THE SUPREME COURT OF THE RUSSIAN FEDERATION HAS EXPRESSED ITS APPROACH TO THE TAXATION OF COMPENSATION PAID IN CONNECTION WITH NON-CONTRACTUAL ELECTRICITY CONSUMPTION.
Tax Compliance informs that the Supreme Court of the Russian Federation has expressed its position on the case of Rosseti Kuban PJSC (case No. A40-13192/2016), which may give way to certain exemptions for taxpayers.
Background of the case
- During the audited period, Rosseti Kuban PJSC (hereinafter, the Company) identified non-contractual electricity consumption and collected compensation from the culprits based on acts of unaccounted consumption and calculations of the cost of non-contractual consumption (hereinafter, the "Compensation"). As a rule, such recovery took place in court, but in a number of cases violators paid the cost of non-contractual consumption voluntarily;
- The Company did not pay VAT on the Compensation because it believed that the money received was not related to the sale of electricity;
- The Compensations were accounted by the Company as non-operating income for corporate income tax purposes either at the time the court decisions on the award of the appropriate amounts entered into force, or on the date of recognition by the debtors (e.g., the date of full/partial payment).
Position of the tax authority
- Compensation is in fact payment for sold electricity, and therefore subject to VAT;
- Income for corporate income tax purposes should be accounted by the date of the acts of unaccounted electricity consumption.
Conclusions of the Supreme Court of the RF
- Compensations for electricity consumption without a contract are, as a rule, not subject to VAT. The exceptions are cases where:
(a) the consumer is known; and
b) the amount of actual electricity transmission is unambiguously established (the calculation method is not applied).
- Compensations are included in income for corporate income tax purposes:
(a) in the period in which the debtor acknowledges the debt; or
b) in the period when the court decision about the recovery of the appropriate sums comes into force.
Note: The dates of acts of unaccounted electricity consumption are irrelevant because they are not an indication that the debtor acknowledged the debt.
Tax Compliance Suggestions
The approach stated by the supreme judicial body of the Russian Federation requires a balanced legal assessment and elaboration by professionals, including taking into account potential tax risks associated with the deduction of "incoming" VAT.
In view of the above, we offer you qualified legal assistance in identifying potential tax reserves, supporting the process of clarifying tax liabilities and, if necessary, defending the interests of your organization before the tax authorities.
About the Author of the Article
Denis Kozhevnikov, Head of Tax Dispute Resolution Practice, has significant experience working for tax authorities (Interregional Inspectorate of Major Taxpayers) and major law firms (Vegas Lex, Bryan Cave Leighton Paisner LLP).
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