Article 170. The Order of Referring Tax Amounts to the Costs of Production and Sale of Goods (Works, Services)

1. Amounts of tax a taxpayer is charged when buying goods (works, services) or actually paid by him when importing goods to the customs territory of the Russian Federation, unless otherwise established by provisions of the present Chapter, shall not be included in the expenses accepted for deduction when calculating the tax levied on profit of organizations (income tax of natural persons), except for cases stipulated by Item 2 of the present Article.

2. Amounts of tax a taxpayer is charged, when buying goods (works, services), including fixed assets and intangible assets, or actually paid by him when importing goods, including fixed assets and intangible assets, to the territory of the Russian Federation, shall be included into the cost of such goods (works, services), and likewise of fixed assets and intangible assets, in the event of:

1) acquiring (importing) goods (works, services), including fixed assets and intangible assets, used for operations related to production and (or) sale (as well as to transfer of goods, carrying out works and rendering services for own needs) of goods (works, services) which are not taxable (exempt from taxation);

2) acquiring (importing) goods (works, services), including fixed assets and intangible assets, used for operations related to production and (or) sale of goods (works, services) whose place of sale is not recognized as the territory of the Russian Federation;

3) the acquisition (importation) of goods (works, services), in particular, fixed assets and intangible assets by persons not being taxpayers under the present chapter or relieved from the duty to act as a taxpayer in terms of tax calculation and payment;

4) acquiring (importing) goods (works, services), including fixed assets and intangible assets, for production and (or) sale of goods (works, services), the operations in sale or transfer of which are not recognized as a sale of goods (works, services) under Item 2 of Article 146 of this Code.

3. If the taxpayer accepts the amounts of tax specified in Item 2 of the present Article for deduction or reimbursement in the order stipulated by the present Chapter, the appropriate amounts of tax shall be subject to recovery and payment to the budget.

4. The amounts of tax, taxpayers making both taxable operations and those exempted from taxation are charged with by sellers of goods (works, services):

shall be included into the cost of such goods (works, services) under Item 2 of this Article - with regard to goods (works, services), including fixed assets and intangible assets, used in operations on which the value-added tax is not levied;

shall be deducted under Article 172 of this Code - with regard to goods (works, services), including fixed assets and intangible assets, used in operations on which the value-added tax is levied;

shall be deducted or included into the cost thereof proportionally to their use for production and (or ) sale of goods (works, services), operations in sale of which are taxable (exempt from taxation) - with regard to goods (works, services) including fixed assets and intangible assets, used in both taxable operations and in those exempted from taxation.

Said proportion shall be determined reasoning from the cost of shipped goods (works, services), operations in sale of which are taxable (exempted from taxation), as compared to the total cost of goods (works, services) shipped within a tax period.

Separate accounting of amounts of the tax by the taxpayers who have transferred to payment of the uniform tax on imputed earnings for certain types of activity shall be carried out in a similar procedure.

With this, a taxpayer shall be obliged to keep separate records of the amounts of tax with regard to acquired goods (works, services), including fixed assets and intangible assets, used in both taxable operations and those not subject to taxation (exempted from taxation).

Where there are no separate records kept, the amounts of tax with regard acquired goods (works, services), including fixed assets and intangible assets, shall not be deducted and shall not be included into the expenses deducted in the course of calculating the profit tax on organizations (the income tax on natural persons).

A taxpayer shall be entitled not to apply the provisions of this Item in respect of the tax periods where the share of aggregate expenditures with regard to production of goods (works, services), operations in sale of which are not taxable, does not exceed 5 per cent of the total amount of aggregate expenditure with regard to production. With this, the total amounts of the tax, such taxpayers are charged with by sellers of goods (works, services) used in production within said tax period, shall be subject to deduction in compliance with the procedure provided for by Article 172 of this Code.

5. Banks, insurance institutions, and non-state pension funds shall have the right to include in the costs accepted for deduction when calculating tax levied on profit of organizations the amounts of tax paid to suppliers for the purchased goods (works, services). Here, the entire amount of tax received by them under taxable operations shall be payable to the budget.

Article 171. Tax Deductions

1. The taxpayer shall have the right to reduce the total amount of tax computed according to Article 166 of the present Code by tax deductions established by the present Article.

2. Subject to deductions shall be amounts of tax presented to the taxpayer and paid by him when purchasing goods (works, services) on the territory of the Russian Federation or paid by the taxpayer when importing goods to the customs territory of the Russian Federation under the customs treatment of release for free circulation, temporary import and processing outside of the customs territory, in relation to:

1) goods (works, services) purchased to carry out operations recognized as items of taxation according to the present Chapter, except for the goods specified by Item 2 of Article 170 of the present Code;

2) goods (works, services) purchased for resale.

