Russia will change its current VAT regime on electronically supplied services (ESS) from 1 January 2019, resulting in tax registration and reporting requirements for foreign companies in B2B markets.
In this article, we summarize the tax implications for both foreign vendors and Russian customers and the recommended actions.
1. Foreign companies required to tax register in Russia and report VAT:
- Tax registration requirement - Foreign companies providing e-services to Russian customers not only in B2C, but also in B2B markets will be required to register for tax in Russia and to report Russian VAT (special rules may apply if there are intermediaries in the supply chain). The same registration and reporting rules will apply to foreign companies treated as tax agents of foreign ESS vendors (eg, marketplaces, aggregators, designated agents, except for payment processors).
- Virtual PE risks - Unlike European jurisdictions, there is no separate VAT taxpayer registration in Russia. The tax registration under the VAT regime may potentially be used for all tax purposes and increase long-term exposure to general tax audit and permanent establishment risks.
- VAT exemption on software use licenses - The VAT exemption on software use licenses is still valid. However, it does not relieve foreign licensors from the VAT registration and reporting requirements in Russia under the VAT regime on ESS.
- Effect on intercompany transactions - Importantly, the new law technically captures foreign suppliers of e-services under intercompany transactions. For example, if a foreign entity recharges its global IT costs (eg, as a portion of license fees and related service fees) to its Russian affiliate as a service fee, the latter will be considered ESS. As a result of such transactions related suppliers will formally be required to tax register in Russia and report VAT. Depending on the circumstances there may be various ways to legitimately mitigate this impact.
2. VAT payment mechanism:
- Russian business customers no longer required to act as tax agents - The changes abolish the obligation of Russian business customers (companies and individual entrepreneurs) to act as tax agents when making payments to foreign ESS vendors. Such customers will not be allowed to voluntarily withhold applicable VAT from these payments. Foreign ESS vendors (or their tax agents) will be required to (i) collect, report and pay VAT on all their sales to Russian customers, and (ii) maintain information on the locations of such customers. Note that the location of a business customer is determined based on other rules than the location of an individual customer: it is the country of registration / incorporation. Foreign ESS vendors and their tax agents may need to introduce changes to their IT systems to collect these additional data on Russian customers.
- Disputable situations - Complications may arise when transactions provide for both e-services and regular services for a bundled fee or when e-services are provided under mixed agreements or when e-services should be VAT exempt. The Russian Tax Code does not expressly address how VAT should be paid when the e-service fee is not separately determined (eg, by the foreign supplier on the entire fee and/or by withholding by its Russian customer or otherwise). Companies should revisit and consider restructuring their agreements for Russia that may contain ESS.
3. Special rules on VAT recovery:
- Default VAT recovery - Russian business customers will be able to recover VAT paid to foreign ESS vendors based on the following documents: (i) an agreement and/or a transaction document that separately indicates the applicable VAT amount, tax ID ("INN" in Russian) and basis for tax registration ("KPP" in Russian) of the foreign ESS vendor; and (ii) a document confirming the payment (including of applicable Russian VAT) to the foreign ESS vendor. The same rules will apply if a foreign tax agent is present in the supply chain.
- VAT recovery in the absence of vendor's tax registration in Russia - If the foreign supplier of e-services is not tax registered in Russia, its Russian customer can decide to withhold applicable VAT and remit it to the Russian budget. The Russian Tax Code does not provide for such a VAT payment procedure under the new regime. Hence, there is a risk that the customer will be unable to recover the VAT so withheld. Lawyers in Baker McKenzie's Moscow office are working on draft proposals to the Federal Tax Service through various forums and expect further guidance on this matter.
4. Russian banks and telecom operators not to be considered tax agents for the purposes of the Russian VAT regime on ESS:
The new law expressly exempts Russian banks, credit card companies and telecom operators from acting as tax agents when transferring payments of Russian customers to foreign ESS vendors. The same rule applies to all Russian companies qualifying as "subjects of the national payment system", eg, electronic money operators, payment agents, federal post offices, etc.
Intermediaries that collect customer payments in the capacity of agents/commissionaires of foreign ESS vendors will be regarded as tax agents.
This aspect is important for foreign ESS vendors, since – if there is no tax agent for their Russian sales – they would fall under the Russian VAT registration and reporting requirements. This change came into force on 1 January 2018 and is in line with the current interpretation of the existing VAT regime on ESS and with guidance provided by lawyer's in Baker McKenzie's Moscow office to the Federal Tax Service on the EU approach to VAT ESS regimes.
- Analyze your customer base for Russia and determine whether your company falls under the new Russian VAT registration and reporting requirements, either as a foreign ESS vendor or as a tax agent.
- Revisit transactions with Russian customers, including intercompany transactions, that may provide for e-services, and consider restructuring them, including by way of segregating e-services into separate contracts. Separately analyze which services may be considered electronic for Russian VAT purposes, which may be VAT-exempt, and whether data is available or can be easily obtained to determine applicable service fee amounts for each such e-service. Further structuring may be necessary to ring-fence ESS revenues from other revenues.
- Consider introducing changes to your IT system to enable collection of the required data on business customers from Russia.
- Consider notifying your Russian business customers that they may no longer be required to withhold Russian VAT from their payments for ESS.