Russia is in the process of making changes to its VAT system and this will take effect from January 1, 2019. Business-to-business electronic services providers should be aware of these as they will require foreign providers selling to businesses in Russia to register for and collect VAT and make payments to local authorities.
The new rules are contained in Russia’s federal law 335-FZ — “On Amending Part I and Part II of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation”, which was passed last year.
Electronic services subject to Russia’s new VAT requirements
The electronic services subject to the new Russian VAT rules include the following:
- Online software and automated support;
- Online subscriptions to news and other content sites;
- Online data services;
- Web-hosting or online databases;
- Automated online advertising services; and
- Cloud or similar online data storage and memory services.
It is important to note that many B2B software-as-a-service (SaaS) offerings fall under the scope of Russia’s new VAT requirements. The number of businesses around the world that sell SaaS products across borders is significant, and they all must be mindful of the new provisions to avoid possible penalties. Fines may include 10 percent of income earned on sales during an unregistered period and 20 percent on any unpaid VAT.
Some exemptions will remain in place under the new rules, such as selling the right to use certain licensed software.
Who should register and how
Foreign organizations — that is, organizations without a legal presence in Russia — supplying the electronic services outlined above to Russian businesses must register for VAT with Russian tax authorities (if they are not already registered).
Critically, the new rules have no value threshold, so all foreign providers are required to register, regardless of sales volume to Russian businesses. Registration is compulsory even for organizations that supply VAT-exempt services.
The new rules are effective starting January 1, 2019, and companies already supplying electronic services in Russia must register by February 15, 2019.
Registration can be completed using Russia’s Federal Tax Service portal.
Vendors who begin to make such supplies for the first time in Russia after January 1, 2019 will have to register within 30 days from the date the supplies are first made.
How to charge VAT and the applicable rate
Starting January 1, VAT will be charged at the rate of 16.67 percent on the value of electronic services supplied.
Foreign suppliers must state the amount of VAT on their invoices, as well as indicating their tax identification number and registration “reasoning code,” which is issued upon VAT registration.
Generally speaking, companies registered for VAT in Russia are not able to claim any Russian VAT incurred on local costs.
Recipients of these B2B services can deduct VAT paid to the foreign supplier, provided they have valid documents supporting the deduction.
Documentation should include a valid invoice issued by the supplier and may include specific agreements, including those that are a part of or separate from the overall supply contract the foreign vendor has with the Russian customer.
Accounting for VAT
Once registered, foreign companies are required to submit quarterly returns, which are due by the 25th of the month following the end of each reporting quarter.
The supplier’s transaction records must indicate Russia as the place of taxation. The foreign supplier must also retain customer-location information.
Electronic services suppliers should consider the extent to which they supply services to both businesses and consumers in Russia. As mentioned, there is no threshold that triggers the new VAT rules on B2B sales, so each business must do their best to determine their exposure, understand the related risks and determine if they are obliged to register for, collect and remit Russian VAT.
Foreign suppliers should also determine the extent to which their B2B electronic services qualify for exemption under Russian rules. In addition, they should review their licensing agreements and make any changes necessary to account for Russian VAT obligations under the new rules. In order to remit VAT to Russian authorities, foreign companies will need access to a Russian bank account, either through establishing their own or by contracting with a third party.
Finally, while this discussion has almost exclusively addressed suppliers with no legal entity in Russia, corporate groups that do maintain one or more Russian entities must also carefully consider the new rules. The resupply or recharging of centrally purchased SaaS platforms (including accounting and expense reporting packages, as well as sales and marketing platforms) to owned entities in Russia may create VAT liabilities. For example, a non-resident entity in the group that effects re-supplies must register for VAT in Russia.
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