1. A comprehensive value added tax (`VAT') instruction has been reissued, replacing Instruction No. 1 Official publication of Instruction No. 39, incorporating major amendments, commenced in Rossiskaya Gazeta on 23 November 1995 and will presumably continue in subsequent issues.
2. The most significant amendments are summarized in this Tax Alert. Highlights include:
- some financial transactions between head office and branches (filials) become VAT-exempt
- toll-processing charges may generally be treated as exempt exports
- VAT documentation and disclosure requirements are elaborated
- creditability of the VAT withholding (`reverse charge') remains in doubt.
BRANCHES (FILIALS)
3. The list of taxpayers is extended by including filials and other separate divisions of Russian enterprises independently selling goods or providing services. Previously, such divisions also needed to maintain a settlement bank account in order to be separate VAT payers.
4. Sales of goods and provision of services of a productive nature, by divisions of taxpayers to each other are stated to be VAT exempt. It is, however, unclear from the language whether filials of either Russian or foreign companies may be regarded as divisions for the purposes of this exemption. Informal discussions with State Tax Service officials indicate that this apparent exemption was unintended. It is possible that a clarification or amendment to the Instruction may be issued to eliminate this ambiguity. In the meantime, clients should consult with us if they might need to rely on the terms of the exemption.
5. Exemptions are provided for the following intra-company transactions:
- transfer of funds from the central reserves of a company to its separate divisions to finance specific projects, removing an anomaly under which the provision of funding to a filial was subject to VAT, whereas the capitalization of a subsidiary was generally exempt
- transfer of funds to the head office of a company by its filial as a contribution to central reserves or to finance central management - such amounts would not be profits tax deductible for the filial.
OTHER EXEMPTIONS
6. A sale of fixed assets already used by the seller will be subject to VAT on sale consideration only up to the net book value of these assets as recorded in the seller's Russian statutory accounting records.
7. By contrast, the transfer of a `unit of ownership' in a Russian legal entity, such as a participation in a Limited Liability Company (`OOO'), should be subject to VAT only on that part exceeding the original contribution of the seller.
8. The exemption for licence fees will be limited to payments under registered licence agreements concluded with owners for the use of patents. A Ministry of Finance official has indicated that, in order to qualify for this exemption, registration must be effected with Rospatent, the State patent office, under the procedure is laid down in a Rospatent ruling of 21 April 1995. Other types of licence and royalty payments will be treated as subject to VAT.
9. Following recent amendments to the VAT Law, exemption is allowed for works and services on projects related to the withdrawal of the Russian Army from foreign states. This exemption extends to consultancy services provided by foreign and Russian entities within the framework of such projects.
10. Where foreign raw materials are processed by a Russian company under an agency agreement (usually referred to as `tolling') and the finished products exported outside the CIS, the processing charges would be VAT exempt, provided the finished products are not subject to Russian excise.
LOWER RATE ON FOOD PRODUCTS
11. Instruction No. 39 includes a temporary definition of delicatessen products excluded from benefiting from the 10% lower rate of VAT applicable to basic food products. However, that list has been superseded by a definitive and broadly drawn list of delicatessen fish and meat products issued as Government Regulation No. 1120 of 13 November 1995, effective from 18 November 1995. The corresponding State Customs Committee Order applicable to VAT on imports is expected to be issued in the near future.
12. Sales for processing purposes, of non-exciseable foodstuffs listed in the Government Regulation, should also be subject to VAT at the 10% rate.
FINANCIAL SECTOR COMPANIES
13. Many financial sector companies, notably banks and insurance companies, are exempt from VAT on a major part of their business. If revenue from services subject to VAT is less than 5% of total revenue of a taxpayer, VAT paid to suppliers need not be credited as input tax, but may be written off as a deductible expense for profits tax purposes. VAT on the purchase of fixed and intangible assets should be capitalised at their balance sheet value and depreciated over their prescribed lives, as for other companies.
14. Regulations abolished by the new Instruction include Letter of the Ministry of Finance #70 dated 7 August 1992, which listed bank services that should be subject to VAT. The new Instruction, however, does not contain any reference to this issue, so that some further clarification may be necessary to enable banks to identify VATable transactions.
