Taxation of Medical Goods in Russia: VAT Regulations

 

August 31, 2022

BRACE Law Firm ©

 

Medical goods are a socially significant category of goods; consequently, operations for their import into the territory of the Russian Federation and subsequent sale in cases established by legislation are supported by the state through the provision of tax incentives. At the same time, tax incentives are generally granted in cases where domestic analogues are absent on the Russian market, and the medical goods are included in the relevant lists.

In practice, there are many nuances of taxation that raise questions among participants in the medical goods market. In this article, we will consider the specifics of taxation of medical goods with value added tax (the "VAT") and analyze issues causing difficulties using examples from judicial practice.

General Rules for Taxation of Medical Goods

In accordance with Article 146 of the Tax Code of the Russian Federation (the "Tax Code"), the object of taxation involves operations for the import into the territory of the Russian Federation and the sale of medical goods. At the same time, according to the position formulated by the now-abolished Supreme Arbitration Court of the RF, for the application of a preferential rate, compliance with the conditions established by the Tax Code is sufficient; no additional restrictions, such as whether the goods are of Russian or foreign production, whether the sale of the goods took place in the territory of Russia, or whether the goods were imported into the Russian territory, can be established [1].

Payers of VAT by virtue of Article 143 of the Tax Code are legal entities and individual entrepreneurs, as well as persons carrying out the movement of medical goods across the customs border. The exception is taxpayers applying special tax regimes:

• simplified taxation system (in accordance with Chapter 26.2 of the Tax Code);
• those who received an exemption from the fulfillment of VAT payer duties due to the fact that for the 3 preceding consecutive calendar months the amount of revenue from the sale of goods did not exceed 2 million rubles in aggregate (in accordance with Art. 145 of the Tax Code);
• participants of the Skolkovo project (in accordance with Art. 145.1 of the Tax Code).

Article 164 of the Tax Code provides for several types of value added tax rates: 0%, 10%, 20%, or a calculation rate. Due to the vital importance of certain types of medical goods, preferential VAT rates of 10% and 0% are established for them. In other cases, a VAT rate of 20% will apply.

We intentionally did not dwell at the beginning of the article on what constitutes a medical good subject to preferential taxation in the understanding of tax legislation. The fact is that depending on the applied rate, this list will differ. Next, we will consider the conditions for applying each of them in more detail.

Taxation of Medical Goods at a 10% Rate

As a general rule, taxation of operations for the sale and import of medical goods is carried out at a rate of 10% (Subclause 4 of Clause 2 and Clause 5 of Article 164 of the Tax Code).

The types of medical goods falling under taxation at a 10% rate include:

• medicinal agents, including active pharmaceutical ingredients (APIs), medicinal agents for conducting clinical studies of medicinal products, and those compounded by pharmacy organizations;
• medical devices, except for those fully exempt from taxation in accordance with Subclause 1 of Clause 2 of Article 146 of the Tax Code.

Let us recall that according to Article 4 of Federal Law No. 61-FZ dated April 12, 2010, On the Circulation of Medicinal Products (the "Law on Circulation of Medicinal Products"), medicinal agents include medicinal products and active pharmaceutical ingredients (pharmaceutical substances). Medicinal products are used for prevention, diagnosis, treatment of disease, rehabilitation, for preservation, prevention, or termination of pregnancy. Active pharmaceutical ingredients are active substances possessing pharmacological activity that are intended for the production, manufacturing of medicinal products.

At the same time, mandatory conditions giving the right to apply the preferential VAT rate of 10% for medicinal agents are established.

First, for a medicinal product, this is inclusion in the State Register of Medicinal Products (the "SRMP") or the Unified Register of Registered Medicinal Products of the Eurasian Economic Union (the "Unified Register of the EAEU") and, as a consequence, the availability of a valid Registration Certificate for it. For active pharmaceutical ingredients, the presence of information about the substance in the SRMP or the Unified Register of the EAEU is sufficient. Medicinal agents intended for conducting clinical studies must have a permit from the Ministry of Health of Russia for the import of a specific batch of medicinal agents.

