Resolution of the Russian Supreme Arbitration Court on the Deduction of VAT on Unreliable VAT Invoices Has Been Published
Pepeliaev Group advises that the Resolution of the Russian Supreme Court [1] on the lawfulness of deducting VAT on VAT invoices containing inaccurate data and signed by unauthorised persons has been officially published.
The position expressed in the Court's Resolution differs radically fr om the position that it expressed in late 2008 on the case of ZAO Kestroy-1 [2] , where the unreliability of source documents constituted the grounds for disallowing VAT deductions and the deductibility of expenses for profit tax purposes.
According to the facts of the case reviewed by the Presidium of the RF Supreme Arbitration Court on 20 April 2010, the taxpayer manufactures and sells rail-road switch products. It deducted VAT on goods purchased from contracting parties. The delivery of the goods was confirmed by supporting shipping documents, waybills and powers of attorney for the transfer of the inventory.
While the tax office did not contest the fact that business transactions had been performed, which demonstrated long-term relations with contracting parties, it disallowed VAT deductions and the deductibility of expenses on the acquisition of goods for profit tax purposes. The tax authority took this action, citing the invalidity of the source documents that confirmed the above business transactions.
The courts of appeal and cassation upheld the company's claims in respect of profit tax, as the tax office had not contested the fact that actual business transactions had been carried out by the company and that the expenses incurred by the company had been duly documented, were of a production nature and had been performed for revenue-generating purposes. At the same time, the courts concluded that the company had failed to demonstrate due care when choosing contracting parties, the VAT invoices contained inaccurate data, as they had been signed by unauthorised persons of the contracting parties on behalf of their directors, which deprived the company of the VAT deductions. In addition, the courts concluded that the actual nature of the delivery did not constitute a determining criterion for the company's eligibility for a tax benefit in the form of corresponding VAT deductions.
The Presidium of the RF Supreme Arbitration Court, when admitting the taxpayer's appeal for supervisory review, noted that the taxpayer was entitled to claim for a VAT deduction, provided that it complied with articles 171 and 172 of the Russian Tax Code.
The Court, based on the arguments set out in Resolution No. 53 of the Presidium of the RF Supreme Arbitration Court dated 12 October 2006 “On the Assessment by the Arbitration Courts of the Substantiated Nature of the Receipt of a Tax Benefit by the Taxpayer”, pointed out that the obligation to draft VAT invoices reflecting data determined by article 169 of the Russian Tax Code should be imposed on the seller. Accordingly, if the contracting party discharges the above requirements on the execution of required documents, there will be no grounds for concluding that the data contained in said VAT invoices are unreliable or inconsistent, unless facts have been discovered attesting to the fact that the taxpayer knew or should have known that the seller had submitted inaccurate or inconsistent data. The Presidium of the RF Supreme Arbitration Court noted that if there was no evidence that business transactions had been carried out, in respect of which a taxpayer had filed for tax deductions, the court might conclude that the taxpayer had known or should have known about the inaccuracy (inconsistency) of the data from the assessment of the set of facts related to the conclusion and performance of the contract (including in connection with the grounds on which the taxpayer had chosen a respective contracting party), as well as other circumstances cited in Resolution No. 53 of the Presidium of the Russian Supreme Arbitration Court dated 12 October 2006 “On the Assessment by the Arbitration Courts of the Substantiated Nature of the Receipt of a Tax Benefit by the Taxpayer.”
In this case the tax office had not identified during the audit any facts that made it possible to doubt the bona fide nature of the taxpayer. The case file contained statements from the suppliers' bank accounts, showing that they carried out operations during the audited tax periods to acquire goods and subsequently sell them, not only to the company, but also to other buyers with which they also performed business transactions on a regular basis. The Presidium of the RF Supreme Arbitration Court also established that the company, when concluding supply contracts, demonstrated due care and verified the supplier's legal capacity and their due state registration by obtaining extracts from the Unified State Register of Legal Entities.
In view of the above, the Presidium of the RF Supreme Arbitration Court held that the conclusion on the inaccuracy of VAT invoices signed by persons that are not indicated in the suppliers’ foundation documents as the companies' directors may not be considered independently, without any other facts and circumstances, as grounds for declaring a tax benefit to be unsubstantiated.
Consequently, the following circumstances constituted grounds for granting the taxpayer's claims:
- the actual nature of business transactions performed
- the failure by the tax office to prove that the taxpayer knew that the VAT invoices had been signed by unauthorised persons on behalf of the contracting party; the failure to prove other circumstances that lead to doubts as to the bona fide nature of the taxpayer
- due care demonstrated by the company (the Presidium of the RF Supreme Arbitration Court held that it was sufficient to obtain an excerpt from the Unified State Register of Legal Entities in respect of the supplier — the court decision makes no mention of the need to be personally acquainted with the supplier's director, request passport copies, etc.).
The Resolution of the Court's Presidium sets a precedent, as indicated clearly in the following statement: “The interpretation of the rules of law contained in this resolution of the Presidium of the Russian Supreme Arbitration Court is compulsory and should be applied by state arbitration courts when considering similar cases”. Bearing in mind the position of the Russian Constitutional Court expressed in Resolution No. 1-P [3] dated 21 January 2010, this means that the above Resolution of the Court's Presidium is not only compulsory for state arbitration courts when considering future disputes, but may also serve as grounds for revising cases, wh ere the courts ruled against a taxpayer, based on newly discovered circumstances.
At the same time, the conclusions drawn by the Presidium of the RF Supreme Arbitration Court are based on specific facts identified by lower courts. Consequently, we cannot rule out the fact that the courts will be cautious in future when applying the position expressed in the Resolution concerned, taking into account the specific circumstances of the case under consideration. In this context the taxpayer, when proving its position, should pay significant attention to the circumstances of concluding a contract and display due care when choosing the contracting party and other facts showing that it is not complicit with bad-faith suppliers.
In our opinion, the question on the actions to be taken in each separate case to demonstrate due care should be resolved in accordance with best business practices, the circumstances of business activity and the internal regulations of a specific company.
[1] Resolution No. 18162/09 of the Presidium of the RF Supreme Arbitration Court dated 20 April 2010 on the case of the Muromsk Swtich Plant.
[2] Resolution No. 9299/08 of the Presidium of the RF Supreme Arbitration Court dated 11 November 2008 on the case of ZAO Kestroy-1.
[3] Resolution No. 1-P of the Russian Constitutional Court dated 21 January 2010 “On the Case Concerning the Review of the Constitutionality of the Provisions of Part 4, Article 170, Clause 1, Article 311 and Clause 1, Article 312 of the Russian Arbitration Procedure Code in Connection with the Appeals from Closed Joint-Stock Company “Production Association “Bereg” and Open Joint-Stock Companies “Karbolit”, “Plant “Mikroprovod” and “Research and Development Enterprise “Respirator”.
For further information, please contact:
in Moscow – Andrey Nikonov, Senior Partner, at: (495) 967-0007 or by a.nikonov@pgplaw.ru; Julia Alexandrova, Leadig associate, at: (495) 967-0007 or by j.alexandrova@pgplaw.ruin St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by s.sosnovsky@pgplaw.ru