The Russian Constitutional Court has upheld Sony Mobile’s appeal, which was prepared by lawyers from Pepeliaev Group

Russia's Constitutional Court has held to be invalid the requirement of the Russian Tax Code that a taxpayer should include in its tax base for VAT not only the cost of goods (work, or services) sold, but also the amount of an insurance payout the taxpayer has received because the buyer has breached its obligation to pay for the goods (work or services). 

The Constitutional Court stated that if a taxpayer has calculated (paid) tax on an operation to sell goods (work or services), this requirement is lacking any economic justification and is at odds with the principle prohibiting double taxation. The Constitutional Court published the corresponding conclusions in its Resolution No. 19-P dated 1 July 2015. 

In 2013, the tax authorities accused Sony Mobile of failing to include in its returns insurance payouts received by way of compensation when it had not been paid for goods it had supplied. The amount charged additionally taking account of penalties and default interest was in the region of RUB 50 million. 

In the appeal, Pepeliaev Group on behalf of the company put forward several arguments to justify its position that, in its case, constitutional tax principles had been violated. Particular emphasis was placed on the fact that the rule of the Tax Code that was being appealed against led to double taxation. The company also pointed that such taxation becomes discriminatory in relation to insurance as a method of securing property interests. In other cases (such as when a bank guarantee is enforced), obtaining payment for goods sold on credit does not entail similar tax consequences. Therefore, the provision of the Tax Code that is being appealed against can be said to violate the principle of tax neutrality.

Sony Mobile was represented by Pepeliaev Group senior associate Vlaimir Voinov, who noted that situations involving double taxation are common in practice. As a result, the Constitutional Court’s decision could also be significant in terms of developing court and administrative decisions in Russia. As he sees it, the principle of tax neutrality is no less important. “Tax legislation should not have a material influence on a taxpayer’s selection of different methods for doing business which lead to the same result,” commented the lawyer. “This is because tax legislation does not regulate the procedure or conditions for taxpayers to carry out financial and business operations.”

Meanwhile, Pepeliaev Group senior associate Natalia Faizrakhmanova, who was also involved in preparing the appeal, believes that victory in the Sony Mobile case has shown once again that turning to Russia's Constitutional Court can be an effective tool for mounting appeals. Companies should not be afraid to go down this route. 

Pepeliaev Group is a leading Russian law firm offering the full range of legal services in all regions of Russia, most former Soviet countries and abroad. Over 160 lawyers in Moscow, St. Petersburg and Krasnoyarsk, as well as in Vladivostok and Yuzhno-Sakhalinsk (within the alliance with Russin & Vecchi), provide legal assistance to over 1,500 companies operating in various industries. 50% of these are international corporations implementing long-term investment projects in Russia.