Alina Khammatova, a lawyer of S&K Vertical, spoke at the research and practice conference "Taxes-2018"of the publication Novyi Prospekt

24 december 2018

On December 12, Novyi Prospect together with the St. Petersburg State University held the research and practice conference for the business community, which was dedicated to the relevant topic of tax optimization.

At the conference, Alina Khammatova, a lawyer of S&K Vertical Ms., told the audience, who will actually bear the burden of paying the increased VAT. The essence of her speech is that the increased VAT will be paid by the weakest party to any contract: the contractor under a government contract; the consumer as for B2C; and, as for B2B, the parties shall arrange it between them.

Please find bellow Alina's detailed report.

Burden of two percent: who will pay the increased VAT

Everyone knows that, from January 1, 2019, the sale of goods, works and services shall be subject to the value-added tax at the rate of 20 percent instead of 18 percent.

The legislative innovations raise a number of very important questions of market players, the key one among which is who of the participants to civil relations (seller or buyer) shall bear a "risk" of the increase in VAT by 2 percent, if the contract price is agreed upon based on the VAT rate of 18 percent. Let's go into the issue.

Many companies have started to prepare for the forthcoming changes beforehand. A small questioning of the fellow lawyers made it possible to detect typical conditions as to arrangement of the contract price, taking into account the changes in the tax rate in 2019: some parties reached a consensus on the increase in the price as of the first of January, other parties reached an agreement about the wordings "applicable VAT" or "VAT at the rate valid as of the time of sale of goods/signing of a certificate".

However, the simple truth is that all parties did not manage to come to an agreement amicably.

To settle this issue, two of the explanations of the official authorities should be considered.

Firstly, Informational Letter of the Ministry of Finance of Russia No. 24-03-07/61247 dd August 28, 2018 "Regarding the issue of a change in contract prices after the increase in the value-added tax rate".

So, the Ministry of Finance states that, generally, prices of contracts, executed before the increase in the VAT rate, shall not be changed due to such an increase. It follows from the above that, in government contracts, the risk of the increase in the VAT rate should be generally imposed on the buyer or the contractor.

Secondly, Letter of the Federal Tax Service of Russia No. SD-4-3/20667@ dd October 21, 2018 "Regarding the procedure of application of the VAT rate during the transition period", intended for settlement of issues on the procedure of application of Federal Law No. 303-FZ dd August 03, 2018 "On making amendments to certain legislative acts of the Russian Federation on taxes and levies". The brief wordings used by the Federal Tax Service of Russia do not give clear answers to the question and, according to the text, mean the following:

This means that, in any case, the seller shall pay 20 percent to the budget, issue to the buyer an invoice stating the VAT amount at the rate of 20 percent, but the matter of settlements between counterparties is left for the parties' disposal.

It is difficult to argue against the stated position of the Federal Tax Service of Russia as the matters of agreement of the contract price are out of the scope of public regulation.

However, how should the situation with the agreed contract price at the 18 percent tax rate and the need for sale of goods in 2019, where it is impossible to reach an agreement amicably, be settled?

We think that the possibility of a change in the price should be considered from three basic positions.

First alternative: the burden of the VAT increase is imposed on the buyer.

The said conclusion is based on the provisions of Article 168 of the Tax Code of the Russian Federation (hereinafter referred to as the Tax Code). So, Part 1 of the said Article states that, in selling goods (works, services), transferring property rights, the tax payer shall charge on the buyer of such goods (works, services), property rights the relevant tax amount in addition to the price of such goods (works, services) sold.

Thus, the total amount, to be paid by the buyer, consists of the contract price and VAT, charged in addition to it at the relevant rate. Moreover, the seller has a public legal duty to charge on the buyer VAT at the rate, valid at a relevant period. Therefore, the total contract amount will increase with the increase in the VAT percent rate.

The said interpretation of the provisions of Article 168 of the Tax Code of the Russian Federation (with regard to the issue under review) takes into consideration the economic nature of VAT as an indirect tax, and, therefore, the risk of increase in the rate shall be borne by the buyer.

However, the approach, described in this clause, is in direct contradiction to the existing practice of the Supreme Court of the Russian Federation as to application of the provisions of Article 168 of the Tax Code.

Let's consider the second approach, where the burden of the increase in VAT should be borne by the seller.

Generally, in private law relations, the risk of the rise in the cost of goods and the work at a loss was generally borne by the seller, for example, in the event of an increase in the cost of materials and other surrounding circumstances, increasing the cost of goods. Perhaps, the risk of adoption of the law on the increase in the VAT rate should be classified as such circumstances.

Ruling of the Supreme Court of the Russian Federation No. 308-ES17-9467 dd November 23, 2017 under Case No. A32-4803/2015, in which the court comes, through the prism of the freedom of contract, to the conclusion that the risk of determination of the price, in the event of incorrect determination of the tax rate, should be, generally, imposed on the liable party, i.e. tax payer, may serve as an indirect confirmation of the above.

Moreover, Clause 17 of Decree of the Plenum of the Supreme Arbitration Court of the Russian Federation No. 33 dd May 30, 2014 "Regarding certain issues faced by arbitration courts in considering cases, related to recovery of value-added tax" states that the contract price always includes the VAT amount. It appears that, from the perspective of the buyer, it is of no importance how the contract condition is formulated: for example, "RUB 118" or " RUB 118, including 18 % VAT", as the buyer shall be only due the pre-agreed amount to the seller.

At the same time, when using the said explanation in the context of the issue "regarding two percent", it should be noted that it is unlikely that, in developing it, the Supreme Arbitration Court of the Russian Federation meant the risk of adoption of the law on the increase of the tax rate.

One more argument in favor of the position on the need to impose the risk of the increase in the VAT rate on the seller is the existing court practice on the issue of a possible change in the contract price in the event of a change in the taxation method by the contractor from the general regime to the simplified one. In such cases, the courts satisfied claims on recovery of the cost of unpaid works at the rate of 18 percent, with a reference to the inalterability of the contract condition (for example, the case of UltraStroy LLC and the Administration of the municipal district "Village of Ust-Omchug" ( А37-662/2014), the case of Garant LLC and the Administration of the city district "City of Dagestanskie Ogni" ( A15-3160/2016).

There is also the third alternative, where the burden is borne by the buyer, if VAT is not designated in the contract price. This alternative may be deemed a compromise one, as the possibility to increase the contract price depends on the conditions for determination of the price, agreed upon by the parties.

Let's assume that the contract conditions are formulated as follows: "the price of goods shall be X roubles plus VAT". In this instance, the parties have agreed upon the price that is not specified, but to be specified: X roubles + VAT.

Therefore, if the VAT rate changes, the buyer may not be protected by the reference to the agreement and inalterability of the price condition. The price will be determined in accordance with the formula approved by the Parties. However, this approach may be denounced in court under pressure of the opponent concerning interpretation of the contract as to the fact that the price is specified or to be specified.

Having analyzed the potential alternatives of progression of events, it may be concluded that the most probable scenarios of settlement of conflicts will be those, where the burden of the VAT increase should be borne by the seller or the buyer, if the VAT is designated in the contract price. However, certainly, first of all, it is necessary to wait for explanations of the legislator and the court orders of the Supreme Court of the Russian Federation.

All events

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