On 1 January 2019, the standard Russian VAT rate increased from 18% to 20% under the Federal Law of 3 August 2018 No. 303-FZ. The reduced VAT rate of 10%, applied to certain socially significant goods, remains unchanged.
The change in the VAT rate affects Russian companies and foreign companies doing business in Russia. This article clarifies some issues related to the transition period arising for foreign companies without a Russian tax ID.
Foreign companies with a Russian tax ID are liable for calculating and paying VAT in the same way as Russian companies. If a foreign company without a Russian tax ID provides goods, works or services (hereinafter “GWS”) to its Russian customers, the VAT amount should be withheld by Russian customers acting as tax agents.
Russian customers should be liable to withhold VAT if the place of supply of the GWS is treated as being in Russia. Goods are treated as sold on Russian territory if the goods originated in Russia. Works/services are treated as sold on Russian territory if such works/ services concern property located in Russia. Furthermore, Russian tax law contains a list of services treated as sold on Russian territory if the buyer is registered in Russia (e.g. transfer of licences, software development, consulting, accounting services, etc.).
Tax agents use the whole price of the GWS provided by foreign companies to calculate VAT. In this case, the VAT amount is settled at a calculative rate: 20/120, equivalent to 16.67% (until 2019: 18/118, equivalent to 15.25%). Generally, the VAT amount should be withheld from every payment for purchased GWS (advance and final payments). Therefore, some issues may arise if a contract with a Russian customer covers 2018 and 2019. Clarifications for such cases were issued and outlined by the Russian Federal Tax Service in Letter No. SD-4-3/20667@ of 23 September 2018.
In practice, some controversial issues have arisen relating to the calculation of VAT. Possible solutions to such issues are presented below:
- Foreign company that has received an advance payment from a Russian customer in 2018 for GWS to be provided in 2019; final payment to be made in 2019 after delivery of GWS;
The Russian customer was liable to withhold VAT from the advance payment amount at the tax rate of 15.25% as a tax agent. When the final payment is made, the Russian customer will be liable to withhold VAT at the rate of 16.67%.
- Foreign company that has provided GWS to a Russian customer in 2018. The Russian customer will pay the total amount in 2019 after delivery;
The Russian company will be liable to withhold VAT at the rate of 15.25% as delivery of the GWS was made before the VAT rate increase.
- Foreign company that provides GWS to a Russian company in 2019. Settlements will be made in 2019.
The Russian company should calculate and withhold VAT at the tax rate of 16.67% for any payments made to foreign contractors.
Russian tax law does not contain an obligation to amend contracts. However, provisions of contracts regarding connected settlement procedures and the value of GWS may be amended on a voluntary basis.
If a foreign company provides electronic services to Russian customers (individuals/legal entities), the company is liable for being registered as a VAT taxpayer in Russia and must itself pay VAT at the rate of 16.67%. For a more detailed description of Russian VAT rules with respect to the provision of e-services, please refer to our previous article in WTS Global VAT Newsletter Q4 2018.