VAT WITHHOLDING
15. The former Instruction included a controversial provision prohibiting taxpayers from obtaining a credit for VAT withheld from payments to foreign companies selling goods or providing services in Russia (the so-called `reverse charge'). Although Instruction No 39 omits this prohibition, it is not clear whether this amounts to permission to credit withheld VAT against output VAT liabilities in the usual manner. We understand that this issue may currently be a matter of debate between the relevant authorities.
16. In these unsatisfactory circumstances, Russian enterprises that cannot delay making affected payments may, as soon as Instruction No. 39 comes into effect, consider making such payments subject to VAT withholding and account for tax withheld as creditable input VAT, relying on the deletion of the former prohibition. This approach is not without risk, although there is nothing in the VAT Law itself to imply a prohibition of an input tax credit, and we would support any client who encountered difficulties as a result. The relative contract should be checked to ensure that a tax grossing clause is included, if appropriate. The VAT withholding requirement does not extend to all payments to non-residents, and we advise clients to consult with us beforehand to calculate the extent of liability and to assess relative risks.
DOCUMENTATION AND DISCLOSURE
17. In future, applicable VAT should be specified in all payment documents, and in invoices or other relevant supporting documentation in the following circumstances:
- for the purposes of accounting for a barter deal
- if an advance payment is to be made for goods purchased or services consumed
- if settlement is to be made by means of a promissory note
- to account for a settlement of mutual liabilities.
18. If the amount of VAT on the purchase of goods or services for production purposes has not been correctly disclosed, the purchaser is required to include the entire gross payment in the cost of production, so that no input VAT credit would be obtained.
19. VAT not specified in the supporting financial document may, however, be calculated and claimed as an input VAT credit if incurred as business travel expenses within the specified norms, including transportation and accommodation costs.
20. The new Instruction lists the documents required from an exporter of goods from Russia in order to obtain the relevant export exemption. If any of these documents is missing the VAT benefit may not be granted.
TAX CALCULATION AND RETURNS
21. Where a wholesale trading company purchases goods for resale, the relative input tax will be immediately creditable against VAT payable on sales. Where such a wholesaler sells goods imported into Russia free of VAT, the VAT charged to the purchaser should now be calculated on the difference between the sale price and the sum of the customs value of the goods, the customs duty and customs clearance fee paid on import. This might, for example, apply to sales of `technological equipment' imported duty-free.
22. An excess of input VAT paid by a VAT taxpayer over output VAT for a period may be offset against future VAT payments or refunded by the tax office within 10 days of filing a refund claim and additional tax calculation. Any such claim may be submitted within three years from the due date for filing the original tax return for the period of the excess.
23. VAT payers will be entitled to submit amendments to tax returns already filed, to rectify any mistakes subsequently identified. Any penalties applicable in such circumstances are not specified, however, under the May 1995 and October 1995 decisions of the State Tax Service, the 100% and 10% penalties should not apply, although we believe that interest, currently 0.7% per day, would be due.
TAX PAYMENT
24. VAT payment frequency depends on the average monthly tax liability (`AMT'), as follows:
AMT Roubles Frequency of payment up to 3,000,000 Quarterly 3,000,000 - 10,000,000 Monthly more than 10,000,000 Three times each month
25. Taxpayers with a limited number of employees (varying with industry sector) continue to pay VAT quarterly, irrespective of the scale of their AMT.
26. VAT and penalties claimed as a result of a tax office investigation of a taxpayer become payable within five days of receipt of the relative decision of the tax authorities.
27. If goods are sold or services provided in Russia for hard currency, the vendor may pay the corresponding VAT in hard currency at the Central Bank of Russia exchange rate on the date of VAT payment. This implies that separate VAT accounting and reporting for such sales will still be necessary.
EFFECTIVE DATE
28. Since the Instruction makes no specific provision, it would appear to be effective from the date of official publication, presumably from 23 November 1995, as noted in paragraph 1 above. Further information or advice on VAT matters may be obtained from our tax department in Moscow or St Petersburg.
This publication is intended for general guidance only and should not form the basis of specific decisions.
For further information please contact the firm on +007 503 232 5511 or enter text search 'Coopers and Lybrand' and 'Business Monitor'.