VIP perks enjoyed by banks’ clients might become subject to VAT

Today’s business daily Vedomosti.ru reports that the bank clients with premium credit cards could end up paying the 13 percent VAT for the benefits they enjoy as privileged clients. The lawsuit filed by the Tax Administration accuses Citibank of failing to report that its VIP clients used incentives such as free access to airport VIP lounges. 356 Citibank’s clients with an average monthly balance exceeding 1.3 million rubles (approximately USD 43.000) thus received compensation in kind without paying the 13 percent VAT. The bank did not withhold the tax nor report on the provided compensation, and the Tax Administration found it liable of paying a penalty in the amount of 17,000 rubles (USD 570). Should the Tax Administration win the case at the Supreme Commercial Court, Citibank will have to pay the outstanding VAT, respective penalties and interest.

Earlier, two lower commercial courts found that the respective benefits were not provided for free, as the clients were required to maintain a certain balance on their accounts, while the Appellate Federal Commercial Court of the North-West Region sided with the plaintiff, stating that the services were provided as a substitution for higher interest rate on deposits. Nonetheless, the Appellate Federal Commercial Court decided to forward the case to the Supreme Commercial Court and let it decide whether the total value of provided services exceeds the threshold defined by the Tax Code – Central Bank’s refinancing rate plus 5% for ruble deposits or 9 percent for foreign currency deposits – in which case the services would be subject to VAT.

Citibank’s representative stated that the bank never encountered such issues in any of the countries where it operates. The bank’s position is that the services should not be taxed, as they represent an interest rate income that is, instead of being paid out, used to pay for the services. Citibank’s representative sees this as a disturbing precedent, as it could create risks for other bank clients using of any of the free services, such as text message notifications. Should this become the standard practice, the banks will have to charge VAT for all free services provided to its clients, which might not be viewed favorably by the Federal Customer Protection Service and the Central Bank. The Tax Administration did not comment on the subject.

Other bankers were quoted saying that they treat the costs for such services as marketing costs, which is allowed by the Tax Code. Interestingly enough, one of them asked the Russian Ministry of Finance for an expert opinion in the past and received an answer that favors such interpretation. Vedomosti.ru remarked that such opinions protect only those who asked for them. In 2012, the Ministry of Finance treated such services as a discount that is not considered as an income. One of the bankers stated that the principal issue is drawing a line between marketing costs and gifts to clients. Should the services in question be treated as income and subject to VAT, it will mean that the banks are forcing services on their clients when issuing VIP cards, which will create problems with the Federal Customer Protection Service. As things stand now, the biggest concern for Citibank is not the potential financial damage, which is rather limited, but the risk to its reputation.

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