1. The State Tax Service has finally confirmed that VAT, withheld by Russian enterprises from payments to foreign suppliers which are not registered in Russia for tax purposes, is creditable as input VAT for the Russian enterprise (Letter of the State Tax Service of 30 July 1996, No. VG-6-06/525).
2. Under an amendment to the VAT law that entered into force on 28 April 1995, a reverse charge mechanism was implemented to collect VAT in cases where a Russian enterprise used services or purchased goods from a foreign supplier which was not registered with the Russian tax authorities. The law required VAT to be withheld from the amount transferred abroad but failed to unequivocally permit such VAT to be treated like normal input VAT. In this way, the Russian system differed from the European "reverse charge VAT mechanism" under which a customer takes over the obligation of its supplier to collect and pay over VAT but is allowed a credit against output VAT. Without such credit, the VAT simply represented an additional cost.
3. After more than a year of prevarication and growing pressure, the State Tax Service has officially confirmed that VAT withheld is offsettable. In order to qualify for the credit, the following conditions must be observed:
VAT must actually be paid out of the funds transferred to the foreign supplier
VAT must be physically paid to the budget before it can be credited as input VAT
As with normal VAT, credit will be allowed on the condition that the goods purchased or the services performed are eligible for inclusion in the "cost of production"
4. If VAT is not mentioned separately on the invoice or in the contract, VAT is withheld from the gross amount paid at the rate of 16.67% (20/120ths). The amount of VAT withheld is recorded on the debit side of account No 19 and, after actual payment to the Budget, is recorded on the credit side of account No 19 and on the debit side of account No 68.
5. No details are given about when the new regime enters into force. The letter is merely an interpretation of existing legislation, and is therefore of immediate effect without requiring registration with the Ministry of Justice. The 'existing legislation' concerned is Instruction No. 39 "On the order of calculation and payment of VAT" of the State Tax Service which was published on 23 November 1995 and which, unlike its predecessor (Instruction No 1), did not state that VAT withheld is not creditable. From that date, therefore, credit for VAT against current and future VAT liabilities appears to be accepted (provided the conditions mentioned above are met), but the position regarding VAT withheld until that date remains unclear.
6. The new ruling is of crucial importance for foreign companies which supply services or grant licences to Russian enterprises. Under an amendment to the VAT law which was published on 9 April 1996, payments to foreign legal entities for certain "professional" and other services or for patent and licence agreements, author's rights or similar rights are subject to VAT if the recipient of the services has a "place of economic activity" in Russia. Typically, such foreign entities are not registered in Russia and withholding VAT applies.
For further information contact Bauke van der Meer on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Click Contact Link or enter a text search 'Coopers & Lybrand' and 'Business Monitor'
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