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Andrey Grachev |
Anton Borisichev |
The Russian State Duma has accepted a legislative proposal (Draft Law No 962487-6) related to new VAT rules for electronic services (e-services). In all likelihood the draft law will be amended several times before its final adoption and enforcement, but content analysis shows its main purpose is to get foreign companies registered for VAT in Russia and remitting tax on services that are electronically supplied.
These legislative amendments are in line with EU practice and global VAT trends, but at the same time, they could spark a 'small revolution' for the Russian tax system.
Background
At present, the supply of e-services from domestic companies or sole proprietors to Russian private consumers (non-taxable persons) is a taxable operation. However, if these services are provided by foreign companies to Russian non-taxable persons, there is no obligation to pay VAT, because there is no mechanism by which VAT may be collected (reverse charges are not applicable).
As a result, Russian companies are disadvantaged against foreign companies, as the services of the Russian firms are hit with 18% VAT. The new VAT registration requirement should create a level playing field between Russian and foreign suppliers of e-services.
Taking into account the economic situation in Russia, KPMG believes that the new VAT rules will become part of the tax code. It is planned that the provision will come into effect on January 1 2017.
Main features
The draft law defines electronic services as "services provided via Internet data telecommunications networks or any similar network with the use of information technologies, on an automated basis". The list of services to be classed under 'electronic services' and subject to VAT in Russia is very detailed and includes all up-to-date e-commerce activities (such as the supply of e-books, images, audio, apps, online TV/radio, software, e-advertising, and the storage and processing of information, among others).
The place of supply for e-services is defined in accordance with the customer location principle. Criteria governing the customer location principle will be defined further by the Russian Ministry of Finance after the draft law has been adopted.
If e-services are rendered to Russian non-taxable persons, then the following entities will be liable for VAT:
The foreign vendors; and
The foreign intermediaries, but only if they participate in calculations between the vendor and consumer.
As the abovementioned foreign companies are obliged to be registered for VAT in Russia, it is safe to presume that they will also be required to provide the tax authorities with documentation and, following their acceptance, they will be granted access to their own online personal tax accounts (called 'private rooms' on the tax authority website). From this point on, interactions with the Russian tax authorities – such as submitting tax declarations, tax returns, or providing other documentation – will be carried out entirely via the taxpayer's 'private room' in this online system.
In addition, foreign companies registered in Russia for VAT purposes will not be able to deduct Russian input VAT.
It should also be mentioned that the draft law cancels the VAT exemption on the transfer of rights to use software and databases under license agreements. The aim of this cancelation is to boost VAT income to the state budget from operations with these services, precisely those rendered by foreign companies. At the same time, the proposed cancelation has raised displeasure among parts of the Russian IT sector, because without this preference they will need to start charging 18% VAT on their products. We expect that one of the main discussion points of the draft law will be finding a balanced decision for how to cancel this preference.
KPMG's tax and legal practices provide the Russian State Duma Committee on the budget and taxes with an expert support of this draft law and further amendments.
Andrey Grachev (agrachev@kpmg.ru) and Anton Borisichev (aborisichev@kpmg.ru)
KPMG in Russia and the CIS
Tel: +7 (495) 937 44 77
Website: www.kpmg.ru
