New in the taxation of electronic services in Russia
Currently, overseas sellers can operate in Russia without VAT registration or charging VAT on their B2B and B2C sales. The Federal Law “On Amendment of the first and the second parts of the Russian Tax Code” N 244-FZ (The “Law”) which was signed by the President on 3 July 2016 introduces the following amendments to the taxation of e-commerce:
1. Change of the place of supply of electronic services
VAT is to be imposed on electronically supplied services if the customer resides in Russia. Such services include, in particular:
- hosting services;
- advertising services on the Internet;
- sale of electronic books, images or musical works via the Internet;
- storage and processing of information in the Internet;
- posting of offers to buy (sell) goods (work and services) and property rights in the Internet;
- provision of access to the Internet search systems.
Foreign suppliers of electronic services will not be able to recover input VAT incurred in Russia.
The Law also contains the list of operations not regarded as electronic services:
- sale of goods and services where goods and services are ordered via the Internet and supplied without using the Internet;
- sale or license of computer programs on magnetic storage media;
- provision of consulting services by e-mail;
- provision of Internet access.
The location of an individual is deemed to be Russia if:
- it is his place of residence;
- the bank which keeps the account for payment for electronic services is located in Russia;
- the network address of an individual used for acquisition of services is registered in Russia;
- international mobile phone country code used for acquisition of services is provided in Russia.
If according to the law of a foreign state the location of an individual is deemed to be the territory of this state, an electronic services supplier should choose the country in which an individual is located.
2. Registration requirement
Foreign companies selling to private customers (B2C) must register at the web portal of the Russian Federal Tax Service by submitting documents in electronic form. The online service VAT declarations will be used for filing VAT declarations and correspondence with the tax authorities. All documents submitted to tax authorities should be prepared in Russian. Further, enhanced encrypted non-certified digital signature may be used for signing the majority of documents.
An application may be submitted to the tax authority personally or with the help of an intermediary or by mail.
The tax authority can deregister a foreign supplier in case of
- revelation of incorrect information contained in the submitted application and other documents;
- non-compliance with the request to pay VAT and fines;
- non-compliance with the request to submit required documents (information);
- non-submission of a VAT return;
- non-payment of VAT due.
Deregistration should be undertaken not earlier than all measures for recovery of VAT due are complete.
Foreign sellers providing services to business customers (B2B) are not required to register for VAT, since Russian buyers have to remit VAT to the Russian state on behalf of the foreign seller. Thus, there is no change to the present mechanism of VAT collection in the case of B2B sales.
If a foreign seller supplies services to consumers via an internet portal, gateway or a similar platform acting on the basis of a commission, agency or a similar agreement, the platform operator is deemed as supplier to Russian consumers and is subject to VAT registration and VAT payments.
3. Recovery of VAT underpayments
Non-payment or incomplete payment of Russian VAT by foreign sellers may trigger seizure of property held by such entities in Russia/their funds in a Russian bank account. However, the Law does not address the procedure of enforcement of tax claims against foreign companies which have no assets in Russia.
As opposed to the initial version wording, the final version of the Law reserves VAT exemption with respect to licenses of software.
The adopted amendments are expected to take effect as of January 1, 2017.
The Law is expected to complicate the work of foreign suppliers of electronic services. Alone the registration procedure could lead to hardly predictable difficulties. Besides the technical aspects it is necessary to solve the issues of cooperation with the Russian tax authorities. The absence of a developed institute of fiscal representation will hinder the administration of new requirements, for instance, filing tax returns and correspondence with tax authorities in Russian as well as performance of tax audits.