Many accountants are wondering whether the penalty is calculated with or without VAT, how to correctly determine its size and which regulatory document to refer to in order to avoid further penalties from regulatory authorities.
Two answers can be given to this question, based on completely opposite points of view of specialists and officials:
- Value added tax is charged on collection, since the tax base for it is made up of all amounts that are associated with payment for sold products (clause 2, clause 1, article 162 of the Tax Code of the Russian Federation).
- VAT is not charged due to the fact that, according to Art. 331 of the Civil Code of the Russian Federation, the agreement on collection is an independent document of title, separate from the main contract, and collection is not directly related to the sale of goods (Letter of the Ministry of Finance of Russia dated 06/08/2015 No. 03-07-11/33051).
Let's look at each position in more detail.
The first point of view of officials is that the penalties that the seller receives from the buyer for late payment are directly related to payment for the goods, and therefore they must be included in the tax base for value added tax. This position is confirmed by Letters of the Ministry of Finance of Russia No. 03-07-11/311 dated 08.17.2012, No. 03-07-11/1 dated 05.18.2012 and No. 03-07-11/222 dated 09.11.2009, but at the moment no There is not a single judicial precedent to support this point of view of experts. According to the Ministry of Finance, penalty obligations are determined in the terms of the contract and, in fact, act as one of the pricing tools for goods sold, therefore they must be included in the tax base (Letters of the Ministry of Finance of Russia No. 03-07-11/64436 dated 09.11.2015, No. 03 -07-15/6333 dated 03/04/2013).
As for the second position, officials, in response to the question whether the penalty is subject to VAT or not, argue that the penalties received by the seller are sanctions imposed on the buyer for violating his obligations, that is, payment terms. That is why fines and penalties have nothing to do with the sale of products and should not be included in the tax base (Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated 02/05/2008 No. 11144/07). It is this position that answers the question of whether a penalty based on a court decision is subject to VAT. There are many official court decisions confirming that value added tax should not be taken into account when calculating penalties.
To date, disputes continue, and experts cannot give an unambiguous and legally enshrined answer to this problem.
Which position should a taxpayer organization choose?
Each institution must independently decide whether or not to include penalties in the tax base for value added tax. If the penalties received are in no way related to the sale of goods, works or services, then VAT is not charged on the penalty under the contract. If the manager has a different opinion, then the tax should be taken into account when calculating penalties and fines.
In any case, management needs to reflect its position in the accounting policy, justifying in detail the chosen method of accounting for sanctions.
Supplier companies, when deciding whether to include in the VAT base amounts from fines for violation of contract terms received from buyers, will have to take into account not only legal norms, but also court decisions.
Companies often have to pay penalties, fines, and penalties for violating the terms of contracts. Are such sanctions subject to VAT?
Sanctions for transactions not subject to VAT
The Russian Ministry of Finance has clarified that the amounts of money received by the seller of goods (works, services) from the buyer for violation of contractual obligations are classified as amounts associated with payment *(1). Therefore, such amounts are included in the VAT base. In this case, the seller registers invoices issued in one copy in the sales book * (2).
The fee for issuing a loan and penalties for early repayment are considered as funds associated with payment for services for providing a loan. Such services are exempt from VAT*(3). Therefore, the amount of the commission for issuing a loan and penalties for its early repayment are not included in the calculation of the VAT base. Let us note that this position of the department is well-established. Previously, the Ministry of Finance of Russia explained that the money received by the seller of securities from the buyer for the latter’s violation of the payment obligation should be considered as related specifically to the payment for securities, sales transactions of which are not subject to VAT *(4). That is, the money received by the buyer of securities from the seller for violating his sales obligations is also not included in the tax base.
Tax officials indicate in their letters that reimbursement by the tenant for the cost of ongoing repairs that have not been made is not recognized as the performance of work or the provision of services. Consequently, upon receipt of the amounts of the specified compensation, the lessor does not become subject to VAT *(5). At the same time, he does not have any grounds for issuing invoices indicating the amount of VAT * (6).