As for medicinal products compounded by pharmacy organizations, which are not subject to registration by virtue of Article 13 of the Law on Circulation of Medicinal Products, in the opinion of the Federal Tax Service of Russia, the preferential rate may be applied based on the availability of a prescription for medicinal products or a requirement of a medical organization [2].

Second, compliance of the medicinal agent with the product type code indicated in Decree of the Government of Russia No. 688 dated September 15, 2008, On Approval of Lists of Codes of Medical Goods Subject to Value Added Tax at a Tax Rate of 10 Percent (the "Decree No. 688"). The indicated decree approved 2 (two) lists:

• List with codes of goods in accordance with the All-Russian Classifier of Products (the "List of codes according to OKPD 2").
• List with codes of goods in accordance with the single Commodity Nomenclature of Foreign Economic Activity of the Eurasian Economic Union (the "List of codes according to TN VED EAEU").

The first is aimed at determining medical goods subject to VAT at a tax rate of 10 percent upon their sale, and the second – upon their import into the territory of Russia [3]. Note that for some positions, the names and codes of goods in OKPD 2 and TN VED EAEU do not match. In this regard, VAT rates upon import and sale for the same good also differ, which raises questions among market participants. Let us illustrate with an example of one of the court cases. An economic entity imported a medical device "blood transfusion apparatus." A declaration was filed, and the application of a tax rate of 10 percent was declared. The customs authority made a change to the declaration regarding the calculation of VAT at a rate of 18 percent. Disagreeing with the indicated decision of the customs, the company applied to the arbitration court. Courts of three instances recognized the customs decision as illegal, proceeding from the fact that the company complied with all conditions for applying the 10 percent rate: namely, the imported good is classified as a medical device in sub-subheading "9018 90 500 9" of TN VED EAEU and corresponds to code "93 9800" of the All-Russian Classifier of Products, and a Registration Certificate confirming the compliance of the good with a certain code of medical goods was submitted regarding the good. As the Supreme Court of the RF indicated, the courts did not take into account the following: Decree No. 688 approved a separate list of codes of medical goods in accordance with TN VED for the import of goods into the customs territory. The indicated classification code of TN VED EAEU is absent in the List of codes of medical goods in accordance with TN VED EAEU. In the present case, the OKP code does not have legal significance, since the concepts of "import of goods" and "sale of goods" are not identical; when importing goods, to apply the incentive, it is necessary to proceed from the presence or absence of the TN VED code in the relevant list. Contradictions between the Lists according to TN VED EAEU and according to OKPD 2 do not matter in the present case. At the same time, differences in the legal status of economic entities purchasing medical devices in domestic trade and entities importing medical devices do not lead to a violation of the rights of market participants, since the buyer of goods imported into the territory of the Russian Federation is not deprived of the right, when calculating VAT on their own taxable activity, to deduct the amounts of tax paid upon the import of these goods [4].

Despite the apparent clarity, in practice, many questions arise regarding the application of the indicated lists. Let us consider an example. Based on the results of a declaration check, the customs authority made a decision on the unlawful application by an economic entity of a VAT rate of 10% on the imported medicinal agent "Tachocomb" and additionally assessed customs payments in the amount of 4 million 800 thousand rubles. The company applied to the court with a demand to recognize the decision as illegal. As established by the court, the code of the imported medicinal agent is absent in Section I of the List "Medicinal agents," but is included in Section II "Medical devices," which was not disputed by the parties. To confirm the right to the incentive, the economic entity submitted a Registration Certificate for the medicinal agent. The customs authority motivated its position by the fact that the application of the preferential rate in such a case is possible only subject to passing state registration as a medical device. The court decided that a reference to the code in any of the sections of the specified List is sufficient and satisfied the claim. Note that by supporting the taxpayer, the court proceeded more from general principles than from the formal letter of the law, which, in our opinion, is absolutely correct. However, the formal correctness of the customs authority also cannot be denied [5].

