Russian Federation: Tax Alert 1/97 - New VAT Invoicing Rules

Last Updated: 21 January 1997
1. In this Tax Alert, we will discuss the new VAT invoicing and accounting rules, which are effective as of 1 January 1997. The new requirements were initiated by Presidential Decree No. 685 of 8 May 1996, set out in Government Regulation No. 914 of 29 June 1996 and recently clarified by a joint letter of the State Tax Service and the Ministry of Finance (Letter of 25 December 1996 No. VZ-6-03/890 and 109).


2. Under the new system, all VAT payers are required to:

  • include certain compulsory information on VAT invoices;
  • maintain an invoice ledger, purchase ledger and a sales ledger exclusively for VAT purposes.

3. The primary purpose of the system is to match VAT paid by the seller (output VAT) with VAT offset by the purchaser (input VAT). The new system should enable tax authorities to check whether VAT offset by a purchaser has actually been paid for by the supplier. VAT is the main source of revenue for the budget and increasing compliance is a high priority for the Government.


4. If a purchaser does not receive a proper VAT invoice from its supplier, this may lead to a double exposure. Firstly, VAT charged by the supplier will not be eligible for offset or refund by the purchaser. Secondly, the VAT which the purchaser must then pay from his own pocket will not be profits tax deductible. For profits tax purposes, costs are usually accounted for exclusive of VAT. VAT can only be deducted for profits tax purposes in very specific circumstances, and therefore the tax authorities will probably not allow a profits tax deduction for any VAT which is not eligible for offset.

5. In the following example, company A purchases goods worth 100 Roubles from company B. VAT is charged at 20%:

Net sales price             100
VAT @ 20%                    20
Gross sales price           120

6. If the invoice does not meet the requirements, the 20 Roubles of VAT cannot be offset by company A from its output VAT, and will constitute a cost. Assuming this cost will not be deductible for profits tax purposes, and a profits tax rate of 35%, company A must earn 20/(100-35) x 100 = 30.77 Roubles in order to pay for the VAT. This means that a minor mistake in a VAT invoice can lead to an aggregate cost of 30.77%, whereas VAT is supposed not to influence the cost of production.


7. If a supplier does not issue a proper invoice, the tax authorities apparently consider this to be wrongful accounting, which may result in a penalty of 10% of the "concealed" amount. This raises the question of what will happen if a proper VAT invoice has not been issued but the VAT has nevertheless been properly accounted for. It is questionable whether the tax authorities can legally penalise such taxpayers, but the intention is clearly to make everyone comply with the system. As explained above, purchasers have a more obvious incentive to require proper VAT invoices.


8. Invoices must be issued in Russian (or bilingual) and contain, inter alia, the following information:

  • TIN - Taxpayers Identification Number of both the seller and the purchaser;
  • Account number of the purchaser. Presumably, this must be the bank account from which the invoice will be paid.

9. The requirement to mention the following information in the VAT invoice has been temporarily suspended. From a date yet to be announced by the tax authorities, the following data will need to be included on VAT invoices.

  • OKONCh - Code according to the All-Russian Classification of Branches of Economy of both the seller and the purchaser;
  • OKPO - Code according to the All-Russian Classification of Enterprises and Organisations of both the seller and the purchaser.
  • OKDP - Code according to the All Russian Classification of Kinds of Economic Activity, Production and Services relating to the type of goods or services for which the bill is issued.

10. The OKONCh, OKPO and OKDP codes are issued by the statistical authorities (Goskomstat) and are generally obtained upon registration of a company. Russian legal entities are obliged to register with the statistical authorities, whilst registration for representative offices and branches of foreign legal entities is generally optional. Foreign legal entities which carry out commercial activities and want to offset input VAT against output VAT may consider registering with the statistical authorities in order to avoid potential problems in the future.


11. The procedure that is envisaged for issuing VAT invoices and accounting for VAT can be summarised as follows:

  • Issuing the invoice;
  • Registration in the invoice ledger and filing it with the invoice ledger;
  • Entering the invoice in the sales ledger of the supplier;
  • Entering the invoice in the purchase ledger of the purchaser.


12. Within 10 days after shipment of goods/rendering of services but before the end of the VAT accounting period, the seller issues a VAT invoice in two copies. This means that if goods are shipped on the last day of an accounting period, the invoice will have to be issued on the same day. The original (a faxed version is insufficient) is sent to the purchaser and signed for as acknowledgement of receipt. The original is the official document on the basis of which the entry into the purchase ledger of the purchaser is made and offset of input VAT is granted (see below).

13. Companies which provide services may have difficulty in determining the moment at which services are rendered, in particular if these are provided on a continuous basis. Service providers may therefore choose to define the moment a service is considered to be rendered in their contracts as the moment when they issue the final invoice. We suggest supporting this by including special clauses in contracts and invoices and adapting the accounting policy accordingly.

14. Each invoice must bear a unique number. Numbers should be in ascending order based on the moment of shipment of goods or rendering of services. This should not normally be a problem where invoices are issued by one central financial department, and an invoice number is generated when distribution points request an invoice to be raised. However, if series of pre-printed and numbered invoices are issued to different distribution points, the invoice numbers may no longer match chronologically with the day of sale. The creation of separate sub-sequences for each distribution point could avoid this problem.


15. The copy of the VAT invoice is registered in the invoice ledger of the seller, and is then filed with the invoice ledger. Upon receipt of the orginal of the invoice, the purchaser registers the original in its invoice ledger and files it there.


16. If the seller accounts for VAT on the accruals basis, the invoice is entered into the sales ledger at the date of shipment of goods or rendering of services. If the seller accounts for VAT on a cash basis, the invoice is entered into the sales ledger on the day of receipt of the payment.