Sanctions for the buyer from the supplier
According to the explanations of the tax authorities, VAT is levied on amounts associated with payment for goods sold, work performed, services rendered, including penalties received by the supplier from the buyer for the latter’s violation of its obligations (payment) * (7). However, the provisions of the Tax Code *(8) do not apply when the buyer receives penalties for improper performance of the contract by the supplier. In particular, for late delivery of goods, for poorly performed work (services provided), for inappropriate assortment, etc. This group of sanctions also includes fines paid by the buyer to the supplier for late acceptance of goods received from him.
Analyzing this position of the tax department, we can come to the conclusion that penalties received by the buyer from the supplier are not subject to VAT.
The legitimacy of this conclusion is confirmed by the Russian Ministry of Finance and judicial practice.
Thus, the financial department indicates that the money received by the company from the bank as interest on the balance of budget funds in bank accounts, from employees as compensation for overpayments of wages, according to an audit report and from sellers of goods (works, services) for violation of the state regulations delivery time contracts are not included in the VAT base *(9). The arbitrators indicate that VAT can only be imposed on that amount of money that increases the cost of goods (work, services) sold *(10). The list of amounts that, in addition to revenue*(11), are included in the base subject to VAT is exhaustive. It does not contain an indication of the amount of sanctions for non-fulfillment or improper fulfillment of obligations. And since the disputed amount was received by the company for improper fulfillment of obligations under a civil contract and is not related to payment, it is not legally included in the VAT base.
Sanctions to the supplier from the buyer
According to the Ministry of Finance of Russia * (12), the amounts of money received by the supplier from buyers of goods (works, services) in the form of penalties for late payment are related to payment. Such penalties are included in the VAT base. The amount of tax upon receipt of these funds is determined by calculation based on a rate of 18 percent to the base, taken as 100 and increased by the rate (18/118) * (13).
Moscow tax authorities also explain *(14) that the amounts of penalties received by the supplier of goods (works, services) and associated with settlements for their payment are included in the VAT base on the basis of the Tax Code *(15). However, these rules are not applicable when such amounts are received by the buyer.
The moment the tax base is determined is the earliest of the following dates*(16):
— day of shipment (transfer) of goods (works, services), property rights;
— the day of payment, partial payment for upcoming deliveries of goods (performance of work, provision of services), transfer of property rights.
However, the courts do not currently support this official position of the tax authorities*(17). The reason for this is the resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation * (18). In this case, the court of first instance proceeded from the following. Since transactions under the contract are subject to VAT at a rate of 18 percent, and the penalty received by the supplier in connection with the counterparty’s delay in fulfilling its obligations is associated with these transactions, the tax base for them increases by the amount of the penalty * (19). The appellate and cassation courts supported this conclusion. However, the Presidium of the Supreme Arbitration Court of the Russian Federation recognized it as erroneous, considering that the amount of the penalty as liability for late fulfillment of obligations received by the supplier from the counterparty under the contract is not related to payment for the goods in the sense of Article 162 of the Tax Code. And such amounts are not subject to VAT.
The situation with the imposition of value added tax on various fines, penalties and penalties for violation of the terms of the contract has been controversial for a long time. Representatives of tax authorities demanded that the amounts of sanctions for unfulfilled contracts be included in the tax calculation base, lawyers were looking for ways to circumvent such requirements. In this article we will consider whether the fine is subject to VAT.
Reasons for disputes regarding the imposition of penalties/fines/VAT fines
The main reason for the long-term disputes on the issue under consideration was the one hundred and sixty-second article of the Tax Code of Russia ( NK clause 2.1), indicating that the taxpayer is obliged to increase the VAT base at the expense of all funds received by him for the products or services he sold (including through financial assistance, as funds for a special fund or otherwise tied to the sale of goods). If the buying company does not fulfill its part of the contract in the proper way (evades payment for the goods delivered, makes payment later than the agreement), then it is obliged to pay creditors for the amounts of debt and penalties. The amount of the penalty is determined by legislation or an agreement between organizations.
