Recalculating mineral extraction tax if the calendar year standard for extraction losses is approved with delay

For the attention of: chief accountants, finance directors and heads of tax divisions of subsoil users

On 19 February 2013, the Presidium of the Russian Supreme Arbitration Court (SAC) considered whether taxpayers may adjust the tax base for the previous reporting periods if there is a delay in approving the standard for extraction losses (Ruling No. VAS-12232/12 dated 19 November 2012 to refer the case to be considered by the Presidium of the SAC).

In 2009, before the standard for extraction losses was approved for the relevant year, the taxpayer paid mineral extraction tax at the 0% rate, applying the standard for losses 2008. The Russian Ministry of Energy approved the losses standard for 2009 in October 2009. The new standard was higher than the old one, in other words, it allowed for the 0% rate to be applied to higher volumes. There was no dispute as to whether the 0% rate could be applied to a higher volume of losses after the standard was approved. The Inspectorate disputed that it could be applied to a higher volume for those periods of 2009 when the standard had not been approved. This interpretation is not without foundation: article 342(1)(1) of the Tax Code states that the old losses standards must apply until a new standard is adopted. 

Courts of three levels upheld the company’s position that it may recalculate tax for the time before the standard was approved. Disagreeing with this conclusion the inspectorate filed a claim with the SAC…

SAC’s Conclusions 

… and it lost. The Resolution of the Presidium of the SAC has not yet been published, but the rationale is already clear. The SAC has most likely upheld the lower courts’ findings that the Tax Code does not prohibit the losses standards from being applied to the period before the standards are approval and that the inspectorate’s interpretation of  article 342(1)(1) increases the extent of taxpayer’s obligations for no valid reason. 

The SAC’s conclusions benefit those taxpayers for whom the annual standards are getting higher. Those companies for whom the standards are lowered (i.e. the majority of companies) may feel a substantial impact from the SAC’s judgment. The tax authorities will require them to make new calculations. Therefore, after the reasons for the Presidium’s Resolution are published, they need to be analysed to decide whether or not an adjusted return should be filed. If not, then how may possible claims of the inspectorate be guarded against?

Pepeliaev Group lawyers have extensive experience of successfully representing clients before tax authorities and courts. We will help clients to use to the fullest possible extent their new opportunities for optimising minerals tax. We will examine whether the tax payments for previous periods need to be adjusted if this worsens the company’s position and will prepare arguments to protect the company and avoid the recalculation.

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