necessary, act for you to resolve disputes in and out of court.
[1] The list of the Far North regions and areas equivalent to the Far North is given in the Resolution No. 1029 dated 10 November 1967 of the USSR’s Council of Ministers. Some areas in Maritime Territory (Primorsky Krai), Amur Region, Khabarovsk Territory, Irkutsk Region, Krasnoyarsk Territory, Tuymen Region, Arkhangensk Region etc. are classified as areas equal to the Far North. Kamchatka Region, Magadan Region and some areas of Karelia Republic are the Far North regions.
For further information, please contact:
in Moscow – Pavel Kondukov, Head of Offshore Projects and PSA Group, at: (495) 967-0007 or by e-mail
in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 640-60-10 or by e-mail