Forthcoming VAT changes in Russia

8 July 2022
Tax Messenger
On 5 July 2022 the State Duma passed in the third reading a bill (draft law No. 136 059−8) proposing a number of amendments to Part Two of the Russian Tax Code. Among other things, the bill envisages the following changes to the VAT rules:
Changes to the rules for the payment of VAT on electronic services

  • Where a foreign entity provides electronic services to Russian companies and private entrepreneurs (so-called B2B operations), responsibility for calculating, withholding and paying VAT on those electronic services will remain with those companies and entrepreneurs, which must act as tax agents. Currently, the Tax Code requires the foreign company to register with the Russian tax authorities for VAT purposes in connection with the provision of electronic services.
  • Tax agents must calculate and pay VAT according to the rules laid down in clauses 1 and 2 of Article 161 of the Tax Code, i.e., tax must be paid to the budget on the day on which a payment is made to a foreign company.
  • However, the bill as it stands does not abolish the requirement for a foreign company to register for VAT purposes in Russia in connection with B2B operations in Russia. The bill does not contain provisions expressly rescinding obligations for foreign companies to register for tax purposes and file VAT returns.
  • Foreign entities would still be required to calculate and pay VAT on electronic services provided to Russian individuals in cases where that obligation is not borne by a tax agent (so-called B2C operations).
  • The new rules set out invoicing procedures for Russian intermediaries of foreign companies that are registered with the tax authorities and carry on business with direct involvement in settlements with customers. In particular, invoices must be issued not later than the 5th calendar day of the month following the quarter in which payment or partial payment was received for electronic services provided by the foreign companies.
  • The bill removes clause 2.1 of Article 171 of the Tax Code, which allows the recovery of VAT calculated and charged by a VAT-registered foreign company in respect of electronic services provided in Russia.
  • The register of operations provided for in clause 5 of Article 148 of the Tax Code, which confirms the place of supply of electronic services, remains in place for services provided to Russian individuals. The register is no longer required to confirm the place of supply of B2B operations.
  • The new VAT rules for electronic services are expected to come into effect from 1 October 2022.
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What do these changes mean for businesses?

The proposed changes to the rules for the payment of VAT on electronic services would require the current approach to the payment of tax in Russia to be revised. In particular, foreign companies and tax agents would need to reconfigure their accounting systems in line with the new requirements, review current contract provisions and adjust the formats of invoices and source documents.

Also, the process of adopting the new VAT mechanism would require advance planning, since the bill does not establish a transitional period. This means that foreign companies would need to discuss the new rules (including commercial implications) with their Russian counterparties.
How can B1 help?

The B1 team can provide prompt support in discussing matters relating to changes in the VAT rules for electronic services. Our services may include:
  • Analysing the provisions of contracts with counterparties, preparing necessary adjustments and making amendments to contracts
  • Participating in negotiations with counterparties
  • Reviewing invoice and source document templates and making adjustments as necessary
  • Reviewing transition issues and preparing a roadmap (based on the volume of electronic services, the type of services (B2B or B2C), and invoices issued and paid / not paid)
  • Evaluating tax risks for a foreign company and a tax agent if the company decides to deregister for tax purposes in Russia
  • Assessing the need to register for tax purposes for foreign companies that are only at the stage of planning to provide electronic services to Russian companies and private entrepreneurs
  • Communication with the Federal Tax Service and/or the Ministry of Finance of Russia to obtain clarifications on the new VAT rules for electronic services.
Other VAT changes

The bill adds the following items to the range of operations not deemed subject to VAT:
  • The provision of free services to connect gas-using equipment to gas networks in dwellings owned by individuals (subsection 22 of clause 2 of Article 146 of the Tax Code)
  • The provision of free gas transmission and transportation services to individuals if the gas is used to ensure the continuous burning of an Eternal Flame and the periodic burning of a Memorial Flame at military burial grounds and memorials (subsection 23 of clause 2 of Article 146 of the Tax Code).

Amounts of input VAT on goods (work, services) purchased for the purposes of the above operations may be reclaimed and do not have to be subsequently restored (paid back) (paragraph 1 of subsection 2 of clause 3 of Article 170 of the Tax Code).

The new rules extend / amend the list of non-taxable operations:
  • VAT will not be chargeable on sales of property and property rights to an individual by a foreign entity if the individual was a controlling person and/or founder of that entity as at 31 December 2021 in accordance with clause 60.2 of Article 217 of the Tax Code (subsection 39 of clause 2 of Article 149 of the Tax Code).
  • The bill makes amendments to subsection 15 of clause 3 of Article 149 of the Tax Code according to which operations involving the financing of participation in credit (a loan) in monetary form, including interest thereon, would be exempt from VAT.
  • Amendments are made to subsection 9 of clause 3 of Article 149 of the Tax Code which provide a VAT exemption for sales of precious metals in ingot form and polished natural diamonds by banks to individuals.

A 0% VAT rate would apply to sales of rough and polished diamonds to the State Precious Metal and Precious Stone Fund of the Russian Federation, regional precious metal and precious stone funds and banks (and to other organisations in the case of sales of rough diamonds) by taxpayers which carry out the extraction of precious stones (subsection 6.1 of clause 2 of Article 164 of the Tax Code).

The bill makes amendments to subsection 10 of clause 1 of Article 164 of the Tax Code according to which a 0% VAT rate would also apply to sales in 2022 of vessels owned by a Russian leasing company and registered in the Russian International Register of Vessels, provided that the documents specified in Article 165 of the Tax Code are submitted to the tax authorities.

Authors:
Vadim Ilyin
Partner
Indirect Tax Group
Yulia Kolesnikova
Senior Manager
Indirect Tax Group
Alena Bodrova
Manager
Indirect Tax Group
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