Starting from 1 January 2019, foreign companies providing electronic services are supposed to register with tax authorities of the Russian Federation. This legal change was actually intended to eliminate the “tax agent”concept in terms of electronic services, thus obliging foreign suppliers to pay taxes on their own. Although half a year has passed since the change was enacted, questions continue to arise. What follows is a description of the difficulties foreign companies are continuing to face.
Tax Payment Regulations
On 1 January, the scheme for paying taxes to the budget of the Russian Federation changed for foreign providers of electronic services. Previously, a foreign organisation used to calculate and pay tax on its own where the service recipient was a Russian individual (without the private entrepreneur status). Otherwise, the obligation to pay was assigned to the tax agent. The situation changed in January. Russian users of electronic services are no longer required to withhold and transfer this VAT to the budget as tax agents.
However, in April, the Federal Tax Service simplified the situation for foreign companies by issuing a clarification (Letter of the Federal Tax Service No. SD-4-3/7937 @ dated 24 April 2019 "On the VAT application procedure for foreign providers of electronic services from 1 January 2019") whereby a Russian customer may voluntarily become a tax agent. That is, if a Russian buyer voluntarily withheld VAT from the amount of payment, transferred it to the budget and accepted this VAT for deduction, the tax authorities have no reason to deny the buyer the deduction of such VAT and claims for VAT payment by a foreign supplier.
However, the voluntary VAT payment by the buyer as a tax agent in the above situation is contrary to the Tax Code of the Russian Federation. The approach proposed by the FTS may represent temporary measures to settle the issue of charging/paying the agency VAT.
It should be noted that the FTS explanations are not legally binding on taxpayers and courts. In practice, therefore, they do not provide 100% protection against claims by local tax authorities.
It is important to keep in mind that VAT payment through a tax agent does not relieve a foreign supplier of the obligation to register for tax purposes in the Russian Federation. Violators can be held accountable, including by imposing a fine of 10% of the income received from doing business without registration. In its clarifications, the FTSI considers that if a foreign organisation has registered with the FTSI for VAT payment purposes under Art. 83 of the RF Tax Code, the foreign supplier shall also pay VAT in case of sales other than electronic services.
Still controversial is the issue of paying VAT on other services delivered in the Russian Federation. after registration with the RF tax authorities.
Mixed Contracts
It is customary for companies to sell software licenses in conjunction with technical support. However, Art. 174.2 of the RF Tax Code stipulates that the granting of SW rights under a licence agreement is VAT-exempt in the Russian Federation, including exemption for foreign companies that, from 01.01.2019, are supposed to pay the tax on their own when providing e-services. To minimize tax risks, therefore, companies may find it more expedient to delimit the above services in documents, thereby reducing the tax base. It is often the case that contracts of foreign companies are not based on Russian laws and they have to alter the wording in existing contracts.
Working in the Personal Account
The personal account on nalog.ru does not show tax payment information. It means a company transfers money but sees no payment status, For example, one of our clients noticed a refund accidentally, but did not have time enough to repeat the payment within the right time and had to pay late charges. Another company paid the tax on time, but some time later received a delay payment notice from the administrative body.
This process proved hard to control from anther country. So the company had to engage an employee in Russia, who came to the tax office and figured out the situation. The company may certainly receive arrears information in the tax claim through a personal account, but before it is notified, substantial penalties may have already been charged.
Refund
Unfortunately, the Russian government has yet to think out the procedure for refunding to accounts at foreign banks. Therefore, if an international company wants overpaid amounts to be refunded, it will have either to offset the amounts against future payments or open an account with a Russian bank.
