VAT for foreign e-services providers: the Russian tax authorities' new approach

Available languages: RU

The Russian tax authorities have issued a Letter* according to which they will accept the payment of VAT by Russian purchasers of B2B e-services from foreign suppliers. This will not however relieve the latter from the formal obligation to register in Russia for VAT purposes and file “null” declarations in the country.

Also, this Letter extends the application of the new VAT regime initially introduced for e-services to other (non-electronic) services rendered by a foreign e-services provider registered in Russia.

Since the beginning of the year, foreign providers rendering B2B e-services in Russia are obliged to register for VAT, file VAT returns and pay VAT in Russia (for a more detailed review of the changes, see our previous Tax eAlert).

The new rules have caused foreign businesses to massively suspend cross-border settlements of e-services, as evidenced by a material drop in budget revenues from VAT.

Extension of new rules to non-electronic services

The Russian Federal Tax service intends to extend the VAT reporting and payment requirements to other (non-electronic) operations of foreign e-services providers registered for VAT purposes in Russia in cases when such operations are subject to Russian VAT.

The same position is also confirmed by the Russian Ministry of Finance (see Ministry of Finance letters No. 03-07-08/17231 dated 15 March 2019, No. 03-07-08/21484 dated 28 March 2019 and No. 03-07-08/23760 dated 4 April 2019).

These other operations include inter alia the sale of goods in the Russian Federation and the provision of services to Russian clients which are VATable at the place of the purchaser (such as, for example, consulting, accounting, engineering, marketing services).

The previous tax agency mechanism under which Russian purchasers of services were under an obligation to withhold VAT and pay it to the Russian budget is not applicable in this case.

The new explanations from Russian authorities do not clarify important VAT calculation and payment details for non-electronic flows (e.g. details such as the determination of the tax base, for instance by accrual or cash method, the form of VAT return and the necessary supporting documents to be used). Further clarifications on these matters are expected.

Compromise on VAT payment procedures

Although new VAT rules for e-services were initially aimed at abolishing the tax agency mechanism for e-services, the Letter of the Russian Federal Tax Service gives the following official explanations:

  • If a Russian purchaser of e-services voluntarily pays VAT for e-services (or non-electronic services rendered by an e-services provider registered in Russia) and claims a VAT offset for the amount paid, the Russian tax authorities are not entitled to claim the repeat VAT payment from the provider or the re-calculation of tax payments from the purchaser of these services.
  • If a foreign e-services provider does not perform VATable operations in Russia other than those in respect to which VAT was voluntarily paid by the Russian purchaser, the foreign e-services provider must in any event file a VAT return with “0” for all entries to avoid a repeat VAT payment.

Since Russian purchasers of such services file VAT returns and pay VAT voluntarily under this new approach, they are not legally liable for any tax underpayments by foreign e-services providers.

Interestingly, the Letter does not state clearly whether these provisions are applicable to non-registered e-services providers, although draft letters previously circulated within the business community covered this point. Based on a direct interpretation of the Letter, foreign e-services providers are not released from liability for failure to register with Russian tax authorities or failure to file VAT returns.

The Letter does not have any legal force of law, but its existence reduces the risk of a dispute with tax authorities. It does not exclude, however, the possibility of a negative outcome if such a dispute is brought before the Russian courts. At the same time, the Russian authorities have introduced a specific online form through which taxpayers may report cases to the Federal Tax Service where regional tax authorities do not comply with the recommendations.

The Letter does demonstrate an important compromise between the business community and Russian authorities seeking to simplify compliance by foreign providers with the new rules. The economic reason behind these new explanations appears to be a material drop in VAT payments to the Russian budget this year, due to the failure by foreign e-services providers falling within the scope of the new rules to register with the Russian tax authorities and the suspension of cross-border payments by numerous companies.

The Letter’s provisions are expected to be temporary and will apply until expected amendments to Russian legislation are introduced to govern VAT taxation of e-services and other services rendered by registered e-services providers.

Take action

In light of the above, foreign providers of e-services should:

  • double-check the qualification of the existing flows in Russia, and determine which electronic and non-electronic components of services are subject to VAT reporting and payment under the new rules in the future;
  • prepare or update VAT reporting methodologies for non-electronic services rendered in Russia;
  • negotiate with Russian purchasers of electronic (and non-electronic) services over the approach to be taken for VAT payment and reporting procedures, and determine the party who will be in charge of VAT payments; and
  • introduce all required changes to agreements so that the new approaches to VAT payment and responsibility issues are covered.

CMS Russia tax experts are closely monitoring these swift developments in Russian tax law and will keep you updated if there are further changes.

If you have any questions on this eAlert, do not hesitate to contact CMS Russia experts Dominique Tissot and Maria Kabanova or your regular contact at CMS Russia.

* In Russian