The Russian President signed a federal law (here in Russian) making e-services VATable at the location of the customer (the “Law”) on 3 July 2016. We have previously reported on this Law.
Foreign organisations providing e-services in Russia fall within the scope of the Law. For example, the services affected include:
- remotely granting rights to use software (including updates) via the internet;
- online advertising services;
- storage and processing of information online;
- provision of capacity for posting information;
- provision of domain names, hosting services;
- administration of information systems, websites and others.
Some operations are expressly excluded from the scope of the Law. These include, for example, the online sale of goods, provided such goods are physically supplied (without the involvement of electronic means), or the provision of consultancy services by e-mail.
The implications for foreign companies providing e-services to Russian consumers
The adoption of the Law increases the financial and administrative burden on foreign companies due to the following new obligations placed on them:
- They need to be tax registered with the Russian tax authorities via the taxpayer’s individual account on the internet.
- They have to calculate the Russian VAT on their own and pay it at a rate of 15.25%, without the right to deduct input VAT amounts.
- They must submit VAT returns to competent Russian tax inspectorates.
The application of VAT incentives to sale of e-services
The initial draft of the Law had envisaged the abolition of incentives in the form of an exemption of VAT on the transfer of exclusive rights under a licence agreement. At the second reading, a decision was made to retain the existing incentive, since its abolition could adversely affect Russian software makers. However, there are no clear criteria to determine the e-services that can benefit from the above incentive. Thus, one cannot exclude the occurrence of disputes with the tax authorities when the incentive will be applied in practice.
Liability of foreign organisations
The only form of tax control over a foreign organisation is an off-site tax inspection, which may be carried out by the Russian tax authorities over a period of six months. When carrying out this check, the tax authorities may require foreign companies to submit documents, as well as request information relating to operations involving the transfer of funds from the national payment cards system or money transfer operators.
If a foreign organisation provides inaccurate information in the application for tax registration or other documents, fails to file tax returns, pay tax, penalties or interest charges, or fails to submit documents, such organisation will be removed from the tax register. The arrears, fines and penalties will continue to accrue against an organisation that continues its business activities after being struck off from the register.
Despite the fact that the Law will come into force on 1 January 2017, it is advisable to take certain steps at this stage:
- Foreign organisations that sell e-services to Russian customers should analyse the types of services they provide, assess the potential impact of the Law and, if necessary, revise their strategies for doing business in Russia.
- Russian organisations exporting e-services abroad should draft tax policies for handling separate accounts of incoming VAT.
- All market participants should consider the risks of applying VAT incentives for the transfer of exclusive rights.