RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

Transcription

1 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

2 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS By Ruslan Vasutin and Damir Zinnatullin Russia has introduced new value-added tax (VAT) rules pertaining to certain cross-border e-commerce services, and these new rules are expected to have a significant impact on foreign e-commerce service providers. The new rules, as introduced by virtue of Federal Law No. 335-FZ of 27 November 2017 On Amendments of the First and Second Parts of the Russian Tax Code and Specific Regulations of the Russian Federation, will become effective from January 1, According to Federal Law No. 335-FZ, foreign companies supplying e-commerce services directly to Russian customers (legal entities and individual entrepreneurs), will be obliged to: (a) register with the Russian tax authorities and (b) independently calculate and pay VAT on the value of services rendered. In this handbook, we review the practical effects of the coming change and suggest some practical takeaways for companies that are pondering action steps ahead of the January 1, 2019 effective date. 02 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

3 I. WHAT WILL HAPPEN TO THE VAT REVERSE- CHARGE MECHANISM? The most significant change that arises from the new rules relates to B2B e-commerce operations, which are currently subject to VAT taxation predominantly via a reverse-charge VAT mechanism. As a result of the rules of Federal Law No. 335-FZ, Russian business entities that are customers of e-commerce services will no longer be required to reverse-charge VAT and withhold it from services payments remitted to foreign e-commerce suppliers in order to then on-pay the VAT to the Russian state budget. Instead, the obligation to collect and pay VAT is being transferred to foreign e-commerce suppliers having tax registration in Russia. Meanwhile the Russian payor will receive a right to recover the VAT so charged as input tax credits, to the extent that such services are used in its taxable operations. This VAT recovery will be available on the condition that the Russian payor has in its files: an agreement and / or a payment document showing the VAT amount, the Taxpayer Identification Number (INN) and the Tax Registration Reason Code (KPP) of the foreign company and documents confirming the actual payment (including VAT) to a foreign e-commerce services provider. II. FOREIGN SUPPLIERS OF B2B OPERATIONS WILL HAVE ADDITIONAL VAT COMPLIANCE OBLIGATIONS The OECD Working Party on Consumption Taxes recommend setting a threshold on the value of rendered e-commerce services, 1 but the new Russian rules have not been supplemented with any such provision. There is no relief from the obligation to register with the tax authorities in Russia, nor a is there a simplified taxation / submission procedure for any foreign service provider. Thus, under the new rules, foreign service providers will likely find that they will face significant compliance and administrative obligations under the new rules despite of the value of the e-commerce supplies into Russia. The specific scope of obligations imposed on foreign suppliers of e-commerce services will depend on how these suppliers interact with the Russian service recipients. Foreign suppliers of e-commerce services in Russia can appear in two ways: Scenario one: e-commerce services are rendered through foreign intermediaries. This can be the case where a particular e-commerce service provider supplies its services on the basis of engagement, commission, agency agreements or other similar agreements concluded with a foreign intermediary. In this scenario, such a foreign intermediary that is engaged to make settlements directly with Russian service recipients will be deemed to act as a tax agent and will have to administer the VAT obligations in Russia. For example, this will be the case for foreign e-commerce service vendors, such as aggregators and marketplaces (except for payment processors ). Scenario two: e-commerce services are rendered to Russian customers directly by a foreign company e-commerce supplier. In this scenario, the relevant e-commerce supplier providing services to Russian businesses will have to register with the tax authorities in Russia. Consequently, it will be obliged to independently calculate and pay VAT on the value of the e-commerce services provided to Russian customers. Under the amended provisions of the Russian Tax Code (RTC): Foreign companies supplying e-commerce services in the B2B context that are not currently registered with the Russian tax authorities will have to apply for a tax registration within 30 calendar days from the date of supply of such e-commerce services. Foreign suppliers that have been registered in Russia and currently pay VAT on B2C e-commerce service operations will also be obliged to assess and pay e-commerce VAT liability on their B2B services. VAT tax base is determined on a quarterly basis, on the last day of the reporting period in which the payment / prepayment was received. For fees on e-commerce services that are denominated in a foreign currency, the tax base will be calculated in rubles, using the Russian Central Bank s exchange rate as at the last day of the reporting period. 1. OECD (2001), Taxation and Electronic Commerce Implementing the Ottawa Taxation Framework Conditions, OECD, Paris, p RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

