VAT refunds for borrowers in Russia

Russia

The Russian Tax Code provides for a fairly large number of circumstances in which VAT payers are exempt from payment. The exemption works so that the taxpayer pays VAT even if it is exempt from payment. Having made the payment the taxpayer is then able to set off the payments against incoming VAT, failing which it can claim a refund from the treasury. Through its decision the Constitutional Court has effectively decided that the taxpayer cannot set off or claim a refund if the VAT payment for goods or services was made using borrowed money which has not been repaid in full. Only upon repayment can the tax payer take any action to rectify its tax liability.

One of the key issues arising from this is a problem with tracing. Russian borrowers are not obliged to pay loan moneys into separate accounts. In the absence of any rule similar to the one in Clayton's Case, it will be impossible to trace whether or not a payment was made from loan moneys or from the borrower's other funds. Does the decision therefore mean that if a company has any debt, however small, it cannot set off and apply for a refund until the debt is repaid? The Constitutional Court does not make this clear. Furthermore, it does not specify whether the borrower can start making proportional set-off in the tax period following the repayment of the portion of the loan.

One of the primary issues is the legal effect of the decision. The Constitutional Court is the body in charge of ensuring that legislation, both parliamentary and secondary, complies with the Constitution of the Russian Federation. According to applicable law its decisions are final and bind the whole world and no further actions are required for the decision to take effect. At the same time the law does not impose a direct obligation upon the state authorities to apply and implement a decision of the Constitutional Court. Moreover, it requires the Government to introduce a bill into the State Duma repealing or amending the offending piece of legislation or clarifying its provisions.

In light of these provisions, as well as the fact that the statement in question was made obiter, it is unclear what legal effect the ruling will have. Furthermore, it is worthwhile mentioning that Judge A Kononov dissented and came to completely the opposite conclusion. To the best of our knowledge, to date no bills dealing with the matter have been introduced into the State Duma nor is any legislation clarifying the legal effect of the decision being drafted at the Ministry of Taxes and Levies. We expect, however, that as a matter of common practice the tax authorities and courts will be taking the ruling into account when deciding cases on VAT refunds.