The conditions for applying the preferential VAT rate of 10% to medical devices are similar to the taxation of medicinal agents.

First, the availability of a Registration Certificate for the medical device issued in accordance with the legislation of the Russian Federation or the law of the Eurasian Economic Union.

As a general rule, if Registration Certificates are absent, including due to the expiration of their validity and the incompleteness of the re-registration procedure, the 10% rate does not apply [6]. An exception is provided for disposable medical devices, which, in accordance with Clause 10 of Decree of the Government of Russia No. 430 dated April 3, 2020 [7], due to the spread of coronavirus infection, are permitted for import and circulation on the territory of the Russian Federation without registration until January 1, 2025. The list of these indicated disposable medical devices is provided in Appendix No. 1 to the said decree with the icon "*". These are, for example, masks, examination gloves, vacuum tubes. The application of the preferential rate of 10% in this case is possible if the medical devices are registered in the country of manufacture and are simultaneously named both in Decree No. 688 and in the list to Decree No. 430 [8].

Second, inclusion of the medical device code in one of the Lists approved by Decree No. 688.

In accordance with Notes 2 and 3 to the List of codes of medical goods in accordance with OKPD 2 (List No. 1), to apply the reduced rate, one must be guided not only by codes but also by the names of medical devices. At the same time, the OKPD 2 code indicated in the List must match the code in the Registration Certificate for the goods. Regarding the List of codes according to TN VED EAEU (List No. 2), according to the note to it, the name is mandatory only if it is marked with the sign "*"; in other cases, the names of goods are given for ease of use.

Note that, as in the case of medicinal agents, the application of the indicated lists causes a significant number of disputes in practice. Let us give an example from judicial practice. Based on the results of a desk audit, the tax authority held an economic entity liable for committing a tax offense provided for by Clause 1 of Article 122 of the Tax Code "Non-payment or incomplete payment of tax," imposed a fine in the amount of 26 thousand rubles, additionally assessed VAT in the amount of 172 thousand rubles and penalties in the amount of 18 thousand rubles. The basis for making the indicated decision was the conclusion of the tax authority about the unlawful application of the VAT rate of 10% when selling a medical product – meshes for implantation, manufactured by "HERNIAMESH SRL," Italy. The company challenged the liability in court. As the courts established, OKPD 2 "32.50.22.190" is assigned in the Registration Certificate for the implantation meshes. In the List of codes of medical goods in accordance with OKPD 2, approved by Decree No. 688, medical goods with the code OKPD 2 "32.50.22.190" are not named, and, therefore, the VAT rate of 10% does not apply to the goods. The decision of the tax authority was left unchanged [9].

Taxation of Medical Goods at a 0% Rate

In accordance with Subclause 1 of Clause 2 of Article 149 and Subclause 2 of Article 150 of the Tax Code, the import into the territory of the Russian Federation and the sale of the following medical goods of domestic and foreign production are not subject to taxation:

• medical devices;
• prosthetic-orthopedic articles, raw materials and materials for their manufacture, and semi-finished products for them;
• technical means, including motor vehicles, materials that can be used exclusively for the prevention of disability or rehabilitation of disabled people;
• corrective glasses (for vision correction), lenses for vision correction, frames for corrective glasses (for vision correction);
• medical goods for the prevention and prevention of the spread of the new coronavirus infection (2019-nCoV).

The list of such medical goods was approved by Decree of the Government of the Russian Federation No. 1042 dated September 30, 2015 (the "Decree No. 1042") [10]. Let us dwell on the key rules for applying Decree No. 1042.

As in the previously considered cases, the mandatory conditions for applying the preference to medical devices are:

First, the provision of a Registration Certificate for the medical device.