The answer to the question is not obvious: “Does the amount of penalties received increase the tax base of the seller-creditor? Is it included in the amount of funds received from the sale of products?” During the period from 2007 to 2016, the point of view of state authorities on the issue under consideration has changed significantly.
Is a fine subject to VAT: grounds for including fines in the base for calculating VAT
Until 2013, the Russian Ministry of Finance conveyed the following point of view: penalties, penalties that the seller received from the buyer for various violations of the contract for the delivery, production, and payment of goods are directly linked to payment for the specified goods or services. Referring to subparagraph two of the first paragraph one hundred and sixty-second of article of the Tax Code and paragraph two of the one hundred and fifty-third article, the ministry demanded that the amounts received in the form of penalties be taken into account in calculating the tax base for VAT. After this period, tax organizations stopped requiring that fines be included in amounts for calculating VAT, based on established judicial practice.
Is a fine subject to VAT: grounds for excluding fines and penalties from the base for calculating VAT
In 2008, a resolution was issued by the Presidium of the Supreme Arbitration Court of the Russian Federation ( № 11144 / 07 ), which recommended considering the amounts transferred by the buyer for violations of contract terms (fines, etc.) as a measure of liability for these violations (contractual obligations). In such a context, fines are not related to payment for purchased goods, do not fall within the scope of article one hundred sixty-two and are not subject to inclusion in the amounts for VAT withholding.
But the Ministry of Finance of the Russian Federation in a letter of 2015 ( № 03-07-11 / 64436 ) continues to emphasize the following point: if the penalties or fines specified in the contract do not really serve the purpose of forcing the buyer to comply with the conditions, but in fact are part of the pricing policy, i.e. affect the final cost of the product for the buyer-client, then such fines are necessarily subject to VAT.
Judicial practice shares the opinion that fines do not increase the VAT tax base
The Federal Arbitration Court for the Moscow District issued a ruling in 2011 ( No. A 40 – 33299 / 11 – 140 – 146), in which he confirmed that the amounts of money for penalties and interest accrued when using other people's money are not directly related to the payment of invoices for the products supplied, and are not subject to VAT. Similar decisions were made in other cases ( 2007, FAS Volga-Vyatka District, case number A 29 – 7483 / 2006; 2008, FAS Central District, case number A 54 – 3386 / 2006 – C21; 2008, FAS Moscow District, case No. A 41 – 3502 / 08; 2012, FAS Far Eastern District, case number A 51 – 14495 / 2011).
In 2015, the Supreme Court of the Russian Federation confirmed that penalties and fines have their own legal nature, which is not related to the objects of taxation. Based on this interpretation, the money that the company received in the form of penalties for failure to fulfill contractual obligations does not increase the amount subject to VAT ( No. A 40 – 20035/2014). Earlier, the Volga region courts came to similar conclusions ( 2015, FAS Volga District, case number F 06 – 3084 / 2015) and Moscow districts ( 2012, FAS Moscow District, case number A 40 – 71490 / 11 – 107 – 305).
The Federal Arbitration Court in the Central District ruled in 2008 that money received by the seller from the buyer in case of non-compliance with the terms of the contract does not increase the amount of VAT, because the fact of payment of penalties does not confirm the transfer of ownership of the products sold. This means that penalties are not included in the list of amounts that increase the cost of production.
Conclusions for law enforcement practice
Based on the explanatory letters of the Ministry of Finance of the Russian Federation and court decisions, we draw conclusions: if fines and penalties under a sales contract are not a hidden component of the formation of the cost of products, but are necessary only to stimulate compliance with the terms of the contract, then the seller paying taxes does not charge VAT on the amounts received fines or penalties (even if payment was late). In the opposite situation, tax officials have the right to demand that the taxpayer take into account the specified amounts and pay VAT on them. You must be prepared to confirm that there are no hidden mechanisms for setting the price of a product in this way.
