Russian VAT Overtakes Modern Times
Since January 1, 2017, new rules for VAT taxation of foreign entities that provide services to individuals in electronic form or through the Internet (hereinafter, the e-services) come into effect. According to the amendments to the Tax Code of the Russian Federation1, if a buyer of such services is in Russia, a place of their implementation will be Russia. The list of e-services includes:
- Provision of rights to use computer programs and databases, including access to computer games;
- Provision of rights to use information in the electronic form (for example, musical works, e-books and other electronic publications, audiovisual and graphic files);
- Provision of trading platforms;
- Provision of services for search and (or) submission of information on potential buyers to the customer;
- Provision of domain names, and web hosting services;
- Provision of advertising services on the Internet;
- Information storage and processing;
- Website administration services.
It should be noted that the sale of goods (works, services) through the Internet, if they are delivered without the use of the global network, is not included in this list2. Online stores will exist in the old way.
There are 4 conditions, and compliance with any of them implies the recognition of Russia as the place of services:
- The Russian Federation is the place of residence of the buyer;
- Location of the bank, where the account is opened, which the buyer uses to pay for the services, or the operator of electronic money, through which the buyer pays for the services, – in the territory of the Russian Federation;
- The network address of the buyer, used when purchasing services, is registered in the Russian Federation;
- International country phone code used to purchase or pay for the services is assigned to the Russian Federation3.
New rules for determining the place of sale mean that in the nearest future a lot of foreign entities that provide electronic services to individuals in the territory of Russia will fall under the Russian VAT taxation. The Federal Law dated 03.07.2016 regulates the administrative procedures for tax registration of foreign providers of electronic services, as well as the procedure for cooperation with the Russian tax authorities through the personal account of the taxpayer. There are two “channels” provided for cash inflows from new taxpayers:
- A foreign entity that directly sells the service to an individual is obliged to submit reports on VAT (if such entity is not a direct service provider, and operates under the commission or agency contract, it is recognized as a tax agent);
- A Russian entity or an individual entrepreneur, selling the relevant services to a foreign organization under the agency or commission contract, will have to act as a fiscal agent for the calculation and payment of VAT from electronic services4.
The tax base is defined as the cost of services, taking into account the amount of tax based on actual sales prices. Since the amount of tax is deemed to be included in the cost of services, the effective tax rate is set at 15.25%, not 18% of the tax base. Foreign entities, which become VAT payers in Russia, will not be entitled to deduction of the input VAT, applied to them at acquisition of goods in Russia or actually payable at import of goods to Russia5.
These innovations actualize the issue of VAT exemption of transactions involving the transfer of non-exclusive rights to use computer programs and databases on the basis of a license agreement. Currently, there are no official explanations from the Russian state authorities as to which electronic services provided by foreign (or Russian) entities fall under this exemption, and which do not. Let us take, for example, computer games. The Federal Law dated 03.07.2016 expressly states that the right to use the computer game and its other features is the right to use the computer program. Formally, it is enough for the right holder (licensor) to provide the consumer with the introduction text of the license agreement before using the program: clickwrap and browse-wrap agreements, to meet the requirements of the Tax Code of the Russian Federation. However, the sales of the gaming products industry are so impressive that it is more and more annoying for the Russian tax service to provide benefit to the cash flow, which gains momentum year by year. For example, in the proceedings of “Mail.Ru Games” against the Russian Federal Tax Service6, which ended in September 2015 with the defeat of the Internet company, this rule of VAT exemption has been radically revised. “Mail.Ru Games”, as the copyright of free online games, sold additional functionality to the game (weapon or armor for the hero). Proceeds from such sale amounted to about 1.6 billion rubles and was included in the non-taxable transactions as the transfer of rights to the computer under the licensing agreements. The tax inspectorate charged additional VAT on that amount. The court, in turn, came to the conclusion that “consumers had an idea that the purchased additional functionality to the game was the service for the organization of the game process” and so the operation cannot be exempt from VAT on the said grounds. This case shows how ambiguous and shaky is the qualification of such services within the current legal regulation, which clearly delays in its development and does not meet the requirements of the modern market of Internet services.
