Federal Law No 335-FZ of November 27 2017 (the Law) has made a number of changes to the VAT rules on e-services, also known in Russia as the 'Google tax'. The first version of these VAT rules, announced in 2017, was quite similar to EU legislation, with only minimal differences, as they were based on the OECD's BEPS Action 1.
However, the Law has expanded the impact of these VAT rules for e-services from B2C companies to B2B supplies from foreign vendors to Russian customers. This will take effect from January 1 2019. As such, all foreign companies will need to assess whether they are rendering e-services to Russian related entities, and structure appropriately before the introduction of these game-changing rules.
The purpose of the new regulations
Under the original legislation, if a foreign company supplies e-services to a Russian business customer, which is a registered legal entity or sole entrepreneur, then the Russian customer should act as a tax agent. This means it must calculate, withhold and transfer VAT at 18% to the state budget. Then, the Russian business customer should make an invoice for itself and offset the VAT paid, if all requirements have been met. In other words, if the supply of e-services was B2B, then foreign vendors would have had zero involvement in the VAT process.
However, during 2017, the Russian Federal Tax Service found that a huge part of the software, database and other e-services supplied came from big multinational foreign companies to small and medium-sized Russian business customers. Analysis showed that thousands of small and medium-sized Russian businesses would need to comply with the new VAT rules, whereas the hundred foreign providers of e-services would have no involvement in the process at all. The tax authorities decided that this state of affairs created a disproportionate tax control burden, and that it would be far easier to target the top foreign providers of e-services, than administer thousands of non-compliant Russian business customers. Thus the tax authorities proposed amendments to make foreign B2B suppliers of e-services register, calculate and pay VAT in Russia.
The main change is that the compliance burden will shift from Russian business customers to foreign suppliers as tax agent rules cease to apply. A plus for foreign suppliers is that they will not need to customise IT systems, online platforms or their websites to identify whether customers are business or private.
As such, foreign suppliers should undergo VAT registration in Russia by February 15 2019 at the latest. The registration process will be online, via a specifically designated 'VAT office for online services providers', and should not take more than one month.
Value added tax registration is very important for B2B suppliers, because Russian business customers can only offset their input VAT if the services acquired come from a registered foreign company. The list of registered foreign companies will be made public, allowing Russian customers to check it online.
In addition, foreign suppliers should provide their Russian business customers with the necessary documents that will allow them to meet special VAT offset requirements, such as documents bearing the seller's tax identification number and the amount of VAT.
It should also be mentioned that the Law doesn't cancel the VAT exemption on the transfer of usage rights to software and databases under licence agreements. So while foreign B2B suppliers of software and databases still need to register for VAT purposes in Russia, and provide a list of their transactions, the VAT base will still be zero.
Despite it being the tax authorities' purpose to catch up with large providers of e-services, the new regulations also cover all intra-group operations related to the granting of IT environments, software and databases to Russian subsidiaries. Practically this means that all of a group's foreign providers of e-services should register in Russia and pay VAT. Thus, it is important for management to ensure they feel confident that the VAT liabilities of their companies have been estimated correctly.
When it comes to practicalities, IT costs are often spread across a group of companies based on the 'allocation keys' principle. They also include other costs of the group. It will be necessary to identify which costs relate to e-services, and to ensure that the allocation principles for these costs comply with Russian tax legislation, because, from 2019 onwards, these costs will be treated as the VAT base.
In addition, foreign companies should find out whether or not their services are VAT exempt, and ensure that licence agreements comply with the requirements of the Russian Civil Code. If so, they will be able to price their services far more competitively on the Russian market, and obtain VAT savings for their group.
The Law entered into force in 2018 but will be applied to foreign companies from 2019. This means there is enough time to review supply chains to Russian business customers, to assess the potential impact on intra-group operations, and to restructure supplies to make them more efficient in preparation for the new VAT reality.
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