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New Resolution of the RF Supreme Arbitration Court on the VAT Rate Applicable to the Export of Technical Documentation

23.06.2010
5 min read
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Pepeliaev Group advises that Resolution No. 17933/09 of the Presidium of the RF Supreme Arbitration Court dated 11 May 2010 has been posted on the court’s official website. The Resolution determines the practice of levying VAT on the export of maintenance and technical documentation in respect of aircraft engines and units and the application of corresponding deductions.

Background

The dispute between the taxpayer and the tax authority arose in respect of the taxpayer’s right to apply 0% VAT and the legal qualification of the transferred maintenance and technical documentation.

The fact that the taxpayer did not develop independently the contested documentation, but acquired it from third parties and subsequently transferred it under a contract to another party, which exported said documentation to a foreign company, was material in the case.

The tax office held that transactions involving the sale of documentation to the foreign company should have been treated as the sale of services in respect of which article 164 of the RF Tax Code does not stipulate zero tax rate. When substantiating this argument, the tax office noted that the documentation constituted the result of intellectual activity. Consequently, it cannot be classified as property by virtue of article 128 of the RF Civil Code or as a product under article 38 of the RF Tax Code, to which clause 1, article 164 of the RF Tax Code is applicable. In addition, the tax office pointed out that by virtue of sub-clause 4, clause 1, article 148 of the RF Tax Code Russia was not the place of sale of work (services) in respect of the development of documentation and, therefore, the general rules for VAT recovery are not applicable to this transaction.

The courts upheld the taxpayer’s position

In the courts’ opinion, the documentation acquired by the taxpayer for subsequent export could be exported only as a product and not sold as a result of intellectual activity. The courts cited the fact that the taxpayer had not developed the documentation, but had instead acquired ready-to-use documentation from third parties as a product in the form of hard copies and magnetic media, in other words, it had not been granted exclusive rights to the documentation. The courts also noted that the taxpayer had not booked the documentation – an item of exclusive rights – as an intangible asset, and that the supply contracts with Russian contracting parties did not contain a provision on the transfer of exclusive rights to the documentation as a result of intellectual activity.

As the documentation sold for export is a product, the courts held that the tax office’s reference to sub-clause 4, clause 1, article 148 of the RF Tax Code was ungrounded.

When referring the case to the Presidium, the panel of judges pointed out to the absence of the uniform judicial approach to settling disputes in comparable circumstances . The Presidium was, therefore, set the goal to qualify correctly this item with due account of the facts of the case and formulate (substantiate and confirm) the general criteria and rules enabling to separate cases when documentation may or may not be treated as a product.

Position of the RF Supreme Arbitration Court

Upholding the conclusions of the lower courts and the taxpayer’s position on the dispute, the Presidium of the RF Supreme Arbitration Court took account of the following:

• the taxpayer did not develop the documentation independently and did not book it as an intangible asset

• the taxpayer acquired the documentation from Russian contracting parties for export and booked it exclusively as a product

• as the documentation sold for export constitutes a product, the tax office’s reference to sub-clause 4, clause 1, article 148 of the RF Tax Code is ungrounded.

In summary, to determine the VAT rate on the transfer of maintenance and technical documentation in respect of aircraft engines and units to a foreign company, one should clarify whether or not this transaction constitutes the sale of a product subject to 0% VAT. In addition, to identify tax implications in such cases, the following circumstances should be taken into account: identification of a specific entity that developed the documentation (whether or not it was the taxpayer) and the procedure for booking the documentation (whether or not it was booked as a product or as an intangible asset).

It should also be noted here that the interpretation of legal provisions and the position formulated by the RF Supreme Arbitration Court (as it follows from the actual wording of the Resolution, which contains a direct reference to this fact) is deemed mandatory and should be applied by courts of arbitration when considering similar cases.


[1] Case of OAO Ufimsk Engine Production Association vs. Interregional Tax Office No. 8 for Major Taxpayers.

[2] The Ruling of the panel of judges on this case dated 18 February 2010 cited three cases: case No. A40-45799/06-90-231 (OAO Foreign Economic Association Technoexport vs. Moscow Tax Office No. 5); case No. A60-23268/05 (OOO Ural Avia PK vs. Sverdlovsk Region Interdistrict Tax Office No. 18); case No. A40-33000/03-393 (ZAO Jordan Union vs. Tax Office No. 14 of the Northern Administrative District of Moscow).


For further information, please contact:
in Moscow – Andrey Nikonov, Senior Partner, at: (495) 967-0007 or by a.nikonov@pgplaw.ru; Daniil Krymskiy, Junior associate, at: (495) 967-0007 or by d.krymskiy@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by s.sosnovsky@pgplaw.ru

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