Taxation of Incentive Payments and the New Trade Law
- By Valentina Akimova
- Mar. 23 2010 00:00
Rest assured — the new law on the basis of the state regulation of trade (the “Law”) does not directly affect the taxation of income and expenses of contracting parties resulting from the payment of remuneration (granting of discounts). The issue, however, does have its own specifics.
Expenses on the payment of remuneration stipulated in Article 9 (4) of the Law should be recorded by the supplier as non-sale expenses according to Article 265 (1) (19.1) of the Tax Code. The buyer (retail network) should record the remuneration obtained as nonsale income according to Article 250 (1) of the Tax Code.
Even if the paid remuneration exceeds 10 percent of the price of the purchased foodstuffs, the taxation of expenses will remain unchanged, including taxation of amounts in excess of the maximum remuneration stipulated by the Law. The supplier shall be entitled to deduct the whole amount of expenses actually incurred, if the nature of such expenses is in compliance with Article 252 (1) of the Tax Code. When calculating the profit tax, a taxpayer is entitled to deduct any expenses that are economically justified (substantiated), confirmed by supporting documents and aimed at generating income. Since the remuneration is paid by the supplier as an incentive for the buyer to purchase more goods, such expenses are economically justified and directly linked to the generation of income.
The statement that even in excess of the maximum remuneration stipulated by Article 5 (4) of the Law the taxpayer does not forfeit his right to reduce the taxable income by the whole amount of remuneration is based on the fact that the terms of taxation, including those that restrict the taxpayers’ rights, may only be established by tax legislation.
By virtue of Article 1 (1) of the Tax Code, the Law in question is not a tax law. This means that any restrictions imposed by the Law or any breach thereof does not entail any tax implications, unless the same are explicitly stipulated by tax laws. At present, the Tax Code does not stipulate any such implications.
This approach is upheld by state arbitration case law (Resolutions No. KA-А41/5145-09 of June 11, 2009; No. KA-А40/5494-08 of June 23, 2008; No. KA-А40/2403-09 of April 6, 2009, of the Arbitration Court for the Moscow Circuit).
In the current commercial practice, parties to supply contracts often stipulate remuneration (premium or bonus) or discount for the discharge of certain contractual terms. Nevertheless, neither civil nor tax legislation defines or formulates the difference between the remunerations and discounts, while practice has established the legal differences between those two types of incentives. A discount is granted for the performance of certain contractual terms and involves a change (reduction) in the price of goods, whereas remuneration is also paid for the fulfillment of certain terms and conditions of a contract but does not affect the price of goods.
Such a difference directly affects implications of the sale of goods from the perspective of VAT.
According to Article 154, 166, and 168 of the Tax Code, the VAT base is determined as the value of goods sold. According to Article 162 of the Tax Code, the tax base comprises the income relating to payment received for the goods.
Taxpayers believe that the VAT base should be adjusted for both the supplier (reduced) and buyer (increased) only if a discount is granted and if it follows explicitly from the terms of the contract that such a discount reduces the price of the goods. In this case, it is irrelevant when the discount was granted, whether at the time of the sale or after the execution of certain contractual terms. If the remuneration is paid and it follows directly from the contract that the parties did not intend to change the price of goods, then the VAT base should not be adjusted by any of the parties to the transaction.
Taxpayers often have disputes with tax authorities to this effect. We believe that the norms set forth in Clause 4 of this article, whereby the remuneration is included in the price of the contract but not in the price of the goods, could contribute to the resolution of such disputes. From a tax perspective, this means that the settlements relating to the payment of remuneration are attributable to settlements under the contract but not settlements for the goods sold. Consequently, they do not affect the VAT base, which is formed by the value of the goods sold.
The taxpayer is entitled to use this norm of the Law invoking Article 11 (1) of the Tax Code stating that institutes, notions and terms of civil, family and other areas of Russian legislation referred to in the Tax Code are used with the same meaning as with those areas of legislation, unless the Tax Code stipulates otherwise.
We believe that the norm contemplated in Article 9 (4) of the Law may, to a certain extent, clarify the discussion that took place after the Supreme Arbitration Court (the “SAC”) had issued Resolution No. 11175/09 of Dec. 22 , 2009, on the Dirol-Cadbury case. The court concluded that, “irrespective of how the parties to a distribution agreement establish a system of incentives (by the granting of a discount that determines a possible reduction in the base price of the product indicated in the contract or the granting of a bonus as additional remuneration or reward payable by the seller to the buyer for the discharge of the transaction terms) and also irrespective of the procedure for granting discounts and bonuses (remittance to a bank account, offset against an advance payment or reduction in debt), when calculating the tax base, the amount of the proceeds shall be determined with due account of the discounts.”
To date, law enforcement practice has developed a clear understanding that the tax implications for VAT purposes depend on the agreement between contracting parties as to how the incentives should affect the price of the goods:
• Discounts are payments that reduce the price of goods irrespective of when they are granted. Consequently, they reduce the VAT base.
• Remuneration, premiums and bonuses do not reduce the price of goods and constitute additional incentives that are not related to settlements for goods sold.
Some specialists believe that by making such a statement, the SAC has made discounts, premiums and bonuses equal for VAT purposes.
We are of a different opinion. A literal interpretation of this wording allows us to conclude that the SAC acknowledges the right of parties to a supply contract to use different ways of remunerating their buyers for the discharge of specific contractual terms — through a system of discounts or through a system of remuneration (premiums or bonuses).
Still, irrespective of the type of incentive agreed for buyers in the contract, “the amount of the proceeds shall be determined with due regard to the discounts.”
In other words, the bonuses, additional incentives and premiums are not deducted for VAT purposes during the calculation of the tax base and proceeds from the sale of goods, notwithstanding the fact that they are also a sort of incentive payable to the buyer for the execution of specific contractual terms.
To justify its position, the SAC refers to the norms of the Tax Code prescribing how the tax base should be formed with due account of all settlements for the goods and changes that may reduce or increase the tax base or, in other words, the price of goods. However, the SAC does not refer to the rule of law saying the tax base should include all of the taxpayer’s income and expenses under the contract, rather than just the settlements relating to payment of the price of goods.
The new law may clarify the issue. As noted before, according to Article 9 (4) of the Law, a remuneration payable to the buyer for the discharge of the purchase volume terms affects the price of the contract but not the price of goods.
The Law entered into force quite recently. This does not mean, however, that the “price of goods” and “price of contract” have been distinguished only since its enforcement. This norm of the Law only fixes the general understanding formed in practice that these notions are different and the “price of contract” is a broader concept than the “price of goods.”
For tax purposes, this means that the VAT base should only include and be adjusted with regard to the value of the goods sold, which is based on the price agreed on by the parties with account of all adjustments to this price envisaged by the contract.
Other settlements between the parties that affect the price of the contract but not the price of goods are not taken into account for the calculation or adjustment of the tax base.
In other words, remuneration (premiums or bonuses) for the execution of specific contractual terms that does not change the price of goods will not affect the VAT base of the supplier or the buyer. Such a conclusion is in line with established state arbitration.