Lawyers of “YUST” won the “five per cent rule” dispute for Procter&Gamble in the SCA of Russia

Today, the Board of the SCA of Russia has revoked the ruling and the decisions of the Moscow District courts, which took the side of the tax authorities. In the court session, the tax authority’s position was called illegal and illogical.

The “five per cent rule”, as formulated in paragraph 9 of clause 4 of Article 170 of the Tax Code of the Russian Federation, permits the taxpayer to not keep the separate VAT register during the tax periods, when the share of total expenses on purchase, production and/or sale of goods (works, services), property rights, the operations of sale of which are not taxable, does not exceed 5% of the respective total expenses. All VAT amounts presented by sellers to such taxpayers are subject to deduction.

However, the tax authorities attempted to invent an exception to that rule. The City of Moscow Inter-District Inspectorate No. 48 of the Federal Tax Service checked the VAT tax declaration for the 1st quarter of 2010 of “Procter and Gamble” LLC, the Russian subdivision of Procter&Gamble, and decided that the company had illegally applied the “five per cent rule”, since the rule only included the companies which produce and sell goods or services, and “Procter and Gamble” LLC was not one of those. As a result, 309824 roubles of VAT (with the account of the correcting decisions of the Moscow Department of the FTS) were additionally charged to the Russian subdivision of Procter&Gamble.

P&G decided to obtain ruling the tax inspectorate’s approach invalid and resorted to arbitration (case A40-10076/2011). The company alleged the fact that it provided financial services by giving loans. The courts of three instances upheld the tax authority’s arguments, but P&G went on and filed a complaint to the supervision. The SCA of Russia heard the company’s arguments. Three Judges of the SCA (Vladimir Tumarkin, Marina Zorina and Anatoly Pershutov) concluded that the case was to be considered by the Board, “since the court acts on this category of disputes are inconclusive” regarding the application of provisions of paragraph 9 of clause 4 of Article 170 of the TCRF.

Igor Pastukhov, Advocate of the Firm, who represented the interests of P&G, said in the Board session that the tax authority’s conclusion that the company did not produce anything had been clearly illegal, since legislation stipulates that issuing loans is a service. He also called the tax inspectorate’s condition of obligatory separate VAT register on purchased goods “a clear lack of logic” contrary to the TCRF provisions.

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The SCA of Russia revoked all acts of the lower instance courts and ruled invalid the inspectorate’s decision to additionally charge 309824 roubles of VAT to P&G.

The publication on Pravo.RU is available here.