Commercial Invoices for Transactions Involving Foreign Currency

Oxana Kovaleva
Senior Attorney
Capital Legal Services

Companies working in Russia often establish contract prices in a foreign currency or “conditional units,” which are the ruble equivalents of the foreign currency, and with the possibility for the payment to be made in the appropriate amount in rubles. This raises the question of how to indicate correctly the amounts in commercial invoices issued by suppliers to purchasers — in the foreign currency, conditional units or in rubles? The commercial invoice is a document sent by the supplier to the purchaser following delivery of goods, completion of works or rendering services and may serve as grounds for the purchaser to obtain value-added tax (VAT) deductions.

Clause 7, Article 169 of the Tax Code applies when selecting a currency to be indicated in the commercial invoice. This regulation envisages the opportunity to issue a commercial invoice in foreign currency in the event that the contractual terms and conditions are expressed in the form of foreign currency. The law, however, does not clarify when the obligations are deemed expressed in foreign currency, which gives both taxpayers and tax inspectors a lot of room for interpreting this Tax Code regulation. For obvious reasons, the opinions of businessmen and tax authorities often vary, resulting in numerous tax disputes.

In particular, companies believe that they are entitled to issue a commercial invoice in foreign currency in all cases when the transaction price is established in foreign currency or conditional units, even if the payment is to be made in the ruble equivalent, while the tax authorities, on the contrary, are of the position that commercial invoices may be issued in foreign currency only in the event of settlements under an agreement being carried out in the foreign currency and not in rubles. This can be seen in the Letter No. 3-1-07/674 of the Federal Tax Service, dated Aug. 24, 2009.

It is important to understand that in Russia few companies may make payments in foreign currency because of restrictions in the currency legislation. Therefore, the approach of the tax authorities, in fact, bans the issue of commercial invoices in foreign currency if payments under the agreement are to be made in rubles. Such an approach may result in claims against purchasers who apply for VAT deductions on grounds of commercial invoices issued in a foreign currency or conditional units.

Suppliers and purchasers are not always ready to assume these tax risks. They prefer not to risk conflict with the tax authorities and do not issue commercial invoices in foreign currency, but rather in rubles. However, in such cases they face the need to adjust the initial commercial invoices.

The ruble equivalent as of the date of payment for the goods may differ from the ruble equivalent as of the date of registering the acquired goods in the accounting books because of a change in exchange rate of the foreign currency or conditional units. For tax purposes, the supplier and purchaser should account for the occurred difference following payment for the goods.

When issuing a commercial invoice in rubles, the supplier should also issue an additional negative or positive commercial invoice for the amount of the respective exchange gain or loss. Keeping in mind the unambiguous position of the tax authorities pertaining to the illegality of issuing “negative” commercial invoices (credit notes), purchasers or suppliers may face tax risks related to adjustment of the VAT tax base for previous periods. It is a Catch-22 situation — it does not matter how you fill out the commercial invoice because you always face both technical difficulties in adjusting the tax base and documentation, as well as the related tax risks.

The Finance Ministry had seconded the position of the Federal Tax Service and specified that a financial obligation could be in the form of foreign currency only in the event that the use of foreign currency in the Russian Federation as a means of payment under a financial obligation is allowed on the terms and according to the procedure established by the law. Therefore, taxpayers should be entitled to issue a commercial invoice in foreign currency if the foreign currency is used as the means of payment (Letter No. 03-03-06/1/204 of the Finance Ministry, dated April 2, 2009).

As a result, taxpayers had to act at their own risk and tempt fate by filling out commercial invoices in either foreign currency, rubles or conditional units.

It should be also noted that despite the negative opinions of financial and tax agencies, in the past Russian courts have taken the taxpayers’ side and declared claims of the tax authorities illegal (Resolution No. KA-A40/13691-09 of the Moscow Federal Arbitration Court, dated Dec. 14, 2009; Resolutions No. A56-5204/2007 and No. A56-16847/2007 of the Northwest Federal Arbitration Court, dated Jan. 11, 2008, and April 8, 2008, respectively; Resolution No. F08-951/2007-386A of the North Caucasus Federal Arbitration Court, dated Feb. 26, 2007).

However, the necessity to assert rights in court, whether successful or not, entailed financial and time expenditures that the majority of companies did not have time for.

Finally, the situation changed and, to the benefit of taxpayers, the Finance Ministry in its Letter No. 03-07-09/21, dated April 13, 2010, amended its position and declared that when settlements are in rubles, issue of commercial invoices in foreign currency is legal. As concerns transactions where the price is indicated in foreign currency but payments are made in rubles, the Finance Ministry clarified that the Tax Code contains no regulations prohibiting issue of commercial invoices in a foreign currency (Letter No. 03-07-09/21 of the Finance Ministry, dated April 13, 2010).

This Finance Ministry clarification is binding for tax authorities, and even if they try to raise objections it still releases taxpayers from the need to pay a penalty or fine.

Therefore, with the Letter No. 03-07-09/21 of the Finance Ministry, dated April 13, 2010, suppliers who have specified a transaction price in foreign currency may freely issue commercial invoices in foreign currencies without misgivings, and purchasers may apply for VAT deduction even if settlements under the agreement are in rubles.