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Situation.

A Russian company imports manufacturing machines of foreign manufacturers into Russia and sells them within the territory of the Russian Federation. The contracts of delivery of those machines to Russian customers specify the company’s obligations of warranty repair of said machines. The foreign providers do not compensate expenses incurred by the company when performing the warranty service. The company purchases the spare parts for repairs from aforementioned foreign providers.

Questions.

1. Is the company entitled to account those expenses for warranty repairs including business trip expenses and the cost of spare parts as expenditures for the purposes of the tax on profit?

2. Is the company allowed to have a deduction of VAT paid when acquiring the spare parts used in said repairs?

The answers are given in the letter of the Ministry of Finance of the Russian Federation dated 13 April 2009 No. 03-03-06/1/236 which stipulates the following.

Pursuant to paragraph 1 of article 252 of the Chapter 25 “Tax on profit of organizations” of the Tax Code of the Russian Federation (hereinafter the “Tax Code”) taxpayer reduces the income obtained by the amount of incurred expenditures except for the expenditures specified in article 270 of the Tax Code.

For the purposes of taxation of profit the expenditures shall be deemed to be reasonable expenses supported by documents (and in the case stipulated by article 265 of the Tax Code, the losses) made (incurred) by the taxpayer.

The reasonable expenditures shall be deemed to be economically justified expenses whose estimation is given in the monetary form.

The expenditures supported by documents shall be deemed to be expenses supported by either documents executed in accordance with the legislation of the Russian Federation or documents executed in accordance with normal business practices applied in a foreign state in the territory of which the related expenses were made, and/or documents which confirm the incurred expenses indirectly (including by a customs declaration, business trip order, trip documents, report on the work performed in accordance with the contract).

The expenditures shall be deemed to be any expenses provided that they were made to carry out activities aimed to obtain income.

Pursuant to subparagraph 2 of paragraph 1 of article 264 of the Tax Code the expenses for provision of services of warranty repair and maintenance including deductions to the reserve fund for forthcoming expenses for warranty repair and warranty maintenance shall be pertaining to other expenditures related to production and/or sale.

Therefore, provided that expenses of the organization carrying out the sale of goods with the terms of warranty repair (maintenance) are confirmed by documents the expenses for such repair (maintenance) (including business trip expenses and cost of the spare parts) may be accounted for the purposes of taxation of profit among expenditures reducing the tax base with respect to the tax on profit.

2. Pursuant to subparagraph 13 of paragraph 2 of article 149 of Chapter 21 “Value Added Tax” of the Tax Code the services for repair and technical maintenance of goods and domestic devices to be provided without collection of extra payment within the warranty period of exploitation thereof including the cost of related spare parts and details, shall be exempted from taxation by the value added tax.

On the basis of paragraph 2 of article 170 of the Tax Code the amounts of the value added tax requested from the buyer when acquiring goods or actually paid when importing goods into the territory of the Russian Federation must be accounted in the cost of those goods in case of acquisition (import) of goods to be used for operations of manufacturing and/or sale of goods not subjected to taxation by the value added tax.

Therefore, the amounts of the value added tax paid when acquiring spare parts to be used in provision of services of warranty maintenance of the manufacturing machines shall not be deductible.