3. Subject to deductions shall be amounts of tax paid according to Article 173 of the present Code by buyers and the tax agents.

Buyers and tax agents registered with the tax authorities and acting as taxpayers according to the present Chapter shall have the right to the aforesaid tax deductions. Tax agents making the operations indicated in Item 4 of Article 161 of this Code shall not be entitled to include into tax deductions the amounts of the tax paid in respect of these operations.

The provisions of the present item shall be applicable if the goods (works, services) were acquired by a taxpayer being a tax agent for the purposes specified in Item 2 of the present article and if the taxpayer withheld and paid the tax out of the taxpayer's incomes when they were being acquired.

4. Subject to deduction shall be amounts of tax presented by the vendors to a foreign person being a taxpayer not registered with tax authorities of the Russian Federation, when said taxpayer buys goods (works, services), or pays the foreign person when importing goods to the customs territory of the Russian Federation for his production purposes or for the accomplishment of his other activities.

Said amounts of tax shall be subject to deduction or refund to a foreign person being a taxpayer after a tax agent pays the tax withheld from incomes of this taxpayer and only in the part in which the bought or imported goods (works, services) have been used in the production of goods (performance of works, rendering of services) sold by the tax agent who withheld the tax. The specified amounts of tax shall be subject to deduction or reimbursement, provided the foreign person acting as the taxpayer registers with the tax authorities of the Russian Federation.

5. Subject to deductions shall be amounts of tax presented by the vendor to the buyer and paid by the vendor to the budget when selling goods, if these goods are returned (including during warranty period) to the vendor or such were rejected. Subject to deductions shall be amounts of tax paid when performing works (rendering services) if these works (services) are rejected.

Subject to deductions shall be amounts of tax calculated by the vendors and paid by them to the budget from amounts of advance payments or other payments for goods (performance of works, rendering of services) sold on the territory of the Russian Federation in case of cancellation of the corresponding contract and return of the appropriate amounts of advance payments.

6. There shall be subject to deduction the amounts of the tax, contract organizations (building owners) charge taxpayers with, when they carry out capital construction works, assemble (install) fixed assets, as well as the amounts of the tax, taxpayers are charged with regard to goods (works, services) acquired by them for carrying out building and assembly works and the amounts of tax, taxpayers are charged with, when they acquire incomplete capital construction objects.

There shall be subject to deduction the amounts of tax calculated by taxpayers under Item 1 of Article 166 of this Code, when carrying out construction and assembly works for their own needs which cost is included into the expenditures subject to deduction (including depreciation charges), when calculating the profit tax of organizations.

7. Subject to deductions shall be amounts of tax paid on expenses borne during business trips (expenses in travel to the place of the business trip and back, including expenses to use bed linen in overnight trains, and also expenses in renting housing) and representation expenses accepted for deduction when calculating the tax levied on profit of organizations.

Where under Chapter 25 of this Code for the purposes of taxation expenditures are taken according to normative standards, the amounts of tax with regard to such expenditures shall be subject to deduction in the amount corresponding to such normative standards.

8. Subject to deductions shall be amounts of tax calculated and paid by the taxpayer on amounts of advance payments or other payments received against future deliveries of goods (works, services).

Article 172. The Order of Application of Tax Deductions

1. Tax deductions stipulated by Article 171 of the present Code shall be made on the basis of invoices drawn up by vendors when taxpayers buy goods (works, services), documents confirming that tax amounts have been actually paid, documents confirming the payment of the tax amounts withheld by tax agents, or on the basis of other documents in cases set forth in Items 3, 6-8 of Article 171 of the present Code.

Subject to deductions shall be, unless otherwise established by the present Article, only amounts of tax presented to a taxpayer and paid by him when he was acquiring goods (works, services) or when the amounts actually paid by them when importing goods to the customs territory of the Russian Federation after aforesaid goods (works, services) are entered into records, with due regard to features laid down by the present Article and provided appropriate primary documents are submitted.

Deductions of tax amounts presented by vendors to the taxpayer when he buys or pays for fixed assets and/or intangible assets specified in Items 2 and 4 of Article 171 of the present Code and imported to the customs territory of the Russian Federation, shall be effected in full after said fixed assets and/or intangible assets are entered into records.

