Federal Tax Service Against VAT Invoices in Foreign Currency Payable in Rubles

01.05.2009

Letter by the Federal Tax Service of the RF No. 3-1-07/674 of 24.08.2009 “On VAT administration of contracts stipulating settlements in conventional units”

Letter attempting to summarize everything the Federal Tax Service knows and has to say about issuance of VAT invoices in foreign currency and conventional units was sent by the Federal Tax Service to the Finance Ministry. The letter is devoted exclusively to the situation in which the settlements are between Russian companies and contractual terms provide for the payment in rubles of an amount equivalent to the price expressed in a foreign currency as of a certain date (typically, it is the date of payment).

The most revolutionary conclusion the Federal Tax Service arrived at is that VAT-invoices in foreign currency shall not be issued for ruble settlements. In substantiating this conclusion the authors try to find grounds in the Law “On Accounting” according to which assets and liabilities are booked in rubles and primary documents formalising the shipment of goods shall be in rubles as well. VAT invoice is in no way a primary document but it is drawn up on the basis of a primary document (e.g., a consignment bill). Accordingly, the conclusion is made that in a VAT invoice any amounts shall be denominated in rubles only.

Still, the letter by the Federal Tax Service recognizes currency denominated VAT invoices when settlements are made in a foreign currency (e.g., under a contract with a foreign company). But in this case the Law “On accounting” requires that primary documents are drawn up in rubles as well, dismissing the logic behind the Federal Tax Service’s letter.

We would like to emphasize that when the price is in a foreign currency, the VAT invoice in rubles is extremely inconvenient for both the supplier and the customer. After the payment has been made, the supplier has to adjust both the VAT invoices and the sales ledger. And the customer incurs VAT recovery problems: if the amount paid to the supplier differs from the one provided in the VAT invoice, the letter requires the customer to adjust the recovery by filing an adjustment tax return for the period of shipment.

VAT invoices in foreign currency eliminate the problems. In any case VAT invoices are posted to the sales ledger (at supplier) and purchases ledger (at customer) in rubles. Should there be any sum difference, the supplier does not need to correct its VAT invoice. Instead, he only needs to enter the difference into the sales ledger in the period within which the payment falls.

We consider it our duty to warn that this letter by the Federal Tax Service can act as the instruction to the tax authorities to audit foreign currency denominated commercial invoices entailing obviously unfavorable consequences – besides the improper form, taxpayers can be charged with a severe violation of the taxation object accounting rules (Article 120 of the RF Tax Code).

A practical solution to the problem can be the review of business processes so that shipment and payment fall within the same tax period. In this case no VAT invoice is issued at shipment (Tax Code has no penalties for non-compliance with the statutory period for a commercial invoice to be issued); when the payment has been received, ruble VAT invoice is issued to the customer for the amount actually paid. In this case neither the supplier nor the customer have to replace the VAT invoices already issued or to file adjustment tax returns.

Neither Unified Social Tax nor Personal Income Tax Are Payable on Golden Parachutes. Moreover, they are tax deductible

Letter by the Finance Ministry of the RF No. 03-04-06-01/208 of 12.08.2009
Letter by the Finance Ministry of the RF No. 03-03-06/1/464 of 14.07.2009

Russian Labor Code sets forth that when employment contract with an executive is terminated (unless it is terminated due to faulty acts (omission) by the executive), a compensation is payable to the executive in the amount specified in the employment contract and in any case of not less than three average monthly salaries.

Letters being considered have chased away the fears shared by the taxpayers that such compensations (extra remunerations) are taxable. Moreover, they can be deductible for corporate profits tax purposes.

One should admit that former executives are lucky: the Labor Code classifies the golden parachutes within the compensations (along with compensations for job-related accidents, occupational diseases etc.). Everything that is denoted by the Labor Code as a compensation is exempt by the Tax Code from the personal income tax and the unified social tax.

We would like to stress that when the compensation amount is specified directly in the employment contract, the whole amount is tax-exempt. Otherwise, the minimum compensation according to the Labor Code (three average monthly salaries) is recognized tax-exempt.

In the other of the letters being considered the Finance Ministry authorizes the deductibility of the compensations distributed to former executives. Now one only has to figure out how this deduction can be aligned with the provisions of Par. 1 Art. 252 of the RF Tax Code: expenses are recognised only if incurred for the purpose of income-generating operations.

One Can Try to Apply for a VAT Recovery in Subsequent Tax Periods

Letter by the Finance Ministry of the RF No. 03-07-11/188 of 30.07.2009

The dispute whether a taxpayer can apply for a VAT recovery in a subsequent period after the acceptance of goods and the receipt of the VAT invoice has a long history. Finance Ministry used to have a vague standing, Federal Tax Service would insist aggressively that a late recovery was impossible and adjustment tax return for an earlier period had to be filed, while courts of arbitration districts supported one day taxpayers and another day tax authorities.

The letter being considered does not draw a line but it is a pleasure to read for those who cannot or do not want to apply for a recovery in the current period and intend to carry it over. Dozens of such situations exist and the simplest is the following: in a period an organisation has input VAT exceeding its output VAT and it is reluctant to take desk audit. The least time-consuming solution is to carry over a share of the input VAT to a later period in which such an excess will not exist.

In the letter being considered the Finance Ministry outlined the time interval within which the taxpayer is entitled to recover the tax. The left border of the interval is the tax period in which the goods are accepted. The right border is 3 years later, i.e. 3 years after the end of the respective tax period in which the taxpayer became entitled to the recovery. Somewhere in the middle of the interval the VAT invoice is issued, but according to the Finance Ministry’s logic, even if it is received by the customer in the tax period in which the goods have been accounted, the interval span does not change and the recovery can be claimed in any of the tax periods within the interval.

Justices of the Presidium of the Supreme Court of Arbitration of the RF embarked on a similar standing in the resolution No. 692/09 of 30.06.2009. They specified that if the recovery was claimed in a return for a later period and not in the adjustment return for the period in which the taxpayer became entitled to the recovery, taxpayer retained the title to the tax benefit. The case in which the resolution was pronounced had arisen in the field of recovery of the input VAT on export transactions.

New Version of the Bankruptcy Law Is Prepared Extending the Opportunities for Financial Groups as Debtors

Ministry of Economic Development has drafted a new version of the bankruptcy law. Its title is “On the Financial Rehabilitation and Insolvency”. Thus, the priority has switched to the rehabilitation procedures and postponing to the extend possible of the proceedings in bankruptcy, i.e. the sale of the debtor’s assets.

Unlike the current version of the law which provides for a rather severe approach to the debtor, under the new version the debtor will be offered the opportunity to postpone debts by up to five years and to be released of a part of liabilities. The procedure of financial rehabilitation is much more liberal:

  • Leap frog transition to this procedure avoiding the supervision phase (7 months) is possible
  • Security (bank guarantee) by third parties covering 120% of the debtor’s liabilities is not required anymore
  • Financial rehabilitation period can be extended from 2 to 5 years (after the third year judicial approval shall be sought)
  • Moratorium against collection under enforcement documents is available as before
  • Creditor claims can be classified and class-specific arrangements are possible
  • Rehabilitation program can provide for the write-off of a part of liabilities (currently it is not available) or conversion into shares

Draft law focuses on the bankruptcy of companies within the same group. Bankruptcy proceedings against group companies can be consolidated into joint proceedings before one and the same court of arbitration. Common trustee in bankruptcy can be appointed for all the group companies concerned.

A principal novelty is the mechanism of cross-border bankruptcies the draft law provides for. Provisions governing such bankruptcies are similar to those implemented in the EU.