Currently, when importing scrap and waste of ferrous metals from the Republic of Kazakhstan (a member state of the Customs union, currently the Eurasian economic union) to the Russian Federation there is an ambiguous practice in respect of calculation of the Value Added Tax (hereafter referred to as the VAT) for the import of scrap metal from the specified country to Russian consumers.
Thus, according to the Ministry of Finance of the Russian Federation, the Russian organization, which imports scrap and waste ferrous metals from Kazakhstan to Russia shall calculate the VAT on such products at the rate of 18 percent (the letter of the Ministry of Finance of the Russian Federation No. 03-07-13 / 01- 30 dd. August 2, 2011, No. 03-07-13 / 01-04 dd. January 22, 2013, No. 03-07-13 / 1/17326 dd. April 16, 2014).
The rationale for this conclusion, according to the Ministry of Finance of the Russian Federation, is the absence of scrap and ferrous metal waste in the art. 150 of the Tax Code of the Russian Federation governing the list of goods which import into the territory of the Russian Federation is not subject to VAT, despite the fact that the turnover on realization of scrap and waste of ferrous metal to the territory of the Russian Federation (internal turnover) is released from VAT by virtue of paragraphs 25 Clause 1, Article. 149 of the Tax Code of the Russian Federation.
At the same time the Ministry of Finance of the Russian Federation has not taken into account the following:
1. Indeed, according to Art. 3 of the Agreement between the Government of the Russian Federation, the Government of the Republic of Belarus and the Government of the Republic of Kazakhstan dated 25.01.2008, “On the principles of levying indirect taxes on exports and imports of goods, works and services in the Customs Union” (as amended by the Protocol dd. 11.12.2009) in case of importation of goods to the territory of one member-state of the customs union from another member-state of the customs Union the indirect taxes are levied by the tax authorities of the importing country. Indirect taxes are not levied on import of goods to the territory of the member state of the Customs Union which in accordance with the legislation of that State shall not be taxable on importation into its territory. At the same time, the third paragraph of Article 3 of the Agreement provides that the rates of indirect taxes on imported goodsin mutual trade shall not exceed the rates of indirect taxes imposed on similar domestic goods.
In our view, this provision was adopted with the aim of creating equal conditions for mutual trade between the countries of the customs union and internal trade policy in these countries.
Moreover, the Treaty on the Eurasian Economic Union, which was signed by the Heads of the States – the countries of the Customs Union in Astana on May 29 of the current year, the similar provision was also set (Section XII «Taxes and taxation”).
2. In accordance with Article 5 of the Free Trade Area Agreement (ratified by the Federal Law dd. 01.04.2012 No. 21-FZ): “The Parties shall provide each other with national regime in accordance with Article III of GATT 1994” (General Agreement on Tariffs and Trade 1994 (GATT 1994) (ratified by the Federal law dd. 21.07.2012 No. 126-FZ).
In this case, paragraph 2 of Article III of GATT 1994 provides that: “The products from the territory of any contracting party imported to the territory of the other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of, directly or indirectly, taxes and charges applied to similar domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set in paragraph 1”.
3. The same conclusion follows from the provisions in Articles 4, 9, 10, 28, 33 of the Treaty on the Customs Union and the Common Economic Space dd. 26.02.1999 (ratified by the Federal Law dd. 22.05.2001 No. 55-FZ).
Thus, in accordance with Article 4 of the Treaty: “4. The main principles of the formation of the Common Economic Space are: non-discrimination; the principle of mutual benefit.
Article 9 of the Treaty provides: “The Parties proclaim the following aims of functioning of the free trade regime for goods: b) the use of a common system for levying indirect taxes; d) elimination of competition restrictions caused by the behavior of economic entities or by the intervention of national and regional bodies, to the extent that it may affect trade between the economic entities of the Parties; e) mutual non-use by the Parties of any measures (including collective) of restrictive or fiscal nature that may directly or indirectly result in discrimination against goods originating from the customs territory of one Party as compared to similar goods originating from the customs territory of the other Party.”
Article 10 of the same Treaty provides: “The Parties shall take the necessary efforts to eliminate at their territories any administrative and fiscal barriers with a local or regional nature and hamper the normal functioning of the free trade regime for goods.”
Article 28 of the Treaty provides: “The rates of indirect taxes on imported goods in mutual trade shall not exceed the tax rates imposed on similar domestically produced goods.”
