VAT may be refunded sooner if there is a dispute with a tax authority concerning the refund

Pepeliaev Group advises that VAT may be refunded within a shorter period if there is a dispute with a tax authority. The developing court practice upholds the taxpayer’s right to apply to court without first launching an appeal with higher-instance tax authorities. Moreover, the decision to hold (or not to hold) the taxpayer liable need not be appealed – the taxpayer may directly appeal the decision to disallow reimbursement of VAT.

It is usually a topical issue for the taxpayer how to actually recover VAT that was claimed for reimbursement in its tax return.

As a general rule, it takes at least four months fr om the filing of a tax return with the tax authority to the actual recovery of the tax, unless the tax authority identifies violations.

However, tax authorities often refuse to refund VAT, thus drawing the taxpayer into a protracted pre-court and court appeal procedure aimed at overturning the decisions of the tax authorities. The VAT refund is accordingly postponed for an indefinite period of time. At the same time, in practice the demands of tax payers for a VAT refund are most often upheld.

Since 2009, a procedure has been in place whereby a tax dispute should necessarily be appealed to a higher-instance tax authority before it is referred to a court. Prior to exercising its right to apply to court, a taxpayer should try to settle the dispute with a higher-instance tax authority. The problem is that the latter often violates the one-month deadline for examining the appeal (in our experience, the review procedure often dragged on for more than 5-6 months).

Given this state of affairs, the question arises as to whether the taxpayer may shorten the procedure, since an appeal to a higher-instance tax authority does not change anything and the disputed decisions are often left unchanged.

In accordance with clause 3, article 176 of the Russian Tax Code, after reviewing objections to the desk tax audit report, the tax authority issues two types of decisions: a decision to hold/not to hold the taxpayer liable for a tax offence and a decision to allow/disallow reimbursement of VAT.

According to articles 101 and 102 of the Russian Tax Code, the first type of decisions requires that the taxpayer apply to the higher tax authority, while there is no such requirement for the second type of decisions. Article 176 of the Russian Tax Code stipulates that the tax authority should take a decision to reimburse or disallow reimbursement of VAT, but there is no procedure for challenging such decisions. At the same time, said decisions including the decision to reimburse VAT are classified as individual regulatory acts which may be appealed through the court.

Pursuant to article 101.2 and 138 of the Russian Tax Code, the procedure for compulsory pre-court settlement of a dispute is only relevant for the decisions specified in clause 5, article 101.2 of the Russian Tax Code and, accordingly, it is not obligatory for other decisions, in particular, for the decisions to disallow a VAT refund.
The court practice on the issue in question may hardly be called uniform. At the same time, the practice which upholds the above approach prevails.

Arbitration courts point out that the obligation to apply to a higher-instance tax authority is only established with regard to decisions to hold/not to hold the taxpayer liable. The decision to allow/disallow reimbursement of VAT is of another legal nature and is an independent decision adopted subsequently at the end of a desk tax audit. This opinion is expressed, in particular, in Resolutions of the Federal Arbitration Court for the Moscow Circuit No. KA-A40/2329-10 dated 16 March 2010 and No. KA-A40/4006-10 dated 27 April 2010.

This position is also upheld by the Federal Arbitration Court for the Far Eastern Circuit (see Resolution on case No. А56-63877/2009 dated 10 March 2010 and Resolution on case No. А05-9076/2009 dated 23 December 2009), the Federal Arbitration Court for the West-Siberian Circuit (see Resolutions on case No. А70-8625/2009 dated 28 May 2010, on case No. А70-10587/2009 dated 31 May 2010 and on case No. А70-10586/2009 dated 3 June 2010)).

In our opinion, the fact that pre-judicial settlement procedure is not obligatory for the recovery of VAT is confirmed by the recent Resolution of the Presidium of the Supreme Arbitration Court on case No. 162/10 dated 20 April 2010. The court of highest instance pointed out that a decision to disallow recovery of VAT may be disputed separately from the decision to hold/not to hold the taxpayer liable. In this case, the decision to disallow the VAT refund was not appealed by the taxpayer to the higher-instance tax authority but, as it follows from the text of the Resolution, the Presidium of the Supreme Arbitration Court disregarded this fact when upholding the taxpayer’s claims.

At the same time, certain arbitration courts hold a different position on this issue (see Resolution of the Federal Arbitration Court for the Volga-Vyatka Circuit on case No. А43-22035/2009 dated 17 May 2010 and Resolution of the Federal Arbitration Court for the Urals Circuit on case No. А71-17495/2009 dated 9 June 2010). In its Ruling No. VAS-5647/10 dated 31 May 2010 the Russian Supreme Arbitration Court found that the case may not be referred to the Presidium and pointed out that the pre-court settlement was obligatory in similar cases.

In view of the contradictory court practice we recommend that you take into account the decisions of courts in the circuit wh ere this dispute will be examined.  This will rule out potential risks and will make it possible to recover VAT within the shortest possible timeframe.

Pepeliaev Group will monitor the situation and keep you informed on all the developments.

For further information, please contact:

in Moscow – Valentina Akimova, Partner, at: (495) 967-0007 or by v.akimova@pgplaw.ru; Pavel Kondukov, Leadig associate, at: (495) 967-0007 or by p.kondukov@pgplaw.ru

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