Timur Nurmukhametdinov
Marina Golubentseva
The taxation of digital businesses is an issue being discussed around the globe at present. Digital services are rendered remotely, suppliers do not physically cross borders and therefore report their revenues in their domestic country. This situation triggers the following questions: where should VAT be charged and who should be responsible for the calculation and payment of VAT?
Russia made a first attempt to structure taxation of digital services in 2017 – since then, overseas suppliers of consumer (B2C) digital services are obliged to register themselves as VAT-payers in Russia and to pay Russian VAT with respect to the digital services provided to Russian individuals. As a result, more than 200 overseas suppliers registered for Russian VAT purposes. These companies submit quarterly VAT returns and pay the Russian VAT from their foreign bank accounts.
Now Russia has taken a bold next step. From 01 January 2019, Russia implemented new rules for corporate (B2B) cross-border digital services. According to these rules, overseas suppliers of digital services are obliged to register with the Russian tax authorities and to pay VAT on services supplied to Russian clients. This registration does not lead to a Permanent Establishment or the necessity of establishing any kind of physical presence in Russia.
Generally, the Russian definition of digital services complies with the one applied in the EU – services delivered over any electronic network (including the internet) with the use of information technologies on an automated basis (without material human intervention). The most common examples of digital services are the following:
- Supply (licensing) of computer programmes, including video games and databases, via the internet;
- Provision of advertising services via the internet;
- Data storage and processing services; and
- Provision of rights to use electronic books, images, music, videos, etc.
Prior to 01 January 2019, Russian business customers were obliged to withhold VAT upon purchases of cross-border digital services – i.e. to act under a “tax agent” mechanism similar to the “reverse charge VAT” mechanism applied in the EU. The Russian authorities have not clarified the reason for changes in the Russian VAT rules, but it appears that they believe foreign suppliers are more reliable than some Russian customers in declaring the VAT due.
The tax authorities also stated that overseas suppliers doing digital business in Russia without VAT registration may be fined – the amount of penalty may be up to 10% of the revenue for the period of the violation. However, the mechanism of fines collection from foreign companies without a physical presence in Russia has not been clarified.
These changes have triggered many a heated discussion in the Russian business community since many questions with respect to the calculation and payment of VAT remain unclarified. Therefore, many Russian companies stopped payments in favor of the suppliers to mitigate the risks triggered by the legislative gaps (Russian VAT on digital services is calculated on a cash basis). Thus, the government VAT revenue was affected in a negative manner.
The tax authorities understood that the new Russian VAT rules for B2B digital services do not work “AS-IS” and as a result of the meetings with the business community, a paper was issued in late April aimed to address the unclarified questions. According to this document, Russian business customers may voluntarily act as tax agents and withhold VAT upon purchase of the cross-border digital services. Technically, this means that the old approach can be used, however, overseas suppliers are still obliged to register for VAT purposes in Russia.
Surely, this is not the end of the story. From today’s perspective, both options – improvements of the new rules and the return to the “tax agent” scheme – seem probable. But it seems unlikely that the common worldwide approach will change. Nowadays, digital businesses must not only follow their domestic fiscal laws but also recognise and understand foreign taxation rules which might impact them.
XLNC MAGAZINE | No. 03 | May 2019