The article 33 of the same Treaty provides: “The Parties shall take measures to prevent abuse of a dominant position by one or more business entities in order to prevent: the application of dissimilar conditions to equivalent transactions with other trading parties, placing them in a competitive disadvantage”.
4. The Treaty on the Eurasian Economic Union dd. May 29, 2014 (in force) also contains the main principles of mutual trade, which fully confirms the position of the absence of the need to pay VAT when ferrous scrap is imported to Russia from Kazakhstan.
Thus, in accordance with Article 71 of the Treaty: “… 2. Member States in mutual trade shall levy taxes and other fees and charges so that taxation in the Member State at the territory of which the sale of goods of other Member States is made was no less favorable than the taxation applied by that Member State under the same circumstances for similar goods originating from its territory …”.
In addition, paragraph 1 of Article 72 of the Treaty provides: “1. Collection of indirect taxes in mutual trade in respect of goods is carried out on the principle of the country of destination, involving the application of a zero rate of value added tax … ‘.
Paragraph 5 of the same article also contains a provision that: “… 5. The rates of indirect taxes in mutual trade of goods imported to the territory of a Member State shall not exceed the rates of indirect taxes levied on similar products in case of their sale at the territory of that Member State … “.
Thus, the policy of both countries consistently and purposefully during many years is aimed at creating of a common economic space of Russia and Kazakhstan. International treaties (agreements) set not only such basic principles as economic equality, a single tax policy, non-discrimination of economic entities, creation of equal market mutual terms of trade between the countries of the Customs Union and the establishment of fair competition in the common customs territory of the Customs Union, but also contain direct norms, according to which VAT is not applicable to imported products in the absence of taxation for similar goods produced domestically.
A different interpretation and application of international and national legislation entails a distortion of the idea of creating a common economic space between the member states of the Eurasian Economic Union, violates international principles and norms.
The Vienna Convention on the Law of Treaties, which has the fundamental character of international law and binding for countries joining it (for Russia as the legal successor of the USSR the document came into force on May 29, 1986) also provides for the basic principles of compliance with international treaties, as well as their priority actions.
Thus, under article 26 of the Convention: “Every treaty in force is binding on its members and must be performed by them in good faith (Article 26 of the Convention.).
According to Article 27 of the same Convention: “A party may not invoke the provisions of its internal law as justification for failure to perform a treaty.”
In addition, in accordance with Article 31 of the Convention: “1. Treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and regarding its object and purpose. ”
According to subparagraph 25 para. 2 of Art. 149 of the Tax Code governing the exemption from VAT for sales turnover in the Russian Federation, scrap and waste of ferrous and nonferrous metals is not subject to taxation (exempt from taxation) in the Russian Federation.
In case of any tax exemption the amount of the tax, including VAT payable to the budget, is 0 (zero).
Thus, from the above provisions of the international agreements to which Kazakhstan and Russia are parties, it follows that the amount of VAT on the import of scrap and waste of ferrous metals from Kazakhstan to the Russian Federation may not exceed the amount of VAT when trading scrap metal within the Russian Federation.
Thus, the amount of VAT for the import of scrap from Kazakhstan to the Russian Federation shall be “0%”.
In other words, the above-mentioned position of the Russian Federation Ministry of Finance on the need to calculate VAT for the import of scrap from Kazakhstan to Russia is contrary to the above provisions of international treaties.
According to Part 4 of Article 15 of the Constitution: “If an international treaty of the Russian Federation stipulates other rules than those stipulated by law, the rules of the international agreement shall prevail”.
The same rule is provided in Article 7 of the Tax Code of the Russian Federation: “If an international treaty of the Russian Federation, containing provisions relating to taxation and fees, establishes other rules and regulations than those provided for by this Code and adopted in accordance with regulatory legal acts on taxes and (or) fees, the rules and norms of the international treaties of the Russian Federation shall prevail”
The fallacy of the position of the Ministry of Finance of Russia is confirmed by the following.
Thus, the Ministry of Finance of the Russian Federation’s position is contrary to the official position of the Eurasian Economic Commission concerning this issue, as expressed in the letters ref. No. 09-126 dated May 14, 2014, ref. No. 10-117 dated May 13, 2014.
