Pepeliaev Group has successfully defended a major foreign bank in a case concerning the deduction of expenses relating to futures transactions for profit tax purposes

At the end of November 2015, a tax authority handed down a decision based on the results of a field tax audit of a foreign bank. The authority went back on a point that had previously been demonstrated in terms of expenses relating to futures transactions being legitimately deducted from the tax base for profit tax. Including fines, the amount claimed was more than RUB 300 million.

Pepeliaev Group represented the taxpayer through senior partner Ivan Khamenushko PhD and senior associate Lyudmila Merkulova PhD.

At the stage of the administrative challenge to the tax authority's decisions, Pepeliaev Group's client successfully put forward a number of arguments to substantiate its position that the expenses were deducted legitimately and to justify the procedure by which it had accounted for the futures transactions. Thus, the fact that parties to a transaction are related is not in itself a reason to challenge whether expenses under the transaction are economically justified. It is only one of the grounds for control over prices. Moreover, the conclusions of the tax inspectors were based on their substituting a challenge as to whether transactions were genuine in place of checking whether they were economically justified (what the business purpose was). Further, the tax authority also wrongly concluded that completed transactions were inefficient or economically unjustified. This was because, when the tax inspectors determined the final financial result, they failed to take into consideration a substantial part of the income the company generated in the form of an unrealised exchange rate difference. The Russian Central Bank has confirmed that this may be taken into account.