Tax Issues to Consider when Providing E-Services to Russian-Based Clients
With effect from 1st. January 2019, Russia amended the rules relating to VAT taxation of electronic (online) services (e.g. provision of rights to use software, streaming music, films, gaming services, hosting, website and webpage support, etc.). The new regulations raised a number of questions that are considered in this article.
New obligations for B2B market
In accordance with the new rules, non-Russian companies providing electronic services to Russian customers, both companies and individuals, are obliged to register with the Russian tax authorities for the purpose of paying VAT (except for the cases when such services are provided through their Russian branch offices, or the permanent establishments).
Until January 1, 2019 the registration requirements did not apply to B2B market. Russian companies and individual entrepreneurs acted as tax agents and withheld applicable VAT on any services provided by non-Russian suppliers.
Following the requirements of the Russian tax law, the number of providers of electronic services and electronic platforms, registered with the Russian tax authorities and paying VAT in Russia, has increased significantly and is currently approaching two thousand (based on the official information provided by the Russian Federal Tax Service). The list of registered providers includes many market leaders such as Airbnb, Amazon, Facebook, Google, etc.
It is worthy of note that non-Russian providers are obliged to register with the Russian tax authorities, even if the value of electronic services is insignificant. Registration is also obligatory, even if the electronic services are VAT-exempt in Russia, (e.g., there is VAT exemption for provision of rights to use software and databases under license agreements) and/or provided under intra-group agreements.
Reporting obligations and liability for non-compliance
The tax registration procedure is online and quite simple. At the same time, non-Russian providers are obliged to file VAT declarations on a quarterly basis, calculate and pay VAT at the rate of 16.67% on the gross value of the provided services.
The Russian tax authorities have the right to perform tax audits of submitted tax declarations and request additional information/documents they may find necessary for the audits.
If non-Russian providers fail to register with the tax authorities, they could be subject to various tax penalties (e.g., fine for carrying on activities in Russia without registration, fine for failure to submit a VAT declaration, late payment interest for VAT non-paid on time, etc.).
Uncertainties trigged by amendments
Despite the fact that the new rules have been applied for more than half a year, some issues are still unresolved.
Thus, according to the clarifications of the tax authorities, if a non-Russian company provides both electronic and other (not in electronic form) VATable services to a Russian company, the non-Russian provider is obliged to calculate and pay VAT on both electronic and other services. In such a case, the Russian company is not obliged to withhold VAT as tax agent, irrespective of the type of the services provided.
At the same time, the described situation is not properly regulated in the Russian Tax Code. Therefore, Russian customers may face difficulties with VAT refunds on non-electronic services, since the special procedure for VAT refunds is defined only for electronic services.
Guidance of the Federal Tax Service
In order to mitigate the uncertainties caused by the new rules, the Russian Federal Tax Service issued its guidance that allowed following the approach that existed before January 1, 2019. Thus, if a Russian company acted as the tax agent and withheld VAT on electronic services, the non-Russian provider of the services is not required to pay the same amount of VAT again and the Russian customer is entitled to a VAT refund.
However, even if the Russian company withholds VAT on electronic services, the non-Russian provider is still obliged to register with the tax authorities and submit the nil VAT declaration.
Awaiting for the changes
The new rules are still under discussion and the described guidance shall be treated as a temporary measure, applicable until the introduction of further amendments. In particular, state authorities are considering the following options proposed by the business community:
- Setting thresholds on the value of electronic services that will trigger the obligation to register;
- Introduction of the concept of a “special tax agent” that will be allowed to withhold VAT on e-services, under the rules that existed before January 1, 2019;
- Excluding non-Russian providers that render electronic services under intra-group agreements from the scope of the new rules.
VAT on e-services may become not the only tax that shall be paid by non-Russian, e-services providers in the future. The Russian Ministry of Finance has recently proposed to introduce new rules for taxation of profits generated in the digital economy. The idea is that the profit of digital companies should be taxed basing on the location of the users, which is generally in line with OECD’s position on this issue.
In order to avoid violations of the Russian tax law, foreign providers of electronic services should check their existing business models connected with provision of services in Russia and follow changes in the legislation and relevant practice.