Taxpayers who purchase goods under a contract, even if the terms of payment are not met, the work is performed poorly, etc., do not take part in accounting for amounts subject to VAT. In such a situation, it is permissible to refer to letters from the Ministry of Finance ( for example, letter No. 03 – 07 – 11/ 12363 of 2013.), clarifications from the Office of the Federal Tax Service (for example, letter No. 19 – 11 / 11309 of 2011).
Today, some institutions have to face the need to provide an explanation to the tax authorities after any audit or reporting. To ensure that explanations do not provoke additional checks by the supervisory authority, the preparation of the explanation must be taken very seriously, with full responsibility, and not delay in responding.
What requirements are relevant now?
As a rule, the requirement to provide explanations arises after a certain period after reports or declarations, and the reason for the requirement may be any erroneous entry or inaccuracy in reporting. Quite often, questions arise from supervisory structures regarding reporting for VAT refunds when counterparties’ reports do not match, due to discrepancies in tax data in income tax returns. Questions may also arise as a result of unjustified losses of the enterprise during an audit, when sending an updated declaration or in tax reporting, in which the tax amount is shown to be less than in the initial information, etc.
For example, for VAT there are 3 main types of requirements for writing explanations, a sample of which was developed and approved electronically by the Federal Tax Service standards:
- According to control compliance
- For disagreements with counterparties
- About information not recorded in the sales journal (letter of the Federal Tax Service No. ED-4-15/5752 dated 04/07/2015).
Requirements for explanations after VAT returns may arise for other reasons, but a sample document has not yet been developed by the tax authorities.
To send a response, the payer has 6 working days to report receipt of the request, plus another 5 working days to send a response to the request (weekends and holidays are not taken into account).
How to write explanations to the tax office in 2019
If the payer has received a request from the tax service for an explanation, it means that the inspectorate has found something suspicious in the payer’s declaration. It should be noted that the Federal Tax Service Inspectorate provides desk control of all declarations and accounting reports using an automatic electronic program that can quickly identify errors in reporting (discrepancies between data in reports, discrepancies between the submitted declaration and the information available to the assigned inspector), as a result of which the Federal Tax Service Inspectorate submits a request for an explanation of this fact (clause 3 of Article 88 of the Tax Code of the Russian Federation). There may be other reasons for submitting a request for explanation.
The explanatory note to the Federal Tax Service is drawn up in free form, except for explanations during the desk audit of the VAT declaration. If the payer believes that there are no inaccuracies or inconsistencies in the sent report, then this should be indicated in the explanation of the requirement:
« ...In response to your request No. 75 dated March 2, 2019, we report that there are no inaccuracies in the tax return for the requested time. Based on this, we consider it unacceptable to make corrections to the reporting for the specified time...».
If you discover an error in reporting that does not entail a tax reduction (for example, a technical inaccuracy in displaying a code), you can explain what error was made, indicate the correct code and provide evidence that this inaccuracy did not lead to a reduction in the amount of tax paid or send an updated declaration.
However, if an inaccuracy is discovered that results in a tax reduction, an amended return must be submitted immediately. It makes no sense to give explanations under such circumstances (clause 1 of Article 81 of the Tax Code of the Russian Federation; Letter of the Federal Tax Service No. ED-4-15/19395 dated November 6, 2015).
Every taxpayer is obliged to know that the legislation does not provide that explanations must be submitted only in writing, i.e. this suggests that explanations can be provided orally, however, to avoid any misunderstandings, it is better to prepare a written response.
Explanation to the tax office regarding losses
When checking unprofitable enterprises, the tax service carefully examines whether income taxes are underestimated. The audit period covers the past two years or more. When a taxpayer receives a request to explain the cause of losses, it is necessary to promptly send a response to the supervisory service, which explains in detail why costs are higher than income. For example, you can refer to the fact that the company was created recently, there is still little clientele, and the costs of renting the building and maintaining employees are high, etc. In the answer, it is necessary to pay attention to the fact that all costs are documented and the reporting is drawn up correctly. For greater clarity, you can create a table displaying a list of costs for the year broken down by operations.