Often the question arises about the exemption from taxation of accessories to medical devices. In the opinion of the Ministry of Finance of Russia, exemption from VAT regarding accessories to medical devices imported separately from the devices themselves applies if there is a Registration Certificate for such accessories, and also if these goods are included in Decree No. 1042 [11].

However, even in the case of importing accessories together with the main device, court disputes arise. Thus, in one of the cases considered, an economic entity, during customs clearance of goods, filed a declaration for a JAY oxygen concentrator with accessories: tube with cannula – 2 pcs., mains cable, filter – 2 pcs., nebulizer – 1 pc., humidifier – 2 pcs., and an application for exemption from VAT payment. The customs authority considered the grounds presented by the applicant insufficient and demanded payment of VAT. The demand was motivated by the fact that part of the products included in the medical device kit (1 humidifier out of 2) is missing in the submitted Registration Certificate. The court concluded that the Registration Certificate for the medical device with accessories confirms the registration of the goods as a medical product; consequently, any number of the accessories indicated in the Registration Certificate may be imported into the territory of the Russian Federation together with the device itself. The court recognized the customs requirement to amend the declaration as invalid and obliged the return of excessively paid customs payments in the amount of more than 5 million rubles [12].

Second, the codes indicated in Decree No. 1042 must match the codes in the Registration Certificate for the medical device.

An example of a court decision not in favor of the taxpayer is the resolution of the Arbitration Court of the Moscow District in case No. A40-220487/2021 [13]. In the case under consideration, a legal entity imported medical devices "bloodlines for hemodialysis" into the territory of the RF. During customs declaration, an exemption from VAT payment was claimed. As documents confirming compliance with the conditions for applying the VAT exemption, the details of the Registration Certificate for medical devices dated December 3, 2007, No. FSZ 2007/00720 were indicated. The customs authority established the fact of unlawful application of the zero tax rate and obliged payment for the imported goods at the general VAT rate. The company appealed to the court with a demand to recognize the decision of the customs authority as illegal. The courts of the first and appellate instances supported the taxpayer. The court of cassation pointed out the fallacy of the conclusions of the lower courts. It motivated the decision as follows: in the Registration Certificate for the medical device, the OKP code 93 9800 is indicated. According to Note 1 to Decree No. 1042, when importing goods into the Russian Federation, for the possibility of their exemption from VAT payment, the coincidence of the TN VED EAEU code and the OKP / OKPD 2 code within one item of the List is essential. The TN VED EAEU code (9018) declared by the company during declaration corresponds to the OKP code 94 4400. Due to the discrepancy between the OKP code indicated in the Registration Certificate of the medical device and the OKP code contained in the List, the company did not comply with the established conditions for exempting the import of medical devices from VAT taxation. Under such circumstances, there are no grounds for exemption from VAT payment regarding the imported goods.

We will also say a few words about the specifics of VAT exemption for other medical goods included in Sections II-IV of Decree No. 1042.

The condition for applying the zero VAT rate in this case is the compliance of the imported (sold) goods with the TN VED EAEU code and the name indicated in Decree No. 1042. A Registration Certificate is not required, since these goods are not medical devices and are not subject to registration, which is confirmed by the position of the Supreme Court of the RF set out in the ruling dated October 7, 2019, No. 308-ES19-16836.

Let us show with an example from judicial practice the importance of the exact match of the goods to Decree No. 1042. Thus, in accordance with Clause 22 of Decree No. 1042, corrective glasses, lenses for vision correction, and frames for corrective glasses are exempt from VAT upon import and sale in the Russian Federation. A company declared the import of soft hydrogel contact lenses for scheduled replacement for vision correction of the model "ADRIA" and submitted an application to the customs authority for the return of paid VAT. Having received a refusal, it applied to the arbitration court with a statement to recognize it as invalid.