In addition, the position of the Ministry of Finance of Russia is contrary to the established jurisprudence in the courts of the Russian Federation. So, the requirements of the territorial tax authorities of the Republic of Mordovia, Volgograd and Samara regions of the Russian Federation on the need to pay VAT for the import of ferrous scrap from Kazakhstan by the Russian organizations, which were based on the letters of the Ministry of Finance of the Russian Federation , were recognized as illegal based on the following judicial acts of the Russian Federation in force:
— The decision of the Arbitration Court of the Republic of Mordovia dd. October 17, 2014 with regard to case No. A39-3813 / 2014;
— The decision of the appeal court of the Federal Arbitration Court of the Volga-Vyatka district dd. April 8, 2015 with regard to case No.A39-3813 / 2014;
— The decision of the arbitration court of the Saratov region dd. October 14, 2014 with regard to case No. A57-15371 / 2014;
— The decision of the appeal court of the Twelfth Arbitration Court dd. December 23, 2014 with regard to case No.A57-15371 / 2014;
— The decision of the appeal court of the Federal Arbitration Court of the Volga District dd. June 23, 2015;
— The resolution of the Supreme Court dd. August 3, 2015 with regard to case No. A57-15371 / 2014;
— The decision of the arbitration court of the Volgograd region dd. July 23, 2012 with regard to case No. A12-11841 / 2012;
— The decision of the arbitration court of the Volgograd region dd. August 20, 2012 with regard to case No.A12-11935 / 2012;
— The decision of the arbitration court of the Volgograd region dd. October 31, 2012 with regard to case No.A12-17208 / 2012;
— The decision of the Arbitration Court of the Saratov region dd. October 24, 2011 with regard to case No.A57-4410 / 2011;
— The decision of the appellate court of the Twelfth Arbitration Court dd. January 26, 2012 with regard to case No.A57-4410 / 2011;
— The decision of the Arbitration Court of Saratov region dd. October 24, 2011 with regard to case No.A57-7802 / 2011;
— The decision of the appellate court of the Twelfth Arbitration Court dd. December 27, 2011 with regard to case No.A57-4410 / 2011;
— The decision of the appeal court of the Federal Arbitration Court of Povolzhsliy district dd. April 6, 2012 with regard to case No.A57-4410 / 2011.
In addition, a similar court decisions were made with regard to case No.A57-7804 / 2011, A57-12036 / 2011 A57-12305 / 2011, etc.
In addition, the invalidity of the letter of the Ministry of Finance of the Russian Federation dated August 2, 2011 No. 03-07-13 / 01-30 has been established by the following decisions entered into force:
— The decision of the arbitration court of the Volgograd region dd. July 23, 2012 with regard to case No. A12-11841 / 2012 (paragraph 1 of page 6 of the decision of the court).
— The decision of the arbitration court of the Volgograd region dd. August 20, 2012 with regard to case No. A12-11935 / 2012 (paragraph 8 page 6 of the decision of the court);
— The decision of the arbitration court of the Volgograd region dd. October 31, 2012 with regard to case No.A12-17208 / 2012 (paragraph 6 page 6 of the decision of the court).
These court decisions are available at the Bank of decisions of arbitration courts at the site: http://kad.arbitr.ru.
The Ministry of Finance of the Russian Federation in its response No. 03-07-14 / 35396 dd. July 18, 2014 refers to the absence of unequal conditions in the mutual trade between the Member States of the Customs Union and in the internal trade policy in the collection of VAT on scrap metal when imported to Russia from Kazakhstan, since, according to Ministry, the export of goods, including scrap metal by the seller applies the VAT rate of 0% with the right for its subsequent repayment, whereas the amount of VAT on turnover of scrap inside Russia is not subject to deduction (compensation) in connection with the existing VAT exemption.
Meanwhile in Kazakhstan, as well as in Russia, the sales turnover of ferrous scrap in the country is exempted from VAT (Article 23, subpara. 248 of the Tax Code of the Republic of Kazakhstan).
This means that the Kazakh scrap procurement companies do not reimburse VAT on its exports, as there is the same terms of scrap trade both domestically and in case of its export to Russia (there is no offset VAT). The situation is similar for Russian scrap collectors.
We believe that this issue raises questions concerning the performance of norms of the international agreements to which the Russian Federation is the party and the position of the Ministry of Finance of the Russian Federation given above has a negative impact on the efforts of the Heads of the States – the countries of the Customs Union to create a legitimate and strong common economic space.
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