Electronic services provided in Russia are subject to ordinary taxes, like any other business activity. And, like anywhere else in the world, most questions arise when value-added tax is assessed on operations that involve foreign companies supplying electronic services.
Before January 1, 2017, value-added tax (VAT) legislation contained no special taxation rules relating to services provided via the internet.
For tax purposes, the nature and type of services were important, rather than the way in which they were supplied. Under the general rule, services are deemed supplied in Russia and are subject to VAT only if the provider of such services performs activities in Russia (though, of course, there are exceptions to this rule).
The rapid development of information technology resulted in most services being provided by foreign companies and consumed in Russia without any tax being paid on them. For example, services aimed at providing domain names or website administration services were not deemed supplied within Russia.
From 2017, special rules—informally referred to as the “Google tax”—were introduced in Russia for assessing the VAT on e-services.
If electronic services have been provided by a foreign entity via the internet (or another information and telecommunications network) to individuals and legal entities located within the Russian Federation, under the new rules they are subject to VAT. In other words, the place where such services are supplied is determined by the place where the buyer performs its activities.
The list of such services is limited. In particular, they include:
- providing rights to use electronic books and musical compositions;
- providing advertising space in the internet;
- website support services;
- storing and processing information (which is accessed via the internet);
- granting rights to use computer software and databases via the internet.
However, special rules regarding VAT do not apply, for example, to providing advisory services by e-mail, or to selling goods, work or services ordered via the Internet but supplied offline.
Before January 1, 2019, when a foreign supplier provided electronic services within Russia, the obligation to pay VAT was, as a rule, performed by tax agents. These were Russian and foreign intermediaries receiving payments from buyers or Russian companies that were buyers.
For the business-to-business (B2B) sector the “Google” tax is also relevant. Here, some difficulties emerged in practice.
Administrative Burden on Foreign Holding Structures
It is typical for foreign holding structures to use a single software for the purpose of management accounting. If rights to the software are transferred within the holding structure to other companies under a license agreement, no obligation arises to pay VAT. Such an operation is exempt from the tax.
Any transfer of rights to the software without such an agreement is taxed if the buyer is active within Russia. Before 2019, Russian companies in a holding structure that acquire such rights were recognized as tax agents and paid VAT to the Russian budget independently.
According to the new rules, which came into force on January 1, 2019, the situation has changed significantly. If a foreign company which supplies electronic services has no intermediary to receive payments from Russian clients, it should register with the Russian tax authorities itself and pay VAT to the budget on its own.
This has become one of the hottest topics in discussions between representatives of foreign businesses in Russia and state fiscal authorities.
The new legislative changes entail an administrative burden on foreign holding structures: they should register with tax authorities in Russia, submit declarations, and respond to inquiries from tax inspectors during audits. At the same time, all these actions frequently do not result in VAT being paid because, within a holding structure, rights to software are as a rule transferred under a license agreement and such transfer is not taxable.
Foreign companies have seen large tax risks relating to registration with Russian tax authorities in connection with intra-group operations that entail transferring rights to software. These risks follow from provisions of Russian tax legislation and explanations of the Russian Ministry of Finance.
Thus, when registering, a foreign company will have to apply for help to Russian tax experts who may, for instance, work in a Russian-based company within its holding structure. The business community has concerns that such help may result in a permanent establishment being created within Russia.
However, the author believes that the risk is minimal. Administrative support supplied to a foreign company should be recognized as auxiliary activity which does not result in any establishment being created in Russia.
Pay VAT Independently
Another difficulty is of more tangible concern. According to the Russian Ministry of Finance, if a foreign company has registered with a Russian tax inspectorate on account of the former supplying e-services, such company is to pay VAT independently (not through a tax agent) on its other services, apart from electronic ones, if they are deemed supplied within Russia (letter No. 03-07- 08/65697 of the Russian Ministry of Finance dated September 13, 2018).
For example, if a foreign company provides advisory services, tax on them is to be paid by a tax agent that is a buyer of the services as provided for by rules of the Tax Code. However, in the Ministry’s opinion, the fact that a foreign company has been registered cancels this general rule.
This approach seems rather debatable. After all, a foreign company providing electronic services is registered with tax authorities for a special purpose. In other words, it has registered with the inspectorate only to perform its obligation to pay the VAT on a specific type of services, i.e. electronic ones. With regard to other types of services, general rules should be applied. This means that tax should be withheld and paid by the tax agent.
If electronic services are supplied by a foreign company that is not registered with a Russian tax inspectorate, a risk arises for a Russian buyer which is a company in the holding structure that it will not be allowed to deduct the “input” VAT amount.
At the same time, fiscal authorities take the view that the Russian buyer may not pay the tax to the budget on its own. So, if a source is created in the budget for the tax to be compensated, this also does not allow the VAT amount to be deducted. This approach certainly seems somewhat strange.
For a Russian buyer to deduct “input” VAT, a foreign company must also state the VAT amount separately in documents. No VAT invoice has to be drawn up.
At the time of writing, the business community is continuing its dialogue with fiscal authorities about the need to amend legislation and to return to tax agents paying VAT in the B2B sector.
However, many foreign companies have simply suspended issuing invoices for rights granted to software to mitigate their tax risks.
Before the discussions have been completed and possible changes have been made to the legislation, foreign companies offering electronic services in the B2B sector need to decide upon a model of how they interact with their Russian buyers—via a payment agent or otherwise. If the payment is effected directly, these companies need to register with Russian tax authorities.
Anton Nikiforov is a Partner at Pepeliaev Group, Russia