During the consideration of the case, the court received a response from the S.N. Fyodorov Eye Microsurgery Federal State Institution of the Ministry of Health of Russia stating that vision correction implies measures aimed at restoring visual acuity. For vision correction, an optical lens with various refractive powers, measured in diopters, is necessarily used, and correction can be positive or negative. The court established that the disputed ADRIA contact lenses do not provide for vision correction and are intended only for a decorative effect. The arguments of the legal entity that the indicated goods are medical devices with references to the Registration Certificate were rejected by the courts, since in accordance with Clause 22 of Decree No. 1042, the exemption of contact lenses from VAT does not depend on the possibility of classifying them as medical devices. They are not subject to tax exemption because they do not possess the function of vision correction. Recognition of the customs authority's decision as invalid was refused [14]. An attempt to challenge the constitutionality of Clause 22 of Decree No. 1042 due to the fact that it prevents exemption from VAT payment for operations on the sale (import) of colored contact lenses was also unsuccessful [15].

Just as important, as practice shows, is the correct application of codes. In one of the cases considered, an economic entity declared the import into the territory of Russia of orthopedic sandals for adults and sent an application to the customs authority for the return of excessively paid tax amounts in the amount of more than 170 thousand rubles, since the goods fall under the TN VED EAEU code 9021101000 "orthopedic appliances", subject to VAT exemption. The customs authority refused the return with the following motivation: "orthopedic footwear" is classified in heading 9021 of TN VED EAEU if made to individual measurements. Mass-produced footwear is classified according to the material of the upper and outer sole and the method of manufacture in Chapter 64 of TN VED EAEU "Footwear, gaiters and the like; parts of such articles".

During the consideration of the case, it was established that the main criterion for classifying orthopedic footwear in heading 9021 is its purpose for the prevention of disability or rehabilitation of disabled people. An expert opinion of the Federal Bureau of Medical and Social Expertise of the Ministry of Labor of Russia confirmed that the imported goods are low-complexity orthopedic footwear, that is, intended for people with moderately expressed orthopedic disorders. By the method of manufacture, this footwear is ready-made orthopedic footwear. At the same time, the note to Chapter 64 indicates that orthopedic footwear is not included in this chapter. Based on the established circumstances, the court decided that the classification of orthopedic footwear under codes of Chapter 64 is incorrect, recognized the decision of the customs authority as illegal, and obliged the return of the excessively paid tax [16].

For motor vehicles intended for the transportation of disabled people, an additional requirement has been established since January 1, 2021. To be exempt from VAT, it must have confirmation that it is intended exclusively for the purposes of transporting disabled people. This is confirmed by a corresponding entry in the Vehicle Type Approval (OTTS) or the Vehicle Construction Safety Certificate (SBKTS).

Section III of Decree No. 1042, in addition to vehicles, includes other means for the rehabilitation of disabled people, such as anti-decubitus and orthopedic pillows and mattresses, clothing for disabled people of special purpose, etc., the taxation of which also gives rise to disputes. Thus, the Supreme Court of the RF considered case No. A40-245395/2020 on the complaint of the customs authority against the decisions of lower courts. As established by the courts, the company imported goods (compression products for lower and upper limbs) indicating an exemption from VAT payment in the declaration. Believing that based on its characteristics, the imported goods do not belong exclusively to special clothing for disabled people and are used not only for the prevention of disability or rehabilitation of disabled people, the customs authority refused to grant the said preference.

Considering the dispute, the courts concluded that in accordance with the Classifier of Technical Means of Rehabilitation (Products) approved by Order of the Ministry of Labor of Russia dated February 13, 2018, No. 86n, and GOST R 57768-2017 "Orthopedic bandages for upper and lower limb joints. Types and main parameters", the imported goods are compression garments (stockings, socks), which can be used for the prevention of disability. In addition, they took into account the expert opinion of the Federal Bureau of Medical and Social Expertise of the Ministry of Labor of Russia. According to experts, these products can be characterized as "special clothing that can be used only for the prevention of disability or rehabilitation of disabled people, described in Clause 35 of Decree No. 1042". The court decisions on the return of excessively paid tax in the amount of more than 1 million rubles were recognized as lawful and justified [17].

