The Federal Tax Service of Russia (the "FTS") has allowed Russian customers to act as VAT tax agents on payments made to foreign vendors of electronic services.1
As of January 1, 2019, foreign organizations that supply electronic services ("ESS") to Russian legal entities and individual entrepreneurs and directly receive payments for these services are required to register with the Russian tax authorities. Once a company is tax registered, it must charge, report and pay Russian VAT on all sales subject to Russian VAT, including non-ESS.2 Russian customers are no longer required to withhold this VAT and remit it to the Russian budget in the capacity of tax agents.
At the same time, according to the FTS, if the Russian customer has voluntarily withheld VAT from the amount of the purchase price, remitted this VAT to the Russian budget and further claimed this VAT for recovery, the Russian tax authorities are instructed not to impose VAT on the foreign ESS vendor or disallow VAT credit to such Russian customer.
Voluntary VAT payment by the customer does not relieve foreign ESS vendors from the Russian tax registration requirement. A 10% turnover fine may apply to companies that fail to do so.
What does this mean in practice?
The parallel use of the tax withholding agent mechanism for tax-registered foreign vendors formally violates the Russian Tax Code. The proposed FTS approach represents a "gentlemen's agreement" between the tax authorities and the business, under which the FTS promises to disregard formal violation of the law as long as applicable VAT is fully paid to the Russian budget. However, the FTS guidance is legally non-binding for the Russian taxpayers and courts and may not provide full protection against potential tax claims.
The FTS did not clarify how the new rules should apply in cases where a foreign ESS vendor reports and pays VAT on its own, with no Russian customer acting as a tax agent. Multiple technical questions on reporting non-ESS sales by foreign companies remain unresolved.
Baker McKenzie is actively participating in communication with the FTS through several major business associations and the FTS Advisory Council on Work with Foreign Investors. Please contact Arseny Seidov, the head of the relevant working groups at Association of European Businesses and American Chamber of Commerce in Russia if you would like to take part in development of relevant
methodological guidance and legislative changes.
We will be happy to navigate you through the ambiguities of the new VAT regime on B2B ESS:
- assess legal and practical aspects associated with VAT payment through the purchaser as a tax agent, as proposed by the FTS;
- develop internal processes to ensure compliance with the Russian tax requirements if you prefer to pay Russian VAT directly as a foreign ESS vendor;
- structure supplies to Russia to minimize negative impact of the Russian ESS VAT rules;
- assess practical risks of non-compliance with certain formal Russian requirements;
- modify your contracts to accommodate the Russian law requirements;
- prepare an application to the Russian Finance Ministry and/or the FTS for clarification of outstanding issues of the new B2B ESS VAT regime
1The relevant guidance is provided in Letter dated April 24, 2019 No. SD-4-3/7937@ "On Application of VAT within Provision of Electronic Services by Foreign Companies as of January 1, 2019"
2 See Letters of the Russian Ministry of Finance No. 03-07-08/24055 dated April 5, 2019, No. 03-07-08/21484 dated March 28, 2019, and No. 03-07-08/17231 dated March 15, 2019.