The Russian indirect tax environment explained
Dealing with indirect tax issues in Russia requires effort and time, but is a manageable task. Vladimir Konstantinov of PwC describes how the system has developed in recent years
At the same time, VAT remains a major source of tax revenues in Russia, so has its share of total budgetary revenues for years now (in 2013, VAT revenues amounted 20% of the total consolidated budget).
In a nutshell, the Russian VAT system follows the classical VAT system, with principles similar to the EU ones. However, there are still significant differences between the Russian and the EU VAT system (for example, no separate VAT registration, no recovery of input VAT related to exports of services, 0% VAT rate requires confirmation to tax authorities, recovery of input VAT related to 0% VAT rated supplies delayed and cash payment of reverse charge VAT).
It should be outlined that the Russian VAT law is in a continuous process of improvement. In some respects the update of the Russian VAT law follows some trends which may be noticed on a broader / regional level (such as e-invoicing, e-filing and e-audits). For instance, for some years already, there has been a trend of enabling a wider use of electronic means and procedures for VAT compliance purposes. For instance, e-invoicing went live in Russia in 2012 and from 2014 all taxpayers are obliged to submit VAT returns in electronic form. The next phase takes place in 2015, when it is expected that Russian tax authorities will be provided with electronic information on all VAT invoices issued in Russia.
Some of the recent changes in the Russian VAT law include new provisions on the VAT treatment of bonuses, the extension from 2013 of the financial services (FS) VAT exemption for certain operations carried out by FS businesses in the securities, commodities and foreign exchanges markets which is notably the biggest VAT change for the FS industry in the last decade. Under discussion are also a set of other important amendments including the introduction for taxpayers of the input VAT recovery right on accrued expenses, the introduction into the Russian Tax Code of the principle of the good faith of taxpayers, as well as of the concept of abuse of law.
Occasionally, Russian tax practice is also affected by major court cases. For instance, in 2012, a well-known case in Russia was the one related to the VAT treatment of bonuses, which historically used to be a typical type of incentive payment in the Russian consumer industry. This case triggered a significant risk for retailers (that is, buyers of goods and recipients of bonuses) of tax authorities challenging their input VAT recovery right, as the Russian Supreme Arbitrage Court (SAC) made a statement in this respective case that bonuses directly relate to supplied goods and should be regarded as a form of trade discounts.
The SAC was working on a resolution on various VAT matters. The aim of the documents is to serve as a guideline for courts in the process of hearing tax disputes. The resolution covers topics such as the VAT treatment of inventory losses, the 0% VAT rate for freight forwarders, as well as a number of others.
These are just few examples that illustrate that businesses in Russia are continuously facing a developing VAT law and court practice. However, it is also an important fact that nowadays businesses in Russia are facing an increased focus from tax authorities on tax audits. It is a well-known fact that practical considerations always used to be very important in Russia. They still are. Tax inspectors in Russia often focus on their fiscal function and can be rather formalistic in their challenges. Notably, more recently it may be observed that tax authorities are getting more sophisticated. This led to a gradual decrease over the last years of the number of disputes brought to court, however with a simultaneous gradual decrease in the percentage of cases won by taxpayers (still above 55% as per the 2013 relevant data, with, however, value-wise, 72% won by tax authorities. One would be interested in knowing what could be the future response of the tax authorities in the area of tax audits considering that in 2013 the Russian budget turned into a significant deficit. No special trends have been outlined so far, however, undoubtedly, developments in this respect should be further closely monitored.
The administration of VAT has become more complex over the years, requiring country or even regional specific knowledge. For instance, the administration of VAT in the Customs Union (CU) between Russia, Belarus and Kazakhstan has become more complex. Nevertheless, if businesses set up their operations properly in the CU, they can avail of numerous advantages, for example, a consumer market of 170 million people, reduced Customs costs, and foreign principal(s) trading structures.
Another important topic in Russia and probably in the whole world is Russia's accession to the WTO. After an 18-year marathon, Russia crossed the finish line of the accession process on December 16 2011, and finally became a full WTO member in August 2012. Its main impact is the gradual reduction of the general level of burden associated with import duties.
However, not all industry groups in Russia welcomed the WTO membership. Some sectors became highly exposed to specific, radical changes, as some of the earlier governmental support measures became not possible after accession. In this context, the Russian authorities have recently introduced the recycling fee, payable by automotive industry players, and focused anti-dumping measures.
Despite its accession to the WTO, Customs administration in Russia is however still an undoubted source of challenges for businesses. Customs administration still remains an issue for companies operating in Russia and which are involved in foreign trade activities. Typically, Customs disputes arise in Russia around valuation, and classification of goods, for example.
And from 2016 the indirect tax system in Russia is expected to include a new type of payment – the ecological fee, payable by businesses for a wide range of goods and packaging. If introduced, this is likely to result in costs and compliance for business.
Finally, the Russian indirect tax framework is generally perceived by businesses as rather extensive and complex. Taking well-informed and balanced business decisions usually requires substantive analysis of the administrative, court and market practice. Dealing with indirect tax issues in Russia requires effort and time, but is overall a manageable task. However, in many situations, the outcome depends on the level of technical and practical expertise.