Recent Indirect Tax Changes in the Crimean Peninsula

While most of us have been watching with close interest the events that have been unfolding in the Ukraine over the past few months, Taxware has been paying particularly close attention to the potential indirect tax ramifications of the shifting political landscape. The changes for taxpayers located in the region of Crimea and in the city of Sevastopol have been quite dramatic. When the region of Crimea and city of Sevastopol were firmly part of Ukraine, the standard Ukrainian VAT rate of 20% applied there. In March of 2014, the Russian Federation formally and physically annexed the Crimean region and the city of Sevastopol. While this annexation has not been recognized by Ukraine or the international community in general, the Russian Federation has already begun to enact laws governing the application of indirect tax in these areas. According to Russian Federation Law of March 21, 2014, № 6-ФКЗ, “On Accepting the Republic of Crimea and the City of Federal Importance Sevastopol into the Russian Federation,” Article 15, the Law of the Russian Federation on Taxes and Collections will apply in Crimea and Sevastopol effective as of January 1, 2015. Until that time, the taxes are regulated by the decrees and acts of the Crimean Republic and the City Sevastopol. On April 30, 2014, the State Council of the Crimean Republic issued Decree No. 2093-6/14. Under the Decree, for the time period subsequent to the annexation but before May 1, 2014, a standard ‘Crimean” VAT rate of 20% applied. However, effective May 1, 2014 and extending until January 1, 2015, the standard VAT rate in Crimea became 4%. A reduced rate of 2% applies for certain items including groceries, goods for children, periodicals, and medical goods. During this period, Crimean taxpayers are not entitled to credit input VAT paid on purchases and imports. This provision effectively converts the VAT in Crimea into a turnover/sales tax with a particularly low rate, but only for the transitional period. In addition, the Deputies of the State Council forgave all unpaid VAT-related liabilities and debts owed by taxpayers as of March 1, 2014, recognizing them as non-recoverable. In other words, Crimea is not recognizing any VAT liability that may have been owed but not paid to the Ukrainian government. Conversely, it appears that if Ukraine owed a taxpayer any money (e.g. input credits) not refunded as of April 1, 2014, taxpayers should not expect that money any time soon, at least not from the Crimean government. Unlike the Crimean Republic, the City of Sevastopol has not enacted the low rates of 4% and 2%. Instead, effective May 1, 2014, a standard VAT rate of 18% applies in Sevastopol, and a reduced rate of 10% applies for certain items including groceries, goods for children, periodicals, and medical goods. Please refer to the Law of City of Sevastopol of April 18, 2014, № 2-ЗС (as amended by Law of May 29, 2014, № 13 –ЗС). One can locate the relevant documents on the website of Sevastopol City Legislative Body. In absence of additional legal or political developments, on January 1, 2015, the VAT rates in Crimea and the city of Sevastopol will harmonize with each other and with the 18% standard VAT rate and 10% reduced VAT rate that currently apply in the Russian Federation. In Ukraine, which recently elected Petro Poroshenko as its President, a planned reduction of the standard VAT rate from 20% to 17% that was to take effect on January 1, 2015 has been repealed. However, these changes will have no direct impact on Crimean and Sevastopol taxpayers, who will quite likely be paying VAT at the rate of 18% to the Russian Government.