2. In case the taxpayer uses his own property (including bills of exchange of a third person) as settlement for goods (works, services) he had bought, the amounts of tax actually paid by the taxpayer when buying said goods (works, services) shall be calculated on the basis of balance costs of such property (with allowance for its revaluation and amortization performed according to the legislation of the Russian Federation) transferred towards payment for such.

If the taxpayer - drawer uses his own bill of exchange (or bills of exchange of a third person received in exchange for his own bill of exchange) in the settlement for the goods (work, service) bought by him, the amount of tax actually paid by the taxpayer - drawer when acquiring aforesaid goods (works, services) shall be calculated on the basis of amounts actually paid by him settling his own bill of exchange.

3. The deductions of tax amounts stipulated by Article 171 of the present Code concerning operations in the sale of goods (works, services) specified in Item 1 of Article 164 of the present Code shall be made only if appropriate documents stipulated by Article 165 of the present Code are submitted to the tax authorities.

Deductions of tax amounts stipulated by the present item shall be made on the basis of a separate tax declaration required by Item 7 of Article 164 of the present Code.

4. Deductions of tax amounts specified in Item 5 of Article 171 of the present Code shall be made in full after appropriate adjustment operations involved in the return of goods or rejection of goods (works, services) have been entered in the records, but no later than one year from the time of the return or rejection.

5. The deductions of tax amounts specified in Paragraph One of Item 6 of Article 171 of the present Code shall be made, as appropriate projects of completed capital construction (fixed assets) or sale of an uncompleted capital construction project are entered into records, from the moment indicated in Paragraph Two of Item 2 of Article 259 of this Code or when selling objects of incomplete capital construction.

Deductions of the amounts of tax indicated in Paragraph Two of Item 6 of Article 171 of this Code shall be made as the tax calculated by taxpayers in respect of construction and assembly works carried out for own needs is paid to the budget in compliance with Article 173 of this Code.

6. The deductions of tax amounts specified in Item 8 of Article 171 of the present Code shall be made after the date of sale of appropriate goods (performance of works, rendering of services).

Article 173. The Amount of Tax Payable to the Budget

1. The amount of tax payable to the budget shall be calculated on the basis of results of each tax period as an amount reduced by the amount of tax deductions stipulated by Article 171 of the present Code (except for tax deductions stipulated by Item 3 of Article 172 of the present Code) being the overall amount of the tax calculated according to Article 166 of the present Code.

The amount of tax payable to the budget under operations of sale of goods (works, services) specified in Subitems 1 - 8 of Item 1 of Article 164 of the present Code shall be defined on the basis of results of each tax period as an amount of tax calculated according to Item 6 of Article 166 of the present Code and reduced by the amount of tax deductions stipulated by Item 3 of Article 172 of the present Code.

2. If the amount of tax deductions over any tax period exceeds the total amount of tax computed according to Article 166 of the present Code, the positive difference between the amount of tax deductions and the sum of tax computed with regard to the operations recognized as units of taxation under Subitem 1 and 2 of Item 1 of Article 146 of this Code, shall be subject to reimbursement to taxpayers in the procedure and on the conditions which are stipulated by Article 176 of this Code, safe for the cases when taxpayers submit tax declarations on the expiry of three years after the end of an appropriate tax period.

An excess of amounts of tax deductions stipulated by Item 3 of Article 172 of the present Code over amounts of tax calculated according to Item 6 of Article 166 of the present Code shall be reimbursable to the taxpayer in the order and on the conditions which are stipulated by Article 176 of the present Code, safe for the cases a tax declaration is submitted by a taxpayer on the expiry of three years after the end of an appropriate tax period.

3. The amount of tax payable if goods are imported to the customs territory of the Russian Federation shall be calculated according to Item 5 of Article 166 of the present Code.

4. In case of sale of goods (works, services) specified in Article 161 of the present Code, the amount of tax payable to the budget shall be calculated and paid in full by tax agents defined in Article 161 of the present Code, at the expense of funds subject to transfer to the taxpayer or other persons as directed by the taxpayer.

5. The amount of tax payable to the budget shall be calculated by the following persons if they invoice the buyer and state separately the tax amount:

1) by persons who are not taxpayers, or by taxpayers released from discharge of the taxpayer obligations involved in the calculation and payment of tax;

2) by taxpayers, when selling goods (works, services) and when operations in selling them are not taxable.

Here, the amount of tax payable to the budget shall be defined as the amount of tax indicated in the appropriate invoice handed in to the buyer of goods (works, services).