On 19 March, BDO Unicon Outsourcing held a business breakfast meeting to address the new regulations on tax reporting for electronic services. In this article, we have summarised information to cover the key legislative changes and any potential issues of concern for taxpayers submitting updated tax returns.
Life without electronic services is unimaginable today. We buy online mobile and desktop applications, subscribe to content services, receive hosting and support services for our websites, and store our data on clouds. In doing so, we hardly ever pause to think about where the service provider or the seller of the goods is physically located. In other words, the actual locations from which the services are provided and profit centres can be spread out all around the world.
In Russia, as is the case in many other countries (e.g. the UK and Australia), there are legal provisions and regulations which govern tax payment for the sale of e-services at the place where they are received, i.e. in the country where they have actually been provided. In Russia, this regulation was introduced on 1 January 2017, when Federal Law No. 244-FZ came into effect “On Amendments to Parts One and Two of the Tax Code of the Russian Federation”. According to this law, the Tax Code was supplemented with a clear definition to define the concept of “an electronic service” (Art. 174.2), a list of “electronic services”, and also stipulates that foreign organisations are only responsible for paying VAT on services provided to natural persons. All of these Russian government initiatives are aimed at equalising the tax burden for local and foreign vendors.
What is an “electronic service”, according to Russia’s tax legislation? These are services rendered in electronic form via the Internet and via other telecommunications networks, in an automated mode, using information technology. “Electronic services” do not include services which involve the delivery of goods and services offline, even if they can be ordered online. Further exceptions include the sale of (transfer of the rights to use) computer applications (including computer games) and databases on tangible media, as well as the provision of consulting services by email and granting network access. The full list of “electronic services” provided in the Russian legislation is far more extensive. It includes the transfer of rights to use computer programmes, hosting services, remote searches and information processing, online consulting, and many more areas. The full list is given in Clause 1, Article 174.2 of the Russian Tax Code.
From 1 January 2019, the law governing this area was further amended. The new changes have affected the list of those recognised as the tax agents for electronic services rendered by foreign companies. The Russian corporate entities and individual entrepreneurs who use electronic services provided by foreign companies are now no longer recognised as their tax agents. In other words, while foreign providers of electronic services used to only pay VAT where the end users of these services were Russian natural persons, now they must also pay the tax when providing these types of services to Russian companies and individual entrepreneurs. This is with the exception of services rendered through intermediaries, i.e. Russian and foreign corporate entities who have contractual relations with Russian recipients of services.
Foreign providers of electronic services must register with the Russian tax authorities within 30 days after rendering these services. Furthermore, a list of documents which are required to confirm deduction of the VAT accrued to electronic services rendered by foreign companies has been defined.
However, there are still some questions which have yet to be answered regarding the taxation of foreign e-service providers. For example, how to tax separate non-electronic services being provided by a foreign service provider who is already registered as a taxpayer for electronic services. According to the provisions of the Russian Tax Code, in this case the foreign organisation shall be the direct payer of VAT, and a Russian company may not act as a tax agent. This being the case, Russian partners must still always check with their foreign contractors to confirm whether or not they have a Russian INN (Taxpayer Identification Number) and KPP (Tax Registration Reason Code).
To date, the conditions for VAT deductions for Russian companies have only been outlined for electronic services, where a foreign company is the direct payer of VAT. Some inconsistency also remain in the legal provisions which have left the requirements for maintaining registers of transactions certifying the origin of services unchanged, although this requirement in and of itself essentially has no purpose for legal entities.
The tax authorities have additionally explained that if a foreign organisation provides electronic services to Russian clients on a free-of-charge basis, they shall not be required to register and pay VAT on these services.
How can a foreign provider of electronic services register as a tax agent in Russia? The registration process must be completed on the website of the Russian Federal Tax Service at lkioreg.nalog.ru. In order to register, applicants should provide all the information required about the company, and should also produce an extract from the register of legal entities in the country where the company is registered or another document which certifies the company’s legal status. The extract must be translated into Russian (notarisation is not required). From now on, any electronic services which have been provided will need to be reported on a quarterly basis before the 25th day of each month after each reporting month.
Those who fail to submit an application to register for tax payment shall be faced with a fine of RUB 10,000. Anyone who fails to submit a tax return shall be fined 5% of the outstanding tax according to the given tax return, for each complete or incomplete month starting from the due submission date (however, the fine shall not exceed 30 % of the specified amount). Failure to pay tax shall cost the company the amount of the tax due plus a 20% or 40% fine with penalties. Finally, the failure to submit information for tax surveillance purposes may result in a fine of RUB 200 per document.
Without a doubt, it is difficult to grasp all the nuances of another country’s legislation without any help, even when it comes to companies which have long been operating on the Russian market. Please, do not hesitate to contact the experts at BDO Unicon Outsourcing with any questions you may have.