Download the explanatory note to the tax office on losses
(Video: “We draw up explanations of losses in response to the request of the tax authority”)
Explanation to the tax office about discrepancies in declarations
Supervisory structures check all declarations using automatic programs, and they can very quickly find a discrepancy between the information in one declaration (for example, for VAT) with the information for another (for example, for income tax) or with the accounting report. In this case, the inspection is forced to contact the payer with a demand to explain the reason for the discrepancy between indicators (for example, revenue).
Considering that accounting in institutions is not carried out in the same order as accounting in the supervisory service, it is not difficult to explain the identified discrepancies. For example, VAT tax data may not coincide with the amount of profit, since there are non-sales income that is not subject to VAT (fines, dividends, exchange rate discrepancies). This circumstance may cause discrepancies, which should be written about in the response to the request. (Article 250 of the Tax Code of the Russian Federation).
Explanation from the Federal Tax Service on VAT
When drawing up explanations to the Federal Tax Service regarding VAT, you must keep in mind that there are some nuances here. As noted earlier, payers are required to submit a declaration in electronic form (clause 3 of Article 88 of the Tax Code of the Russian Federation), therefore, explanations for VAT by institutions are required to be submitted in electronic form. In this case, explanations must be submitted according to the accepted template (FTS Regulation No. MMV-7-15/682@ dated December 16, 2016) and if an institution submits electronic explanations not in the required template, then it may be fined (Clause 1 of Article 129.1 of the Tax Code RF). However, in September 2017, the Federal Tax Service issued a resolution No. SA-4-9/18214@) dated September 13, 2017, which canceled the fine to the payer for an incorrect sample of explanations.
If an enterprise has the right to submit a VAT return in paper form, then it is better to provide explanations according to the samples accepted by the Federal Tax Service (Appendices 2.1-2.9 to the Federal Tax Service letter No. AS-4-2/12705 dated July 16, 2013). It should be noted that the use of these samples is not necessary.
To make the explanation more reliable, you can attach copies of invoices, extracts from sales and purchase logs.
If an inspector demands an explanation from an enterprise about the low tax burden compared to the industry average, then this circumstance can be explained as follows:
“...In the declaration for the required reporting for the requested time, there was no incomplete display of information that would lead to a reduction in tax payments. Therefore, the company believes that clarification of the tax return for the specified time is not required. The tax burden on the main activities of the institution was reduced at the specified time due to a decrease in income and an increase in the institution’s costs...».
And then you need to state the amount of decrease in the amount of revenue and increase in expenses for the requested time compared to the past period, and the reasons for this circumstance (decrease in the number of buyers, increase in prices for the purchase of goods, etc.).
(Video: “UNP News – Issue 8″)
What to do when the tax demand is unfair
There are times when tax structures require explanations when there are no reporting errors. There is no need to ignore such requirements from the tax office. In order to avoid misunderstandings and not be subject to sanctions (including unexpected inspections by supervisory services), it is required to immediately notify the inspectorate that all submitted reports are correct and, if possible, provide copies of supporting documents. We must remember that for the inspection, it is not the text of the explanation that plays an important role, but the fact of the answer itself.
Sample of a response to a tax request for clarification
As noted earlier, there is no unified sample response to an inspection requirement, so you can write an explanatory note in any form. Of course, the text of the response must be displayed in the correct business style adopted for official letters.
- First, usually in the upper right corner, you need to write the address of the tax office, where the institution must provide an explanation. Next, write the letter number, locality and district to which the institution belongs.
- The next line displays the data of the sender of the document: name of the institution, address, and contact phone number.
- In the next paragraph of the letter, before drawing up the text of the explanation, you need to display a link to the number and date of the request by the inspectorate and succinctly describe the essence of their requirement, and only after that you need to start describing the explanations.
- The explanation must be described very carefully, providing the necessary links to supporting materials, certificates, legislation, regulatory documents, etc. The clearer this section of the explanation is, the greater the hope that the controlled body will be satisfied with the answer.
- In the explanation, it is strictly forbidden to refer to unreliable data, as this will be quickly identified with subsequent severe sanctions from tax inspectors.
