By Sergey Gerasimov
Before the amendment there was a tax benefit for foreign IT companies – no VAT imposed on electronic services – which was unavailable to Russian companies. In order to protect Russian providers and boost competition between foreign and domestic providers the Russian Parliament has adopted the so-called “Google tax law”.
This law will affect almost all areas of services in the IT market. Fourteen types of electronic services will be subject to VAT, including programs, applications and games, databases and advertising platforms.
Some transactions are excluded from the scope of the law. Examples include the online sale of goods when such goods are physically supplied (without the help of the internet), or the provision of consultancy services per e-mail.
The law increases the financial and administrative burden on foreign IT companies due to the following.
Registration as a taxpayer with the Russian tax authorities
1) A foreign company that provides electronic services to Russian individuals (not self-employed persons) and performing calculations directly with these individuals, and
2) foreign intermediaries recognised as tax agents, have to submit a request to Russian tax authorities for the purposes of registration as a taxpayer of VAT within the period of 30 days from the beginning of services provision.
If a foreign IT company is providing electronic services when the new law comes into effect on January 1 2017, it has to submit the claim within 30 days. Requests can be submitted personally, by registered mail or by the web site of Russian tax authorities in electronic form.
Calculation and payment of VAT
Foreign IT companies have to calculate and pay VAT at a rate of 15.25%, without the right to deduct input VAT. If a foreign IT company is providing electronic services to Russian companies, the amount of tax will be withheld by the Russian company (buyer) as a tax agent.
Providing electronic services through an intermediary
If a foreign IT company wants to eliminate the administrative burden, it can receive payments for the electronic services through the foreign or Russian intermediary (agent or commissioner) performing calculations directly with the individuals through a Russian branch, e.g. a foreign payment services provider. This intermediary will become a tax agent of the foreign company and liable to calculate and withhold VAT, also without the right to deduct input VAT amounts.
If the VAT tax return was not filed on time, the Russian tax authorities can perform a tax audit on the basis of their existing documents (information) on the taxpayer, as well as data on other similar taxpayers. For the purposes of the audit, tax authorities have a right to request information from money transfer operators, electronic funds operators, operating centers, payment clearing centers, central payment clearing counterparties, settlement centers and mobile operators on transfer of money to the foreign company.
Conclusion and effect of the new law
The effect on the Russian IT market may appear significant, because the majority of Russian IT companies provide their services through a foreign legal entity or an agreement with a foreign app store. The tax burden will fall on consumers in Russia and therefore consumption of such services may decrease.
One can find similar regulations in the EU, South Korea and Japan (among others), where electronic services are taxed on the territory of the country where the consumer lives. However, the question of whether the “Google tax law” will achieve the goals of the Russian Parliament is now open and if so, the Russian government plans to impose VAT not only on e-services, but also online shops selling goods.
This article was prepared by:
|Sergey Gerasimov, senior partner at Althaus Consulting, member of WTS Global|
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