Why new VAT rules are important for international companies
According to the Federal Law of 27 November 2017 No. 335-FZ, starting from 2019 foreign companies providing electronic services to Russian companies (i.e. B2B services) must register with the tax authorities in Russia and pay VAT. These amendments were adopted despite the fact that tax registration of foreign companies providing electronic B2B services was not recommended by the OECD (under the OECD recommendations, only foreign companies rendering electronic services to individuals should be subject to tax registration).
Russian companies purchasing electronic services from foreign companies should not withhold VAT. They have the right to deduct the input VAT charged by the foreign company based on an agreement or a payment document showing the VAT amount and the Taxpayer Identification Number (INN) and the Code of Reason for Tax Registration (KPP) of the foreign company, as well as documents confirming payment (including VAT) to a foreign electronic services provider.
When making settlements with customers through intermediaries (aggregators), foreign providers of electronic services are not obliged to apply for tax registration. However, members of the national payment system (such as credit organisations and companies/individual entrepreneurs engaged by credit organisations for separate bank operations) and communication service providers acting as intermediaries are not recognised as agents, i.e. they are not required to withhold VAT. The current system with the Russian subsidiary as a tax agent will not work anymore in this respect.
Electronic services include services which are generally provided by a foreign parent (service) company to a Russian subsidiary, such as:
- licensing of software and databases;
- storing and processing information;
- administration of information systems and websites;
- advertising services;
- providing domain names and hosting.
Starting from 2019, foreign companies will be obliged to register for tax in Russia even if the cost of the electronic services provided by them is insignificant. Therefore, parent (service) companies granting rights to use ERP systems to Russian subsidiaries under intra-group agreements should not only obtain VAT registration in Russia, but also calculate and pay the applicable VAT.
New regulations and VAT exemption for provision of software under licensing/sublicensing agreements?
The existing VAT exemption for granting the right to use software under a licensing/sublicensing agreement is still applicable. However, foreign electronic services providers are subject to tax registration even when providing electronic services which are VAT-exempt.
Why is tax registration not just a formality?
Although the tax registration procedure for foreign providers of electronic services is simple and fast, there are the following negative factors to consider:
- extra compliance expenses due to tax registration and administration of taxpayer's personal account;
- tax authorities can audit not only VAT, but other taxes as well;
- necessity to disclose information about the foreign group;
- queries from tax authorities regarding submitted reports and a possibility of tax audits.
If foreign providers of electronic services fail to register for tax, they could be subject to a penalty of 10% of revenue earned. A failure to register for tax and to pay VAT on the electronic services rendered could entail a penalty of 20% of the tax underpayment.
We believe that disputes could arise in the following situations:
- A parent company or a service company provides electronic and other services to a Russian subsidiary under one intra-group agreement. In this case, intra-group services would have to be split into electronic and non-electronic services (for example, VAT on consulting services would have to be withheld by a Russian tax agent).
- A service contract covers maintenance and fine-tuning of equipment apart from the provision of electronic services. It is still unclear whether rules on ancillary services are applicable.
- A foreign provider of electronic services is not registered with Russian tax authorities. A Russian contractor may act as a tax agent on its own, i.e. withhold and pay VAT, although in this case there is a risk that the deduction of VAT may be denied.
The Russian Federal Tax Service is yet to give official clarification regarding the unclear aspects of the new electronic services taxation procedure.
Although the amendments will come into effect in 2019, we recommend analysing intra-group services now in order to modify the business model and ensure the correct documentation of transactions.
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.