Due to the spread of coronavirus infection, the list of medical goods, the sale and import of which into the territory of Russia is exempt from VAT, was expanded. Decree No. 1042 was supplemented by Section V "Medical goods for the prevention and prevention of the spread of the new coronavirus infection (2019-nCoV)". This list included, for example, tests for determining COVID-19, masks and respirators, and products for use in the treatment of coronavirus infection. The changes entered into force on April 6, 2020, and applied to legal relations arising from March 16, 2020.

The condition for the exemption of said goods was:

• the intended purpose of the goods, namely the subsequent gratuitous transfer of these goods to non-profit healthcare organizations. The intended purpose was confirmed by a document signed by an official of the executive body of the constituent entity of the Russian Federation.
• registration of the declaration for goods for placing them under the customs procedure within the period up to and including September 30, 2020. There was no further extension of the incentive.

Summing up, we highlight the main problems arising in the taxation of medical goods: complexity and ambiguity of interpretation of legal norms, systematic changes in regulatory acts granting the right to incentives and their extension to previously arisen legal relations. All this creates additional administrative barriers during the import and sale of medical goods and a large number of court disputes.

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References

[1] Paragraph 20 of Resolution of the Plenum of the Supreme Arbitration Court of the RF No. 33 dated May 30, 2014, On Certain Issues Arising for Arbitration Courts When Considering Cases Related to the Collection of Value Added Tax.

[2] Letter of the Federal Tax Service of Russia No. AS-4-3/13016@ dated August 10, 2011.

[3] Ruling of the Constitutional Court of the RF No. 2596-O dated October 2, 2019.

[4] Ruling of the Judicial Chamber for Economic Disputes of the Supreme Court of the RF dated March 14, 2019, No. 305-KG18-19119 in case No. A41-88886/2017.

[5] Resolution of the Third Arbitration Appeal Court dated June 9, 2022, No. 03AP-1350/22 in case No. A33-13357/2021.

[6] Letter of the Department of Tax Policy of the Ministry of Finance of Russia No. 03-07-11/82830 dated October 13, 2021.

[7] Decree of the Government of Russia No. 430 dated April 3, 2020, On the Specifics of Circulation of Medical Devices, Including State Registration of a Series (Batch) of a Medical Device.

[8] Letter of the Department of Tax Policy of the Ministry of Finance of Russia No. 03-07-07/61629 dated July 15, 2020.

[9] Ruling of the Supreme Court of the RF dated July 3, 2020, No. 306-ES20-9025 in case No. A65-21243/2019.

[10] Decree of the Government of Russia No. 1042 dated September 30, 2015, On Approval of the List of Medical Goods, the Sale of Which in the Territory of the Russian Federation and the Import of Which into the Territory of the Russian Federation and Other Territories Under Its Jurisdiction Are Not Subject to Taxation (Are Exempt from Taxation) by Value Added Tax.

[11] Letter of the Department of Tax and Customs Policy of the Ministry of Finance of Russia No. 03-07-11/22009 dated March 29, 2019.

[12] Resolution of the Tenth Arbitration Appeal Court dated July 7, 2022, No. 10AP-10385/22 in case No. A41-7695/2022.

[13] Resolution of the Arbitration Court of the Moscow District dated July 26, 2022, No. F05-16765/22 in case No. A40-220487/2021.

[14] Resolution of the Arbitration Court of the Far Eastern District dated November 29, 2018, No. F03-4832/18 in case No. A51-28239/2017.

[15] Ruling of the Constitutional Court of the RF No. 2910-O dated October 24, 2019.

[16] Resolution of the Ninth Arbitration Appeal Court dated November 17, 2021, No. 09AP-61949/21 in case No. A40-106055/2021.

[17] Ruling of the Supreme Court of the RF dated February 2, 2022, No. 305-ES21-27574 in case No. A40-245395/2020.