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Criteria For Deducting Input VAT


Taxpayers who do not take advantage of VAT exemptions as listed in Article 145 of the Tax Code may not deduct VAT if:

  • the input VAT is not paid by the supplier (the responsible party);
  • the property (work, services, property rights) that the input VAT is being paid is related to operations not subject to VAT;
  • the property (work, services, property rights) that the input VAT is being paid for was not entered into the accounts;
  • the company cannot produce the proper invoice with the specified amount of input VAT. However, accounting errors that do not prevent the clear identification of the seller, buyer, type and cost of the goods (work, services, or property rights), as well as the rate and amount of VAT, do not prevent the company from deducting VAT.

In some instances, companies only have the right to deduct input VAT after the tax is actually paid, for example, when importing goods. If the company did not have the legal right to deduct VAT in even just one of the specified situations, then the tax authorities may revoke its right to the deduction and reinstate the input VAT. As a result, the company will then have VAT arrears subject to fines and late fees.

Input VAT may not be deducted from the value of donated commodities. This is because when the property is handed over, the party donating it does not present any VAT to the receiving party, but rather transfers the amount into its budget (as a part of the total amount of tax calculated) at its own expense.

It is also not allowed to deduct VAT if the seller, who has adopted a special tax regime, submits an invoice for VAT. Single-tax payers who use the simplified taxation system (STS) or the Unified Tax on Imputed Income do not pay VAT. However, there are cases which allow companies to deduct VAT presented by suppliers who are not supposed to be paying VAT. Russia’s Tax Code does not provide for refusing VAT deductions presented by suppliers who are not VAT taxpayers. Therefore, when acquiring goods (work, services, property rights), the purchaser need not verify whether or not the supplier pays VAT. Furthermore, details on the invoices would not allow the purchaser to determine this anyway.

The supplier is required to pay the VAT whether or not it is appropriately included in the invoice. The principle of VAT refunds is that the supplier pays the VAT to the state and the purchaser receives the refund from the state. 

This begs the question of whether or not the tax inspectorate may deprive the purchaser company from its right to a VAT deduction if, in the course of an audit, it is discovered that the supplier does not submit its filings with the tax inspectorate. There is no straightforward answer to this question in the current legislation. In some explanations, the regulating authorities adhere to the position that deducting input VAT presented by suppliers who do not file is strictly prohibited, as the purchasing company’s actions may be deemed "imprudent and careless."

Practices that attest to a purchaser’s discretion and prudence in choosing business partners include, in particular, the following:

  • receiving copies of business partners’ tax registration certificates;
  • using official sources of information which characterize the partner’s business activities (for example, published data from its accounting reports).

These measures verify due diligence by the tax payer. In the worst-case scenario, the tax inspectorate may accuse the company of receiving unjustified tax refunds and revoke its right to receive the refunds.

Courts have generally denied tax inspectors the right to deny VAT refunds based on these due diligence arguments or because the supplier failed to pay their taxes. Existing tax legislation does not obligate a company to regulate its partners' tax filings. A tax refund may be deemed unjustified only if the inspectorate proves that the company knew its partner had allowed violations to be committed, and in particular, if company and its partner are interdependent entities.

In general, when planning and executing business deals, it is important to demonstrate maximum vigilance; especially in relations with those partners that the company is working with for the first time, or when the amount of transactions between the two is significant. If it is extremely necessary, the company may request from its partner copies of corresponding filings with verification from the tax inspectorate that they were accepted.

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