4 E-commerce B2B VAT liability must be calculated at a rate of percent from the gross amount paid in consideration for the e-commerce services. VAT returns are to be filed via the Federal Tax Services online platform called VAT office (e-room) for online service providers or via telecommunication channels through an operator of electronic document flow, by the 25th day of the month following the reporting period (ie, on a quarterly basis). VAT on e-commerce services is payable no later than the 25th day of the month following the reporting period. Foreign e-commerce service providers will be obliged to keep a register of operations containing information confirming (i) the place of the purchaser s activity is considered to be the Russian Federation; and (ii) the supplied amount of such e-commerce services. III. ADVERSE CONSEQUENCES OF NON- COMPLIANCE Provision by a foreign company of e-commerce services to Russian customers without tax registration will be punishable and may result in the application of the following tax penalties: A tax penalty of RUB10,000 for violation of the statutory deadline for submission of the application for the tax registration, and 10 percent of the income received during the unregistered period, but not less than RUB40,000 (Article 116 of the RTC) A standard 20 percent penalty may apply, as set forth by Article 122 of the RTC, on any unpaid VAT which should have been paid based on the results of the company s activities in the reporting tax period (ie, on a quarterly basis) and Article 119 of the RTC imposes a penalty on the late submission of tax returns without reasonable cause; the penalty is 5 percent of the tax payable per month of delay, but it shall not be more than 30 percent of the amount of tax due and not less than RUB1,000. However, it is not clear if delinquent foreign suppliers can be subject to the above penalties in combination, how the penalties will be applied, and whether the Russian tax authorities will be vigilant in enforcing these penalties in the context of the new VAT rules. That being said, the amount at stake is likely to be significant, since the basis of any penalties will be the gross amount of income earned from B2B e-commerce operations. Non-compliance by foreign suppliers may also have a specific negative consequence for the purchasers of the e-commerce services. No VAT input tax credit can be claimed on any purchases from an unregistered foreign company by the Russian customer. Moreover, it is possible that, in cases of doubt, the Russian tax authorities may continue to pressure Russian customers to adhere to the general reverse-charge VAT withholding mechanism. Given that there is currently no explanation from the competent authorities on this issue, VAT leakage may arise in such situations. IV. QUALIFYING E-COMMERCE SERVICES FOR B2B TRANSACTIONS Only services that are electronically supplied are subject to the Russian e-vat regulations. Thus, one of the key issues to be analyzed in relation to the services provided by a foreign e-commerce supplier to a Russian customer is the qualification of services as electronically supplied. The existing list of e-commerce services and exceptions therefrom remains intact and was not modified by the new law. In accordance with Item 1 of Article of the RTC, the following activities qualify as electronically supplied services under the e-vat rules (please note: this is an unofficial, literal translation): a) provision of rights to use computer software (including computer games) and databases via the Internet, including by granting remote access to them, which includes their updates and additional functionalities b) provision of advertising services on the Internet, including by using computer software and databases operating on the Internet and provision of advertising space on the Internet c) provision of services associated with posting offers on purchasing (sale) of goods (works, services, property rights) on the Internet 04 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

