On 18 October 2016, the President of the Russian Federation instructed the government to consider amending the tax legislation to impose VAT and customs duties on foreign-made goods purchased by Russians via foreign internet platforms and e-retailers.

The Association of E-Commerce Companies (“AKITA”) is behind this idea*. AKITA had initially proposed to lower the threshold for duty-free importation of foreign goods. However, it quickly put forward another proposal, namely, the introduction of VAT for foreign e-commerce vendors. The initiative is aimed at making Russian e-retailers more competitive and also at creating equal trade conditions between Russian and foreign online retailers, a policy similar to the Google tax for e-services. The Google tax was introduced in Russia last July (please see our earlier Alert on the Google tax here).

The new system, as proposed by AKITA, will work as follows:

– Tax registration will be mandatory for foreign online retailers when their revenues for the last three months exceed RUB 2m (approx. EUR 29,600). At the same time, a mechanism to automatically collect and account for VAT in respect of each order placed on an e-platform will need to be created, but it is unclear who will be responsible for the creation of this mechanism.

– Once the seller receives an advance payment on the foreign e-commerce platform, the seller generates an order and sends the purchased goods to Russia via its national postal service. When the package is sent, it is marked with a postal ID bar code, which is transmitted to the e-platform and the Russian Post via the ITMATT system (a data exchange system between the postal administrations of different countries). Further, when the parcel is received in Russia, the Federal Customs Service makes a record of it and passes it on to the Russian Post. To get the package, the purchaser needs to show his passport. Then, the Russian Post informs the Russian Federal Customs Service, the Russian Federal Tax Service, as well as the foreign postal service on the receipt of the goods by the purchaser, and the foreign postal service forwards the information to the e-platform. After that, the online retailer pays VAT at the rate of 18% to the Russian Federal Tax Service.

AKITA’s proposal has been criticised* by Russian experts as the VAT administration mechanism is expected to be very expensive. The experts have specifically pointed out that the cost of creating the mechanism may exceed the revenues that could be generated from the introduction of new VATable transactions. In addition, another Russian online retailer association, the National Association of Mail Order and Distance Selling Trade, has proposed* the introduction of a sales tax rather than VAT to the government. This shows that there is no consensus in the Russian business community on this issue.

At this stage, the Russian Government is drafting the relevant bill, which should be ready by 31 December 2016.

One should also expect to see the duty-free threshold lowered since the Russian Federal Customs Service made proposals* in this respect, with the support of the Ministry of Finance. That said, the new threshold has not yet officially been announced (the current threshold is EUR 1,000, provided the weight of the package does not exceed 31 kg).

If the initiatives go through, foreign online retailers will need to adapt their operations to the new requirements. We are closely monitoring the development of the legislation on this issue and are ready to provide legal assistance to foreign online retailers who are exploring ways to meet the forthcoming requirements of the Russian legislation.

* In Russian