17. Upon payment by the purchaser to the seller, the invoice is entered into the purchase ledger. The tax accounting method (cash or accruals) does not influence the moment of entering the invoice in the purchase ledger. Although this is not explicitly stated, the system works on the assumption that a good (service) for which a VAT invoice has been issued has already been shipped (rendered).

18. Payments for goods (services) which have not been delivered (rendered) should be treated as advance payments, for which a special procedure is provided (see paragraphs 21- 23 below). This means that the total amount of input VAT entered into the purchase ledger during a certain accounting period relates to VAT for goods and services which have been received/rendered and which have actually been paid for.

19. Please note that the total amount of VAT entered into the purchase ledger in a certain accounting period does not reflect the total amount offsettable as input VAT. In order to fully qualify for an offset, the expenses in respect of which VAT has been charged should relate to the "costs of production" (Government Regulation No. 552). The newly introduced VAT accounting system does not provide a mechanism to carry out this test, so this is a step which needs to be taken between completion of the purchase ledger and preparation of the VAT declaration.


20. Purchase and sales ledgers may be computerised on the condition that they are printed out not later than the 20th of the month, following the accounting period. The printed pages must be treated as an official accounting document, i.e. they must be filed, numbered and certified with a stamp of the enterprise.


21. If an invoice has not been issued but advance payments or other amounts (such as contractual interest or penalties) for delivery of goods or rendering of services are received, an invoice must be generated within 10 days after receipt of the advance. An "advance invoice" is issued in only one copy and should not be sent to the purchaser. When filling out the advance invoice, instead of a description of the goods delivered or services provided, the reason for receiving the payment must be indicated ("advance", "contractual penalty/ interest"). Other information about the goods or services can be omitted, as none have yet been provided.

22. The advance invoice serves exclusively as a tax accounting document for the seller to support the payment of VAT. Once the actual delivery of the goods or performance of services has taken place, a normal invoice is issued. The reason for this may be that purchasers are only allowed to offset VAT for goods which have been delivered or services rendered and which have been paid for.

23. This may create a problem, however, insofar as invoices are usually desirable (for accounting purposes) and sometimes even required (generally by banks) to make payments. VAT invoices can, however, only be issued after goods have been shipped or services have been rendered. In order to receive advance payments, we suggest the following procedure:

  • the supplier issues an "advance payment notification" which contains all necessary information to make the payment and has its own serial number;
  • the purchaser transfers the invoiced amount. Upon receipt of the amount, the supplier raises a VAT invoice (one copy only!) and makes an entry in the sales ledger, on the basis of which he pays the VAT in the applicable accounting period;
  • when the goods are shipped/services are performed, the supplier issues a VAT invoice, the original of which is transferred to the purchaser and registered in the purchase ledger. The VAT invoice can mention that the amount billed is fully or partly covered by the payment received on the basis of the advance payment notification.


24. Invoices must also be issued if goods are transferred without the obligation for the recipient to pay the supplier. Such transactions generally expose the party which has given away such goods to pay VAT on the market value or the stated equivalent. In such cases, the reason for free transfer must be mentioned on the invoice. The recipient should then make an entry in its purchase ledger without showing VAT, i.e. offset of this VAT is denied.


25. Russian legal entities purchasing services or goods subject to VAT from unregistered foreign legal entities are required to withhold VAT from payments made abroad. In order to be able to deduct this VAT as input VAT, the question arises as to how Russian legal entities should account for withholding VAT under the new system. As has been the case hitherto, we believe that withholding VAT should be accounted for separately. This is because late payment or underpayment of withholding VAT do not lead to the usual exposure to penalties and late payment interest. The issue has not yet been clarified in writing, but on the basis of current practice and conversations with the Ministry of Finance we suggest the following:

  • When making a payment to a foreign supplier, the Russian purchaser pays the VAT to the budget at the same time. This is because withholding VAT should first be paid for in order to receive the right of offset (see Tax Alert 7/96 of 2 August 1996).
  • When the goods are received or services rendered, the Russian company adds the VAT withheld to the total in its purchase ledger. The VAT is deducted as input VAT in the applicable accounting period.

26. We recommend however reviewing the text of invoices for payments made to foreign legal entities, in particular where periodical payments under management and licence agreements are concerned. Preferably, there should be a reference to past periods, as such VAT would already be offsettable and this would not be the case for VAT on advance payments to foreign suppliers.


27. Goods shipped or services rendered before 1 January 1997 and paid afterwards do not need to be recorded in purchase or sales ledgers. If an advance has been paid before 1 January 1997 and the delivery takes place after that date, the new VAT invoicing rules apply.


28. When conducting tax audits of enterprises, the tax authorities will most likely focus on the new VAT invoicing and accounting rules, as this could turn out to be a powerful tool for enforcing compliance with VAT legislation. The authorities may seek to charge penalties if taxpayers prepare invoices and account for VAT in a different way, even if all VAT has been properly paid. We would recommend that all taxpayers take the following steps:

  • obtain the necessary information from customers in order to issue proper VAT invoices and start maintaining invoice, purchase and sales ledgers;
  • check whether invoices are issued within 10 days from the moment of shipment of goods/ rendering of services, the moment when an invoice can be issued and the end of the VAT accounting period. If necessary, the accounting policy should be adapted;
  • review invoicing procedures with regard to advance payments and withholding VAT;
  • do not pay for any supplier invoices which are not issued in the proper format.

29. If you wish to obtain copies of the applicable legislation, invoices and accounting documents, please address your usual contact at Coopers & Lybrand.

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.

For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: or enter a text search 'Coopers & Lybrand' and 'Business Monitor'

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