5 d) provision of services associated with the granting of technical and organizational information and other possibilities via the Internet, where the services are made available using information technologies and systems to allow users to establish contacts and to carry out transactions between sellers and purchasers (including provision of an online trading platform operating on the Internet where potential purchasers bid through an automated procedure and parties are notified about sale by an automatically generated notice) e) establishing and/or maintaining commercial or personal presence on the Internet, providing supporting e-resources for users (such as websites and/or webpages on the Internet), ensuring other users have access to them, making modifications available to users f) storage and processing of information on the condition that the person who provided that information has access to such information via the Internet g) online provision of computing landscape to allocate information in an information system h) provision of domain names and hosting services i) provision of services associated with administration of information systems and websites on the Internet j) provision of services automatically rendered via the Internet when the service purchaser enters data, automated services on data search, selection and sorting upon requests, provision of the data in question to users via information and telecommunication networks (specifically, online stock quotes, automated online translation) k) provision of rights to use e-books (publications) and other e-publications, informational and educational materials, graphic images, pieces of music either with or without lyrics, audiovisual works via the Internet, including by granting remote access to them in order to watch them or listen to them via the Internet l) provision of services associated with search for customers and/or informing the customer about potential purchasers m) granting access to search engines on the Internet n) keeping statistical records on the websites on the Internet. It may be difficult to determine whether any specific cross-border activity or service may fall into the definition of the e-commerce services under the RTC ; answering that question may require knowledge not only of tax but also IP and IT issues. Resolving such questions may be complex, since the definition of many e-commerce services is extremely broad. For example, item (a) on the list above appears to include any software licensing operations, irrespective of their structured form, including SaaS transactions and software licensing operations where the software connection or access is secured through the Internet. Article of the RTC contains specific exceptions for services that, though rendered through the Internet, do not qualify as e-commerce services, namely: sale of goods (works, services) if goods are delivered (works are performed and services are rendered) without using the Internet, even though an order is made via the Internet sale (transfer of a right to use) of computer software (including computer games) and databases on physical carriers provision of consulting services via provision of services associated with granting access to the Internet. 05 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

6 V. VAT EXEMPTION FOR SOFTWARE LICENSING OPERATIONS WILL REMAIN When adopting Federal Law No. 335-FZ, Russian lawmakers did not change or amend the specific VAT incentive set out by Para 26 of Item 2 of Article 149 of the RTC. The specific rule exempts from VAT both cross-border and domestic licensing operations in relation to exclusive and non-exclusive rights to inventions, utility models and, importantly, software, databases and production secrets (know-how) granted under qualifying license agreements. This means that some e-commerce services covered by the incentive, such as the provision of rights to use computer software and databases, will continue to be exempt from VAT. However, even though the qualifying foreign supplier of such e-commerce services may not be obliged to charge and collect VAT from Russian customers, it shall not be released from the obligation to: a) register with the tax authorities in Russia and b) submit the relevant VAT returns showing no VAT payable. VI. PRACTICAL CONCERNS Under the new rules, foreign suppliers of B2B e-commerce services will likely have to face the following issues in Russia: Bifurcating e-commerce services in a bundled supply. Various practical problems will arise where a supply is made by a foreign provider as a bundled package and one invoice is issued for the composite supply covering all services (both e-commerce and non-e-commerce), or as part of the IP complex of rights under franchise or license agreements with one single royalty (franchise) payment from Russia. The Russian tax regulations lack any guidance on bifurcating specific service charges from a bundled payment. Under the new rules, there is a risk that in such a case the Russian tax authorities will expect the entire charge to be reported for VAT purposes. Where unbundling is appropriate, any effort to separate the costs of qualifying e-commerce services should be supported by proper documentation, including proper contractual agreements between the transacting parties. This will be relevant both for intra-group operations and transactions with third parties. Increasing VAT recovery problems for Russian customers paying for composite supplies. Under the new rules, Russian customers who are payors of B2B e-commerce services, will have to establish the proper VAT treatment. If they fail to recognize the e-commerce nature of the received services and erroneously withhold VAT under the reverse-charge mechanism, the Russian tax authorities will likely disallow the reclaim of that VAT even if it was withheld and actually remitted to the budget. Getting a refund of such excessively paid VAT may be difficult in this case, because a Russian payor would be acting as a tax agent, not the taxpayer. Thus, the tax authorities can argue that it is the foreign payee who should have filed for the VAT refund. Excessive compliance costs. The new rules are likely to impose a significant strain on existing compliance facilities. The number of foreign companies with VAT-able activities are likely to increase from the 155 that are registered thus far 2 to hundreds or, more likely, thousands of foreign e-commerce service providers. For each foreign company, the requirements to register in Russia and report on VAT obligations are likely to give rise to additional administrative costs, as well as additional 2. Source: 06 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

