BGP Litigation associate Natalia Yurchenkova speaks with Pravo.ru about key trends and approaches in the practice of the Economic Disputes Chamber of the Supreme Court in tax disputes in 2016
23.01.2017

"Of note was the EDC's calling upon the lower courts to carry out an economic analysis when considering tax disputes, says Natalia Yurchenkova, a lawyer at BGP Litigation.

For example, in the Danone Russia JSC case (No. А32-9413/2014) the question of whether provision of a discount affects the VAT base was considered. The Supreme Court ruled that discounts must be reflected in the calculation of earnings and, if necessary, earnings are to be adjusted in the tax period in which the sale of the goods (work, services) is booked. "This is a good example of application of the principle of economic analysis of law, which comes from the Anglo-Saxon legal system", says Yurchenkova. "This landmark decision by the chamber closes the chapter on many years of tax implications when bonuses are paid retroactively", she added.


When determining the tax base, adds Natalia Yurchenkova, discounts must be reflected in the calculation of earnings and, if necessary, earnings are to be adjusted in the tax period in which the sale of goods (work, services) is booked. The finding is consistent with the legal approaches taken by the RF Supreme Arbitrazh Court in decrees of the Presidium of the RF Supreme Arbitrazh Court No. 11175/09 of 22 December 2009 (the Dirol Cadbury case) and No. 11637/11 of 7 February 2012 (the Leroy Merlin Vostok case).


In addition to the conduct of an economic analysis by the courts when considering tax disputes, Natalia Yurchenkova noted two other trends. 


One is a formalistic approach to interpretation of the Tax Code. While the ruling of the Economic Disputes Chamber of the RF Supreme Court No. 308-KG16-10862 dated 1 December 2016 (the Aquapark LLC case) may be of little consolation, Natalia Yurchenkova says, the Supreme Court does sometimes rule against the tax authorities on the grounds that a taxpayer and its customers are not related parties. This clearly demonstrates that formal provisions of the tax legislation are being applied, even if only to a limited extent. 

In the above case, the BGP Litigation lawyer notes, the court ruled that if the parties are not related then the tax authority does not have the right to review prices for tax purposes. In other words, it is wrong to attribute to the tax authorities a broad power to review the price of any transaction.

Before the Supreme Court the tax inspectorate was asked whether there are any limits on the inspectors' powers and whether prices can be controlled, as was the case prior to 2012. Counsel for the tax inspectorate answered that the sheer number of deviations from the market price gives grounds for this. After all, a company could obtain an unjustified benefit. And this argument has been successfully applied by tax inspectors previously. 

In the Stavgazoborudovanie LLC case (No. А63-11506/2014), notes Natalia Yurchenkova, the judges also took a formalistic approach, as the mere fact that parties are related cannot be construed as proof that a taxpayer obtained an unjustified tax benefit.

A formalistic approach can also clearly be seen in the case of the Magadanenergo energy and electrification joint-stock company (Supreme Court ruling No. 303-KG16-657 dated 27 June 2016), continues the expert, where it was found that the taxpayer had the right to bring legal action seeking a refund (compensation) of excess taxes, penalty interest and fines that had been levied, irrespective of whether the non-normative acts of the tax authority based on which the amounts in question had been recovered were challenged or not. Where a taxpayer files an amended tax return that does not reduce the amount of tax to be refunded, the interest provided for under paragraph 17 of Art. 176.1 of the RF Tax Code is not charged. The Supreme Court issued the clarification that the interest calculation mechanism set out in paragraph 17 of Art. 176.1 of the RF Tax Code, referred to by the tax authority, does not specify the grounds for charging the interest, bypassing the desk tax audit procedure. The judges found that such interest is, in terms of its legal nature, compensation for the budgetary losses attributable to refunds of excess taxes paid. But if an amended tax return leads to a higher amount of tax to be refunded there is no budgetary loss. It is only through an audit that the tax authority can determine whether a tax refund was too large or not. If it was, then a decision is taken to recover interest on the excess VAT that was refunded. Accordingly, there are no grounds to charge the interest in dispute. 

Setting aside the decisions of all the lower courts, the Economic Disputes Chamber of the Supreme Court in ruling No. 307-KG16-7941 of 8 November 2016 in case No. А21-7635/2014 found that the fact the taxpayer did not apply the property tax exemption in question in 2006 cannot in and of itself trigger an extension of the period established by law during which the preferential tax rate is available.


