Loans And 'Place Of Economic Activity'
2. The new Instruction provides no additional clarification on these two key issues, which will therefore remain the subject of uncertainty:
- VAT TREATMENT OF LOANS. The Instruction merely repeats the statement in the VAT law (amendments entered into force on 9 April 1996) that turnover received from payments for goods, works and services is subject to Value Added Tax, as are receipts of other funds connected with settlements for goods, works or services. It may therefore be concluded that the receipt of loan principal is not subject to VAT since this is not a payment for goods, works or services but this has so far only been confirmed in a letter from the Moscow Tax Inspectorate. Practice in other regions is often similar. Some tax inspectors have indicated however that they will look closely at any loans where the two parties also have a trading relationship. There also remains uncertainty as to the VAT treatment of interest on non-bank loans. According to the Moscow Tax Inspectorate, this is subject to VAT, so that interest paid to a foreign legal entity which is not registered in Russia will be subject to withholding VAT;
- PLACE OF ECONOMIC ACTIVITY. It is still not clear what is meant by a 'place of economic activity' and in particular, whether a Russian representative office of a foreign legal entity constitutes a place of economic activity in Russia.
3. Certain services which are physically carried out abroad but which are 'consumed' by an entity with a 'place of economic activity' in Russia are subject to VAT. At present, this provision is interpreted as creating additional taxable events. VAT must be withheld from payments by Russian enterprises to foreign contractors for such services, but it is not clear, however, how the principle should be applied if a payment is made from a Russian bank account but does not relate to activities in Russia. Logically, the principle should also apply in reverse: if a Russian entity renders a service to a foreign legal entity which has no presence (or no sales) in Russia, the service can be considered as having been rendered to a place of economic activity outside Russia and accordingly the transaction should not be subject to VAT. Russian tax authorities have not so far been willing to accept this point and the Amendment does not provide any further clarification. This leads to the !
unsatisfactory situation of Russian enterprises continuing to charge VAT to foreign companies which cannot credit the VAT nor obtain reimbursement.
Services subject to VAT if purchaser has a place of economic activity in Russia
4. The Instruction gives some guidelines on the scope of services subject to VAT if these are purchased by an entity with a place of economic activity in Russia:
- engineering services: any services, consultancy included, relating to the planning of production and/or sales facilities and construction of industrial, agricultural and other facilities;
- information services: services of gathering, transferring and organising unprocessed data and providing the user with the results of processing;
- secondment services: it is stated that such services are taxable if the seconded staff are 'working in the place of economic activity of the purchaser'.
Limitation On VAT Offset
5. The amendments introduce significant restrictions on the availability of VAT offset for companies mainly engaged in the export of services. The amendments distinguish between 'exported' services and services 'sold offshore'. The former are those already exempt under the old legislation (eg transportation of exported goods, services of air passenger carriers etc) whilst the latter are those which are not subject to VAT according to the new rules on place of supply.
6. With regard to the offset of VAT incurred in the production of the above services, VAT which relates to exported services may be offset, whilst that which relates to services sold offshore can only be claimed as a profits tax deduction, unless it relates to assets (not services) acquired in order to provide a services offshore in a non CIS country. In that case, the VAT can be offset in the normal way when payment is made.
Advance Payments For Exports
7. The taxability of advance payments for exports is confirmed. The export of goods is not subject to VAT, but VAT prepayment on advances is required pending the provision of proof of export. On physical export, the VAT prepaid can be offset or refunded from the federal budget, but if there is insufficient output VAT, this repayment is difficult to achieve. Unrecovered amounts can be carried forward for a period of 3 years or be set off against other taxes. The Instruction does not specify whether an existing amount of prepaid VAT can be set off against VAT prepayable on an advance payment for a future export. Any company which believes it may have a problem with advance payments should consult their usual contact at this firm.
Services Rendered By Banks
8. According to the law, banking services are not subject to VAT with the exception of incasso services. The Instruction refers in its definition of banking activities to the Law "On Banks and Banking Activities" and specifies exempt activities as follows:
- receipt of monetary means from legal entities and individuals (being funds which can be withdrawn at any time or after a certain period of time);
- redistribution of such monetary means in its own name and for its own account;
- carrying out bank transfer orders for clients and for other banks (from correspondent accounts);
- cashier services for legal entities and individuals, purchase and sale of foreign currency by way of cash or bank transfer;
- receipt and redistribution of precious metals;
- issuing of bank guarantees;
9. The following banking services do not, however, qualify for the exemption. These are additional services which banks are allowed to undertake on the basis of the banking law:
- issuing on behalf of third parties papers stipulating the obligation to make a payment;
- payments for managing trust funds (money or other property) for legal entities or individuals;
- operations with precious metals and precious stones;
- payments for the rent of safe deposit facilities for documents or valuables;
- financial leasing operations;
- consultancy and information services.
10. The rules governing the offset of input VAT by banks (expense or input option where VATable services less than 5% of total income) have not changed significantly, although the wording of the Instruction in this respect has been amended.
Goods Subject To 10% VAT
11. The following products are subject to 10% VAT if they are used for technical purposes, in food production or the production of pharmaceuticals: raw sugar, fishmeal, fish and sea products.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.