On 3 July 2016 the President of the Russian Federation signed Federal Law No. 244-FZ on Amendments to Parts One and Two of the Tax Code of the Russian Federation (the “Law”), which enters into force on 1 January 2017.
The Law introduces the charging of VAT at the location of the purchaser of services provided electronically via the Internet or another data telecommunication network (“electronic services”), including:
- the granting of nonexclusive rights to use computer programs and databases via the Internet, including the right to access computer programs, e.g., online games;
- the provision of advertising services on the Internet;
- the provision of domain names and provision of hosting services;
- the provision of access to search systems on the Internet;
- IP telephony services;
- the provision of rights to use ebooks and other content;
- online TV and radio broadcasting.
An electronic service is considered to be provided to Russian consumers who are individuals and not private entrepreneurs (the “consumer”) not only if the consumer lives in Russia, but also if the consumer pays for the electronic service from a Russian bank account, telephone number or IP address.
In this instance, foreign entities providing electronic services to consumers (a “foreign provider”) and receiving a fee for this directly from consumers, and also foreign entities that are intermediaries in settlements with consumers for electronic services provided by foreign providers (a “foreign agent”) must register with the tax authorities in Russia, even if they provide the services and/or receive the payments from consumers from abroad and not through their Russian separate subdivision.
Tax administration of electronic services performed by a foreign provider or paid through a foreign agent takes on considerable specificity in terms of
(1) taxation of electronic services provided by foreign entities:
- the tax is at the rate of 15.25% of the value of the services including the VAT amount (rate on the gross amount);
- VAT on the sale of electronic services to Russian consumers is paid to the Russian budget by the intermediary that receives the funds from individuals, whether or not it has a contractual relationship with the foreign provider;
- the foreign provider and foreign agent are not entitled to use VAT tax deductions related to the purchase of goods (work, services) in Russia or the import of goods to Russia, even if those transactions were made to provide the taxable electronic services;
- the granting of rights to use software and databases under a license agreement is still exempt from Russian VAT, although it was initially proposed to eliminate this tax exemption and provide targeted exemptions to Russian providers instead. However, after the law enters into force, when VAT taxpayers distributing nonexclusive rights (licenses) to computer programs and databases to users in Russia decide to take advantage of that exemption, they should analyze the probability of tax risks, in particular, the likelihood of the distribution of those rights being deemed an electronic service and not a license;
- providing electronic services in Russia does not result in the formation of a permanent establishment for profit tax purposes.
(2) tax registration and interaction with the tax authorities:
- foreign providers currently operating in Russia and receiving a fee for this directly from consumers, and foreign agents will have to register between 1 and 30 January 2017. Companies new to the Russian market will have to register within 30 days of when they start providing electronic services to Russian consumers.
- a foreign provider or foreign agent may be deregistered by the tax authority after collecting tax arrears in the event of nonpayment of tax, failure to file returns or documents, and a number of other violations. The unpaid portion of the arrears is considered uncollectable but is restored in the event of repeat tax registration;
- if a foreign provider or foreign agent does not have access to an online account, the tax authorities may send it messages at the email address of which they are aware.
(3) conduct of an office tax audit of a foreign provider and foreign agent:
- the time period for an office tax audit of a return filed by a foreign provider or foreign agent has been increased to six months;
- for failure to file a tax return the tax authority is entitled to conduct a tax audit using the calculation method within six months of the deadline for filing the return;
- the foreign provider or foreign agent does not have to draw up VAT invoices, purchase or sale ledgers for electronic services. Instead, the tax authorities are entitled to request that they provide transaction registers showing the place of residence of the consumer, the consumer’s bank account, telephone number and IP address from which he/she pays for the electronic services;
- with the consent of the management of the Federal Tax Service of Russia the tax authorities may request information on transfer of funds from persons making payments to a foreign provider or foreign agent (banks, settlement centers, telecommunication operators, etc.).