VAT and bonuses: practice of the Federal Commercial (‘Arbitration’) Court for the Moscow Circuit

Law firm Pepeliaev Group advises that positive judicial practice has been forming in relation to calculating VAT when receiving bonuses and other incentive rewards for fulfilling the pre-agreed terms and conditions of delivery. For instance, in late November the Federal Commercial (‘Arbitration’) Court for the Moscow Circuit issued three awards in which it upheld the taxpayers’ position.

The tax authorities have for a long time kept a close eye on companies’ revenue in the form of various incentive rewards (such as premiums and bonuses) which the companies received from their suppliers. The inspectorates have more than once attempted to make the companies pay VAT on these amounts under various pretexts:
- by obliging companies to recover VAT in relation to goods purchased which the tax authorities considered to be unlawfully deducted owing to discounts granted;
- qualified such revenue as consideration for services and charged VAT on sale, etc.
The taxpayers successfully challenged the tax authorities’ claims in court.
One and a half years ago, after the Presidium of the Russian Supreme Commercial (‘Arbitration’) Court had issued Resolution No. 11637/11 dated 7 February 2012 for the case of Leroy Merlin Vostok, the tax authorities raised again claims in connection with that case. They interpreted the legal position of the Supreme Commercial (‘Arbitration’) Court as a pretext to treat incentive rewards as an attempt to decrease the price of the goods purchased and claim that the deductions of VAT declared be decreased accordingly. Virtually all regions of the country have evidenced tax audits with considerable amounts of VAT being additionally charged on the taxpayers.  
The three positive resolutions issued on the level of cassation mean that there is a strong judicial position coming into sight in the Moscow Circuit.
Pepeliaev Group’s lawyers worked on two cases out of these three (refer to Resolutions of the Commercial (‘Arbitration’) Court of the Moscow Circuit dated 14 November 2013 for case No. А40-5347/13-91-18 and dated 22 November 2013 for case No. А40-9139/13).

Before the supplier has executed adjusted VAT invoices and/or made amendments to the source shipment documents specifying the changed price of the goods, the buyer does not have the obligation to adjust VAT deductions previously declared.
As agreed by the parties, the incentive rewards may leave the price of the goods unchanged, which corresponds to the effective legislation (in particular, article 9 of Federal Law No. 381-FZ “On the basics of state regulation of trade activities”). According to law, the buyer may receive consideration for a number of food items purchased from the supplier; this consideration is not taken into account when the price of such goods is determined.
In its clarifications concerning the tax aspects of premiums (bonuses) paid by the supplier of food items to the buyer without changing the price of the goods, the Russian Finance Ministry has multiple times pointed out that there “are no grounds for adjusting the VAT base on the part of the seller and recovering the tax deductions, on the part of the buyer”.
It is necessary to take account of the amendments to article 154 of the Russian Tax Code and consider that if the supplier pays a premium to the buyer for fulfilling the conditions, this does not affect the parties’ obligations in relation to VAT, unless the parties explicitly agree otherwise in the contract. The amendments introduced reflect the legislator’s position on the matter; moreover, they support the courts in their lawful conclusion that the buyer does not have the obligation to adjust (recover) VAT deductions when receiving premiums from the suppler, unless the contract concluded provides for the price of the goods provided being reduced as a result of such premium being paid.

In the context of an arbitration practice concerning these issues which turns out to be generally favourable for the taxpayers, we refer to Resolution № А32-29954/2010 dated 27 May 2013 involving a case where the court of cassation invalidated a decision in favour of the taxpayer, as well as the resolution of lower courts. Instead, it supported the tax authority’s arguments that the beneficiary of the income should pay VAT on the incentive premiums to the budget irrespective of the terms and conditions of the contract, whether there are adjusting VAT invoices or not, etc. The taxpayer applied for the case to be reviewed by the supervisory authorities. Further to this, the Russian Supreme Commercial (‘Arbitration’) Court refused in its Ruling No. VAS-3862/12 dated 2 December 2013 to review the case.
The court pointed to the following:
- bonuses essentially represent a part of the goods’ value which is recovered;
- the amount of VAT by which the deductions should be decreased can be calculated in proportion to the overall amounts rather than based on the price of each item;
- if the VAT invoices are not adjusted, this does not affect the legal nature of a bonus which the parties booked as decreasing the accounts payable to the supplier, and does not exempt a company from decreasing VAT deductions previously received from the budget.

We believe that this Ruling of the Supreme Commercial (‘Arbitration’) Court will once again boost tax disputes relating to whether it is necessary to recover input VAT when receiving incentive rewards, so that the taxpayers will need qualified lawyers’ advice.

Pepeliaev Group’s experts have an intensive experience of advisory and litigation work as related to taxing incentive rewards (premiums and bonuses), including their engagement before the Russian Supreme Commercial (‘Arbitration’) Court. In addition, Pepeliaev Group’s lawyers have directly participated in preparing the text of legislative amendments to article 154 of the Russian Tax Code in respect of calculating VAT for such payments. We are ready to provide full-scope support in any aspect of the matter which may arise owing to premiums being paid or received, including:
•    in preparing the terms and conditions for bonus agreements;
•    in assessing the tax implications of the methods used by a company to pay and receive premiums and in documenting such implications;
•    in assessing the judicial prospects when a dispute with a tax authority arises;
•    in resolving disputes with a tax authority both on the pre-trial stage and in court.