23 November 2017 Tax Messenger Tax Edition Assets Tax Relief for Trunk Pipelines EY s Russian Tax & Law practice was named a leading Tax firm in Russia in World Tax 2017, an annual guide published by the International Tax Review. The case law on the application of the assets tax relief provided for in clause 3 of Article 380 of the Tax Code (clause 11 of Article 381 in versions prior to 1 January 2013) in the form of reduced tax rates for fixed assets classed as trunk pipelines has so far been somewhat inconsistent. There are a large number of court rulings 1 in this area in which the courts side with the tax authorities against the taxpayer and conclude from examining the functional and technical attributes of particular facilities that they cannot be classed as trunk pipelines or functionally integral parts thereof. Those conclusions serve as a basis for charging additional assets tax. In August, however, in a case involving similar circumstances, the Moscow Arbitration Court issued a Decision 2 in which it takes the taxpayer s side. 1 Supreme Court Determinations No. 305-KG17-5043 of 24 May 2017 on Case No. А40-50014/2016, No. 305-KG17-3859 of 10 May 2017 on Case No. А40-51161/16, No. 305-KG16-6715 of 4 July 2016 on Case No. А40-58445/2015; Decision of the Moscow Arbitration Court of 14 November 2017 on Case No. A40-246937/2016. 2 Decision of the Moscow Arbitration Court of 3 August 2017 on Case No. А40-36890/2017.
In the case concerned the taxpayer claimed assets tax relief in relation to a connecting gas pipeline and an export pipeline. The tax authorities took the view that these could not be classed as trunk pipelines or integrated parts thereof for the following reasons: 1) existing standards (construction regulations, industry equipment regulations and codes of practice) do not contain classification characteristics for particular types of fixed assets. Assets not eligible for relief can only be identified by comparing general standards and the taxpayer s internal documentation. The company s standards take account of industry factors and distinguish between a trunk pipeline and gas pipeline branches, connecting pipes, etc. 2) the purpose of introducing the relief was to compensate companies for the cost of fulfilling public obligations to provide non-discriminatory access to gas transport facilities to third parties, given that tariffs for those services are set by the state 3) an expert appraisal showed that the pipelines in question were connecting pipes, did not form an integral part of a trunk pipeline and had been recorded in the state register without any indication that they were trunk pipelines Despite the apparent logic of the tax authority s arguments, the court found that the taxpayer had been wrongly penalized for the commission of a tax offence on the following grounds. Firstly, the court stated that official regulations and standards (construction regulations, industry equipment regulations and codes of practice) took priority over the company s internal documents for the purposes of the classification of fixed assets, and internal regulations had no bearing on the applicability of reliefs. The court also pointed out that construction regulations establish a set of criteria against which the technical characteristics of the fixed assets concerned could be appraised. In particular, the assets in question met the criteria for a trunk pipeline insofar as the transportation of commercial output from the place of production to the place of consumption was concerned, and it made no difference in this regard whether there were one or more sections of trunk pipelines involved in that transportation. The fixed assets at issue could not be classed as field pipelines given that the product that they were used to transport had already been processed into a finished product for supply to end consumers, whereas field pipelines are used to transport products at the raw material stage before they are turned into finished products. Secondly, in establishing entitlement to the relief it is essential to examine whether the grounds specified by the Tax Code exist. The relief in question applies to pipelines carrying marketable gas intended for consumers, and does not constitute compensation for any costs, including costs caused by tariff-setting. The Tax Code does not, therefore, make the applicability of the relief dependent on the right to use the pipeline being granted to third parties with the requirement that tariffs for those arrangements must be set by the state. Thirdly, the court observed that the tax authority committed substantial violations in organizing and conducting the expert appraisal. These include, in particular, the fact that the expert used his own criteria, rather than official regulations, as a basis for judging whether fixed assets were eligible for relief. The expert also failed to give due consideration to documents provided by the taxpayer in support of the view that the assets qualified for relief. The court further observed that the Tax Code contains no provisions making the applicability of the relief dependent on the content of the unified state register of rights in which the fixed assets in question are recorded. In addition, the court identified multiple errors in the report and noted that the expert s qualifications did not meet the necessary criteria and the company that carried out the expert appraisal did not have sufficient resources to do the work. It must also be pointed out that after reclassifying the facilities in question, the tax authorities only changed the rate of assets tax, while the tax base was determined as for trunk pipelines without the reclassification being applied for the purpose of calculating the taxpayer s obligations. Given that the tax 2
authorities had reclassified the assets, they should have used the useful life for non-trunk pipelines, which are in the fourth depreciation group. This would have meant that the useful life had already expired in the period concerned, and the tax base for the assets would therefore have been zero. The court also stated that the inspectorate had failed to observe the proper procedure for classifying fixed assets as depreciable assets. In particular, it is first necessary to determine in which group a facility falls in the government s Classification, 3 and only then to apply the useful life corresponding to that group. In the case concerned, therefore, the court took the taxpayer s side, setting a positive precedent for similar cases. A ruling of this nature helps to determine the structural approach that a taxpayer should take in the future in the event of similar challenges by tax authorities against the application of the assets tax relief for fixed assets classed as trunk pipelines. We will continue to track the progress of this case, which is due to be heard in the appellate instance on 21 December. Authors: Evgeniya Krapivina Alexandr Kornev For additional information please contact: Victor Borodin +7 (495) 755 9760 Victor.Borodin@ru.ey.com 3 Government Decree No. 1 of 1 January 2002 Concerning the Classification of Fixed Assets Included in Depreciation Groups 3
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