As of July 1, 2019, Russian taxpayers will be entitled to recover input VAT pertaining to services provided to customers outside of Russia.1 Previously, such input VAT could only be deducted as an expense for Russian corporate profits tax purposes.
What the new law says
Russian taxpayers that provide services "outside of Russia" under the Russian place of supply rules (Article 148 of the Russian Tax Code) will be able to recover relevant input VAT. The new beneficial VAT regime will apply, inter alia, to the following categories of services provided to foreign customers:
- customized software development and modification;
- legal, consulting, accounting, audit, advertising, marketing services;
- engineering, data processing, research and development services;
- sale or provision of licenses to IP items;
- electronic services;
- lease of movable property (with certain carve-outs);
- sale of emission reduction units under the Kyoto Protocol;
- certain transportation services.
The new rules do not allow taxpayers to recover VAT for services that are VAT-exempt irrespective of their place of supply.
What to consider in practice
The Russian tax authorities have historically audited companies providing services to customers outside of Russia with a high degree of scrutiny. Now, when such services will be associated with VAT recovery, taxpayers can expect even stricter tax audits. The Russian tax authorities may test two major issues affecting the place of supply: the substance of the services and the actual location of the customer. Therefore, it is strongly recommended that taxpayers prepare a defense file to recover input VAT.
- Examine your current agreements to determine whether you or your Russian service provider may benefit from the new VAT rules. Consider revising the current contract prices.
- In case of mixed-type service agreements, consider revising them to distinguish between VAT-taxable and non-VAT-taxable services based on the expected economic effect of the new rules.
- Consider creating and maintaining a proper defense file with respect to services provided to customers outside of Russia in case of a tax audit.
1. See Federal Law No. 63-FZ dated April 15, 2019 "On Amending Part Two of the Tax Code of the Russian Federation and Article 9 of the Federal Law "On Amending Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation on Taxes and Levies"