Foreign entities and their tax agents, being taxpayers from January 1, 2017, will be subject to significant tax risks associated with the described gap in the regulation of the taxation of electronic services. Those who decide to take advantage of the right to benefits could be potentially in a situation similar to the one of “Mail.Ru Games”. The Federal Law dated 03.07.2016 armed the Tax Code with quite non-virtual weapons and armor.
It is established that a foreign entity will be forced to withdraw from tax accounting in Russia, if this entity:
- Provided false information when registering;
- Failed to pay VAT, penalties or interest within 12 months from the date of expiry of the payment deadline;
- Failed to provide the requested documents to the tax authority within 3 months from the date of expiry of the deadline;
- Failed to submit a tax return7.
Forced de-registration will mean the impossibility for a foreign entity to legally sell its services on the Russian market. VAT penalties and arrears, as a result of which a foreign entity may be de-registered, have no limitation period and are subject to renewal in case of re-registration8. However, the taxpayer shall not be able to use a personal account in the year after de-registration, even in case of re-registration. These measures will encourage foreign taxpayers to comply with the applicable Russian law requirements: costs associated with penalties will not allow ignoring the demands of the tax authorities.
Nevertheless, VAT at the buyer’s location is no news at all for foreign entities in the Russian market of Internet services. It is not the first time when Russian lawmakers have adopted the foreign experience and implemented it in the domestic law. In the EU, similar rules for determining the place of sale of electronic B2B services operate from January 1, 2015. The company selling e-services to an individual being the resident of the European Union is obliged to pay VAT on the transaction in the country of its residence. It does not matter whether the service provider itself is a resident of the EU or not. For the convenience of taxpayers and tax authorities, a system of remote tax payment – mini One Stop Shop (MOSS) has been developed and implemented. The entity, registered as a VAT payer in any EU state, receives access to the MOSS system in this country and files through it VAT returns on electronic B2B services rendered in all other states of the European Union. The entity, which is not a EU resident, may at its discretion choose the state of the European Union for VAT registration and access the MOSS. Payment for the declared amounts by general payment is sent to the tax authority of the country of registration, which hereinafter independently distributes due amounts among the tax authorities of other states. Thus, the taxpayer is exempt from registration in every EU state, where it sells the specified services. The MOSS system acts as a certain pan-European hub of tax payments, centralizing the collection of VAT on electronic services.
Unlike Russian, the EU legislation does not provide benefits for VAT payment on the transfer of rights to the software under the license agreement, and therefore there is a priori no debate on what kind of electronic services fall within this definition. It is possible that in order to avoid legal disputes similar to the dispute of “Mail.Ru Games” against the Russian Federal Tax Service, the domestic legislator will choose the way of cancellation of the problematic regulation. Otherwise, from January 1, 2017 the number of such lawsuits may increase significantly.
To sum up, it should be noted that the introduction of an obligation for foreign entities to pay VAT on electronic services meets global trends and brings the Russian legislation in line with the modern events. For the majority of “new” VAT payers, this obligation is not unusual: foreign entities will have to use the already gained experience in the Russian territory.
In recent years, the Russian tax legislation faced changes of “a foreign origin”. Let us hope that the Russian tax authorities will successfully apply the world experience, and the mechanism will work effectively. And each time the application installed on the mobile device will bring its penny to the budget.
- Federal Law N 244-FZ “On Amendments to Part One and Two of the Tax Code of the Russian Federation” dated 03.07.2016.
- Paragraph 1 of Article 174.2 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
- Subparagraph 1 of Article 174.2 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
- Subparagraphs 3,9,10 of Article 174.2 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
- Paragraphs 5, 6 of Article 174.2 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
- Case N А40-91072/14.
- Paragraph 5.5 of Article 84 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
- Paragraph 1.1 of Article 59 of the Tax Code of the Russian Federation, as amended by Federal Law N 244-FZ dated 03.07.2016.
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