Change of VAT treatment of electronic services rendered by foreign suppliers

Change of VAT treatment of electronic services rendered by foreign suppliers

Effective 1 January 2019, foreign suppliers of electronic services to Russian sole traders and businesses ( B2B services ) will have to register for VAT in Russia and pay tax upon such services by themselves. 2 2018 Deloitte Consulting LLC

1 2 3 4 5 6 What services are classified as electronic? The list of services effective since 1 January 2017 remains unchanged. The place of supply of B2B services is determined as the place of customer s activity (business). Should new rules be applied to intragroup services (e.g., IT services rendered by a foreign group company in favor of a Russian company)? New rules should be applied to intragroup services if they are recognized as electronic services. Who must register for VAT purposes? VAT registration is mandated for the foreign entities that meet all of the criteria below: A) The services are supplied in Russia B) The services are supplied without intermediaries that make settlements with the buyers Please note that, starting from 1 January 2019, foreign intermediaries must be tax-registered and pay VAT C) Have no prior registration as a B2C service provider When must an application form for tax registration be filed? Before 15 February 2019. In case of rendering B2B e-services only the application form cannot be submitted to the tax authorities before 1 January 2019 for the purposes of INN (taxpayer ID) and KPP (tax registration code) receiving by 1 January 2019. How and when are VAT liabilities assessed and paid? If the foreign entity receives a payment after 1 January 2019, this foreign entity should account for VAT at a rate of 15.25% with respect to e-services rendered prior 1 January 2019, and at a rate of 16.67% with respect to e-services rendered after 1 January 2019. The above rates are applied on the taxable base, inclusive of the tax amount. The VAT amount is determined upon payment (as at the last day of the reporting quarter) and is to be transferred by the 25th day of the month following the reporting quarter. In other words, the first VAT payment for Q1 2019 must be made by 25 April 2019. If the foreign entity receives a payment prior 1 January 2019, the Russian customer should self-assess and pay VAT on behalf of such foreign entity via the reverse charge mechanism. Can VAT be paid by way of direct debiting from a supplier s account in a foreign currency with a foreign bank? Can services be invoiced in a foreign currency? VAT can be directly debited from one s foreign bank account. However, companies are advised to remit the funds to the Russian Treasury accounts in good time to avoid late payment charges. VAT liabilities are payable in Russian roubles only. 7 Invoices for e-services can be issued in a foreign currency and in a foreign language: VAT will be converted into roubles at the Central Bank s exchange rate as at the last day of the respective reporting quarter. How will the new rules affect Russian legal entities (customers and intermediaries) involved in e- servicing? Starting from 1 January 2019, Russian buyers of B2B services will not be required to assess and pay VAT as tax agents. The tax will be recovered on the basis of invoices issued by foreign service suppliers, setting forth a separate VAT amount and the supplier s INN (taxpayer ID) and KPP (tax registration code). Depending on the number of intermediaries and the arrangements between the intermediary and the supplier, VAT liabilities can be assigned to another Russian intermediary. 2018 Deloitte Consulting LLC 3

Other frequently asked questions We are a foreign entity that licenses software and databases to Russian legal entities. These services are VAT exempt. Do we have to register for tax purposes after 1 January 2019? If a foreign entity has not registered for tax purposes or does not plan to, will a Russian buyer of its services have to assess VAT as a withholding agent? If a foreign entity is unwilling to register for tax purposes (e.g. it only issues few invoices to its subsidiaries during the year), what penalties from the Russian tax authorities will follow? An application form for VAT registration upon rendering solely B2B services can be filed only after 1 January 2019, so in the best-case scenario, INN and KPP will be assigned in mid-january 2019. Can invoices be issued to the Russian buyers without INN/KPP until the registration is complete? Will Russian buyers be able to claim recovery of such VAT? Assessing VAT upon payment is inconvenient. Can we assess it at the time of invoicing (service supply)? How and who must assess VAT on the services that are only partially electronic? How should we proceed if we grant rights to use the software as part of electronic service supply and the royalty amount is not singled out? 4 2018 Deloitte Consulting LLC

What Deloitte can do for you? Determine if services supplied by foreign providers are classified as e-services and provide risk-mitigation recommendations Analyse contracts and supporting documents and suggest amendments Analyse internal accounting systems for compliance with the Russian statutory VAT requirements and advise on the required enhancements Prepare responses to inquiries of tax authorities Support during the Russian tax audits Assist with tax registration of foreign e-services suppliers in Russia Prepare and file VAT returns with respect to rendering e- services; prepare registers of operations 2018 Deloitte Consulting LLC 5

Contacts Our Indirect Tax team will be happy to assist you with these or any other issues. Tamara Arkhangelskaya Director Indirect Tax Group Leader tarkhangelskaya@deloitte.ru +7 (495) 787 06 00, ext. 1222 Oleg Berezin Partner Indirect Tax oberezin@deloitte.ru +7 (495) 787 06 00, ext. 2188 Svetlana Romanova Senior Manager Indirect Tax sromanova@deloitte.ru +7 (495) 787 06 00, ext. 5201 6 2018 Deloitte Consulting LLC

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