Another trend cited by Natalia Yurchenkova is the principle that "reality is more important than due care and circumspection, or the fight against the reassessment of evidence by the cassation courts".

The BGP Litigation lawyer noted that if due care and circumspection is shown, reality is still more important (ruling of the Economic Disputes Chamber of the RF Supreme Court No. 306-KG15-19406 dated 5 February 2016 (case No. А40-77894/2015) and No. 305-KG16-4155 dated 20 July 2016 (case No. А40-87379/2014)). The same position ("reality is more important") can be seen in the practice of the RF Supreme Arbitrazh Court (for example, decree of the Presidium of the RF Supreme Arbitrazh Court No. 2341/12 dated 3 July 2012 in case No. A71-13079/2010-A17). 

Natalia Yurchenkova notes that in case No. А40-87379/2014 the RF Supreme Court clearly found that a considerable amount of significant evidence indicating that a taxpayer acted with due care and circumspection is irrelevant if the transaction itself is not real. 

In ruling No. 305-KG16-10399 of 29 November 2016 in the Tsentrregionugol LLC case the Supreme Court went even further in framing the reality criteria. In that case the taxpayer submitted evidence of the subsequent sale of the goods to end consumers and of transportation of the coal. The court of first instance and appellate court ruled in favor of the taxpayer, rejecting a handwriting analysis submitted by the tax inspectorate which was found to contain material irregularities. The cassation court, however, ruled in favor of the inspectorate, accepting the handwriting analysis as evidence and using the argument that the necessary conditions were not fulfilled for the disputed counterparty to engage in business operations. 

Reviewing the case and finding in favor of the company, the EDC of the RF Supreme Court ruled that neither contradictions in the evidence of shipment of the goods from producer to taxpayer (which did not, however, disprove delivery of the goods to the taxpayer) nor the fact that the parties did not perform the transactions can in and of itself constitute grounds for imposing the relevant negative consequences on the taxpayer. 


Natalia Yurchenkova also summarized the most notable cases to reach the EDC.

1) Once again on price control (ruling in favor of the taxpayer) 
In the Stavgazoborudovanie LLC case (No. A63-11506/2014) the court again clarified whether tax inspectorates can exercise price control in respect of transactions between related parties. Prior to this EDC ruling the situation was unclear. Regional tax inspectorates cannot check transactions between related parties, and the mere fact that parties are related is not a valid reason to impose additional tax, the Supreme Court clearly found. A separate issue is that tax officers often take another tack, seeking to prove that an unjustified tax benefit has been obtained. 

2) Not price control, but an unjustified tax benefit (ruling in favor of the tax authority) 
When the market value of property is much higher than the price agreed in a contract, tax officers may impute an unjustified tax benefit to the companies and recalculate their tax liabilities. The transfer pricing rules do not apply, because such transactions are not controlled transactions. The highest courts ruled in favor of the tax inspectors in the high-profile dispute involving the Minaevskiy Business Centre (RF Supreme Court ruling No. 305-KG16-4920 dated 22 July 2016 in case No. A40-63374/2015). 

3) Back taxes follow the assets (ruling in favor of the tax authority) 
Additional taxes levied on the basis of a tax audit may be recovered under Art. 45 of the RF Tax Code from a company that does not have any formal signs of relatedness envisaged by Art. 105.1 of the RF Tax Code, i.e., against the new owner of a business which has acquired its assets. This was the position taken by the court of first instance and appellate court in case No. A40-77894/15. It was also upheld by the Economic Disputes Chamber of the Russian Federation Supreme Court (ruling of the EDC of the RF Supreme Court No. 305-KG16-6003 dated 16 October 2016). In the wake of this precedent it is difficult to assess the chances of saving a defaulter's business.


Summarizing whether the EDC is managing to strike a balance between the Federal Tax Service and taxpayers, Natalia Yurchenkova noted that when considering tax disputes the Economic Disputes Chamber of the RF Supreme Court applies the approaches taken by the RF Supreme Arbitrazh Court and also formulates some of its own. It cannot be said that the trend is negative, as there have been rulings in favor of taxpayers as well, she notes.


The full article (in Russian) is available here: "Итоги 2016 года: главное в налоговых спорах экономколлегии Верховного суда".    

Юристы BGP Litigation будут рады оказать консультацию
и ответить на ваши вопросы

News