7 work for due diligence and compliance procedures, risk management and documentation. Stability of the FTS digital platform. Because foreign e-commerce service providers must submit their tax returns no later than the 25th day of the month following their quarterly fiscal period, there are questions being raised about the ability of the digital FTS platform to process the expected increase in the reporting flow (especially considering the fact that technical failures were already being reported not so long ago 3 ). VII. TAKEAWAYS Prudent foreign businesses with e-commerce services in Russia are anticipating certain ambiguities arising from the practical implementation of the new VAT rules and are considering the following proactive steps: To start, conducting an in-depth analysis of the services rendered to the Russian customer is vital in order to assess compliance obligation and associated VAT liabilities. Russia seems to recognize the definition of supply merely as invoicing to a designated Russian payor, rather than under the services use and enjoyment principle. For this reason, a foreign e-services provider should determine its strategy with regard to the identified e-commerce services and its invoicing procedures vis-à-vis each group of its Russian counter-counterparties. It may be necessary to identify the value to be reasonably assigned to e-commerce services if some of these need to be carved out from bundled or composite supplies and to prepare proper documentation to support this bifurcation. Review certain operations with a view to converting them into software license transactions where possible. It can be helpful to understand whether some e-commerce services, depending on the business model and the e-platform used, may be restructured into software licensing operations, since the latter continue to qualify for VAT exemption under the new rules. Finally, another issue is in play here. Foreign e-commerce service providers should be aware of the pending permanent establishment (PE) risk in Russia. Although Russia has not legislated or otherwise enforced the concept of a virtual permanent establishment or fiscal establishment for VAT purposes, it cannot be ruled out that obtaining a tax registration via the digital VAT office (e-room) for online service providers may lead to a Russian profits tax exposure. There are several reasons for this risk. Among these, are, first, that while the RTC contains a specific PE exemption for e-commerce services (Article 306(14)), the tax registration that foreign companies have to obtain under the new rules captures all Russia-related activities of that foreign provider and would not fit within this exemption. Second, where foreign service providers supply both e-commerce and non-e-commerce services into Russia, having foreign personnel periodically visiting Russia to provide IT and other support to Russian customers or other businesses would increase the PE risk. 3. Source: 07 RUSSIA S NEW VAT RULES ON CROSS-BORDER E-COMMERCE SERVICES KEY POINTS FOR B2B SERVICE PROVIDERS

8 ABOUT US DLA Piper is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific, positioning us to help clients with their legal needs around the world. Find out more at FOR MORE INFORMATION Learn more about VAT and other tax issues in Russia by contacting: Ruslan Vasutin T +7 (812) ruslan.vasutin@dlapiper.com Damir Zinnatullin T +7 (812) damir.zinnatullin@dlapiper.com For information about DLA Piper s tax work worldwide, please contact one of our Global Leaders: Sang Kim Global Board, US Executive Committee Co-Chair, Global Tax Practice Chair, US Tax Practice T sang.kim@dlapiper.com Roderik Bouwman Partner Global Co-Chair DLA Piper Tax Group T +31 (0) roderik.bouwman@dlapiper.com DLA Piper is a global law firm operating through DLA Piper LLP (US) and affiliated entities. For further information please refer to Note past results are not guarantees of future results. Each matter is individual and will be decided on its own facts. Attorney Advertising. Copyright 2018 DLA Piper LLP (US). All rights reserved. MAY18 MRS