The procedure for paying VAT on bonuses paid to clients is set out in the law
FAO chief accountants, financial directors, heads and employees of financial, tax and legal departments
Pepeliaev Group advises that on 22 March the State Duma adopted a law that regulates the procedure for calculating and paying VAT on bonuses paid to customers. According to the amendments, if the parties have not stipulated in the contract that bonuses will be treated as a discount on the price, the supplier’s tax base and the customer’s tax deductions should not be adjusted. It is expected that in the near future the law will be approved by the Federation Council, signed by the Russian President and officially published.
The adopted law amends article 154 of the Tax Code, according to which the “payment (provision) by the seller of goods (work, services) of a bonus (incentive payment) to the customer for the latter performing certain terms and conditions of a contract to supply goods (perform work, provide services), among other things, for purchasing a certain amount of goods (work, services), does not reduce the cost of goods shipped (work performed, services provided) for the purpose of calculating the tax base by the seller of goods (work, services) (and tax deductions used by the customer), except for situations where a reduction of the cost of the goods shipped (work performed, services provided) by the bonus paid (provided) (incentive payment) is stipulated in this contract”.
Pepeliaev Group advises that on 22 March the State Duma adopted a law that regulates the procedure for calculating and paying VAT on bonuses paid to customers. According to the amendments, if the parties have not stipulated in the contract that bonuses will be treated as a discount on the price, the supplier’s tax base and the customer’s tax deductions should not be adjusted. It is expected that in the near future the law will be approved by the Federation Council, signed by the Russian President and officially published.
The adopted law amends article 154 of the Tax Code, according to which the “payment (provision) by the seller of goods (work, services) of a bonus (incentive payment) to the customer for the latter performing certain terms and conditions of a contract to supply goods (perform work, provide services), among other things, for purchasing a certain amount of goods (work, services), does not reduce the cost of goods shipped (work performed, services provided) for the purpose of calculating the tax base by the seller of goods (work, services) (and tax deductions used by the customer), except for situations where a reduction of the cost of the goods shipped (work performed, services provided) by the bonus paid (provided) (incentive payment) is stipulated in this contract”.
PG’s comment
Therefore, if the contract does not stipulate that the parties regard the bonus paid as a reduction of the cost of the goods shipped, then the seller’s tax base and the customer’s tax deductions are not adjusted.
This amendment is aimed at drawing a line under the dispute that has lasted many years between taxpayers and the tax authorities when the authorities demand that customers that receive various incentives from sellers reduce their VAT deductions with regard to the goods purchased. Another aim of the amendment is to eliminate the need to prepare numerous VAT invoices.
The provision introduced by the legislature is in line with business practice and case law that was formed at the level of federal state commercial courts until the Presidium of the Supreme State Commercial Court (the “SCC”) adopted its notorious Resolution No. 11637/11 dated 7 February 2012 in the Leroy Merlin Vostok case. The point of the courts’ legal approach was that, if the contract between the supplier and the customer does not provide for a change in the cost (price) of goods and if the supplier has not reduced its VAT base in connection with the bonuses paid to the customer, then the customer has no grounds for reducing its VAT deductions.
We remind the reader that in the resolution in the case of Leroy Merlin Vostok the SCC’s Presidium pointed out that: “As a result of suppliers paying bonuses based on results of the shipment of goods for a period set out in supply contracts and annual agreements, the cost of goods is reduced, which results in the suppliers reducing their value added tax base with regard to the sale of goods. The above means that value added tax deductions recorded by the customer earlier shall also be reduced proportionally in the relevant tax periods”. This ruling and subsequent clarifications of the Russian Finance Ministry resulted in the tax authorities raising claims against a large amount of customers that received bonuses from suppliers.
The amendments to article 154 of the Tax Code came into force on 1 July 2013.
This amendment is aimed at drawing a line under the dispute that has lasted many years between taxpayers and the tax authorities when the authorities demand that customers that receive various incentives from sellers reduce their VAT deductions with regard to the goods purchased. Another aim of the amendment is to eliminate the need to prepare numerous VAT invoices.
The provision introduced by the legislature is in line with business practice and case law that was formed at the level of federal state commercial courts until the Presidium of the Supreme State Commercial Court (the “SCC”) adopted its notorious Resolution No. 11637/11 dated 7 February 2012 in the Leroy Merlin Vostok case. The point of the courts’ legal approach was that, if the contract between the supplier and the customer does not provide for a change in the cost (price) of goods and if the supplier has not reduced its VAT base in connection with the bonuses paid to the customer, then the customer has no grounds for reducing its VAT deductions.
We remind the reader that in the resolution in the case of Leroy Merlin Vostok the SCC’s Presidium pointed out that: “As a result of suppliers paying bonuses based on results of the shipment of goods for a period set out in supply contracts and annual agreements, the cost of goods is reduced, which results in the suppliers reducing their value added tax base with regard to the sale of goods. The above means that value added tax deductions recorded by the customer earlier shall also be reduced proportionally in the relevant tax periods”. This ruling and subsequent clarifications of the Russian Finance Ministry resulted in the tax authorities raising claims against a large amount of customers that received bonuses from suppliers.
