Effective January 1, 2017, there will likely be new VAT obligations for foreign sellers of electronic services to customers in Russia. On June 15, 2016, the State Duma (the lower chamber of the Russian Parliament) has approved Bill № 962487-6 in the third reading. The Federation Council (the upper chamber) will now consider the bill. The bill has major implications for foreign suppliers of online services and suppliers of software in general.
How It Would Work in Russia
The bill considers the Russian Federation as the place of supply of electronically supplied services (“e-services”) when provided by foreign organizations to Russian purchasers. For supplies to individual taxpayers (“B2C”), the foreign providers would be responsible for collecting and remitting Russian VAT. They would have to register for VAT and file quarterly VAT declarations for such collections by the 25th of the month following the quarter end. For supplies to taxable persons (“B2B”), the purchaser would be responsible for remitting the tax.
For the B2C supplies of e-services, the place of supply in the Russian Federation when one of the below is in the country:
- The customer’s residence
- The bank or the operator used by the customer for payment of e-services
- The IP address of the customer
- The international country code used for the purchase or the payment
In this case, the foreign provider would have to collect and remit Russian VAT. However, in an effort to avoid double VAT taxation for these supplies, the bill provides that when the place of supply is both in Russia and in another country under that country’s law, the provider has the right to determine the place of supply.
Electronic Services Covered Under the Bill
Under the bill, “electronically supplied services” are defined as automated services provided via the Internet (or other similar electronic network) with the aid of information technology. This definition is rather broad. Below are just some of the examples of e-services under the bill:
- Rights to use software programs and databases over the Internet, including rights to access the software or automated online games and any updates
- Provision of advertising space on websites or software programs
- Provision of online commercial portals, including online marketplace functioning in real time
- Provision of commercial or individual presence on the Internet, including the maintenance of websites and webpages
- Storage and processing of information supplied by the customer to the seller for services supplied via the Internet
- Music, audio, books and other publications supplied via the Internet
- System administration and software support conducted remotely
Examples of supplies not considered e-services include:
- Sales over the Internet if the actual supply of goods or services takes place without the Internet
- Rights to use software programs and databases supplied on tangible medium
- Consulting services over e-email
- Access to Internet
Exemption for Licenses of Software or Databases Would Remain
While the original version of the bill sought to remove the VAT exemption for licenses of software programs or databases, the exemption remains in the version approved on June 15.
The proposed tax on foreign providers of electronic services to Russian customers is consistent with the framework proposed under the Base Erosion Profit Shifting (“BEPS”) Project, the laws in the European Union Member States, as well as the laws recently enacted in other countries such as South Africa, Japan, and the Republic of Korea, and the legislation that will take effect in New Zealand and Australia. One of the bill’s stated aims is to help level the field for Russian companies, such as Yandex. It is also expected to generate significant additional tax revenue that the Russian government needs badly.
The proposed bill would significantly increase VAT costs and compliance obligations for foreign companies providing services to customers in Russia. If the bill is enacted in its current form, it will become effective on January 1, 2017. Please stay tuned as Sovos will be monitoring these potentially significant changes.
Legal Disclaimer: The information provided in this document is for informational purposes only. By publishing this document, Sovos Compliance is providing information of a general nature which should not be construed by the reader as specific tax or legal advice or services. Sovos Compliance recommends that you engage a qualified professional before taking any action that affects your business.