The amendments to article 154 of the Tax Code came into force on 1 July 2013.
PG’s comment
The amendments will help to prevent claims from the tax authorities with regard to future tax periods. However, it is still not clear how these amendments will affect the position of the tax authorities and courts regarding the periods before these amendments came into force. The events may unfold in two opposite directions.
The courts may regard this provision as enacting the legal approaches existing in practice with regard to the taxation of transactions involving bonuses being paid. In this case the disputes will be resolved in favour of taxpayers.
It is also possible that the courts will follow the line that the amendments to article 154 of the Tax Code are something new in the regulations regarding how VAT on incentive payments should be calculated and paid. Until this provision appeared, there were no alternative in the law and the customer had to adjust its deductions when the price on the bonus received was reduced. Therefore, the parties that receive bonuses will only be able to determine whether these incentive payments affect the price of goods in the way set out in the new version of article 154 of the Tax Code from the day on which the relevant law comes into force.
The courts may regard this provision as enacting the legal approaches existing in practice with regard to the taxation of transactions involving bonuses being paid. In this case the disputes will be resolved in favour of taxpayers.
It is also possible that the courts will follow the line that the amendments to article 154 of the Tax Code are something new in the regulations regarding how VAT on incentive payments should be calculated and paid. Until this provision appeared, there were no alternative in the law and the customer had to adjust its deductions when the price on the bonus received was reduced. Therefore, the parties that receive bonuses will only be able to determine whether these incentive payments affect the price of goods in the way set out in the new version of article 154 of the Tax Code from the day on which the relevant law comes into force.
“Unified” VAT invoice
An important amendment was also made for those suppliers that adjust their VAT base and should provide their customers with adjusting VAT invoices for the adjusted amount of VAT which was invoiced earlier.
According to article 169 of the Tax Code, “a taxpayer is entitled to prepare a unified adjusting VAT invoice to change the cost of goods shipped (work performed, services provided) or property rights assigned, specified in two or more VAT invoices prepared by this taxpayer earlier.”
According to article 169 of the Tax Code, “a taxpayer is entitled to prepare a unified adjusting VAT invoice to change the cost of goods shipped (work performed, services provided) or property rights assigned, specified in two or more VAT invoices prepared by this taxpayer earlier.”
PG’s comment
The amendments to article 169(5.2) of the Tax Code do not make unequivocally clear whether it is possible to prepare a unified “depersonalised” VAT invoice to adjust the cost of goods specified in two or more VAT invoices, where the name and price of goods differ.
On the one hand, as the SCC pointed out in its decision No. 13825/12 dated 11 January 2013, a change in the cost of shipped goods is a consequence of the price or the amount of goods being adjusted. According to article 169(2) of the Tax Code, an adjusting VAT invoice issued by the seller when reducing the cost of goods shipped (work performed, services provided) or property rights assigned is a ground for the seller to deduct tax provided that the requirements set out in clauses 5.2 and 6 of this article are met. However, adjustments made by article 169(5.2) of the Tax Code do not release the seller from its obligation to specify, when it adjusts a VAT invoice:
After Resolution No. 13825/12 of the SCC dated 11 January 2013 had been published, the view was expressed that the cost of goods could be changed as a result of the seller paying a bonus to the customer without the price of such goods being changed. This interpretation, naturally, allows companies to avoid the need to add to the adjusting VAT invoice information specified in articles 169(5.2)(4) and 169(5.2)(7) and to issue a unified “depersonalised” VAT invoice, without the need to record detailed information about the goods shipped. In our opinion, such interpretation of articles 154 and 169 of the Tax Code is rather controversial and does not guarantee that the tax authorities will not raise any claims.
On the one hand, as the SCC pointed out in its decision No. 13825/12 dated 11 January 2013, a change in the cost of shipped goods is a consequence of the price or the amount of goods being adjusted. According to article 169(2) of the Tax Code, an adjusting VAT invoice issued by the seller when reducing the cost of goods shipped (work performed, services provided) or property rights assigned is a ground for the seller to deduct tax provided that the requirements set out in clauses 5.2 and 6 of this article are met. However, adjustments made by article 169(5.2) of the Tax Code do not release the seller from its obligation to specify, when it adjusts a VAT invoice:
- the name of goods (work, services) the price (tariff) of which has changed;
- price (tariff) for a unit of measurement before and after the change.
After Resolution No. 13825/12 of the SCC dated 11 January 2013 had been published, the view was expressed that the cost of goods could be changed as a result of the seller paying a bonus to the customer without the price of such goods being changed. This interpretation, naturally, allows companies to avoid the need to add to the adjusting VAT invoice information specified in articles 169(5.2)(4) and 169(5.2)(7) and to issue a unified “depersonalised” VAT invoice, without the need to record detailed information about the goods shipped. In our opinion, such interpretation of articles 154 and 169 of the Tax Code is rather controversial and does not guarantee that the tax authorities will not raise any claims.
Help from your adviser
The lawyers from Pepeliaev Group are ready to provide the legal support regarding the issues connected with VAT paid on bonuses before 1 July 2013, as well as provide advice regarding how the new legislative provisions may be used in the most effective manner and to evaluate how they may be interpreted and applied by administrative authorities and courts.