Russia's State Duma approved the amended draft law introducing VAT on e-services in a third reading on 15 June 2016. To become effective, the law will need to be approved by the Federal Council and signed by the president. The law is expected to become effective on 1 January 2017, and affected foreign suppliers of e-services would be required to submit registration applications within 30 days from the effective date.
Tax registration and permanent establishment
Under the proposed law, foreign suppliers of e-services and their selling agents would be required to apply for regular tax registration in Russia (no separate VAT registration be introduced). However, the provision of e-services deemed to be supplied in Russia by a foreign entity would not create a permanent establishment for the entity. There is no specific sales threshold in the draft law that would trigger registration.
A foreign supplier would be required to register if it provides e-services to Russian private customers (other than private entrepreneurs) and is involved in "direct" settlements with private customers (the law does not define whether it means receiving payments directly from customers or whether payments from aggregators also would qualify).
Where the sales are made via foreign selling agents, the agents would be subject to the tax registration if they act under a commission, an agency or a similar arrangement with the foreign supplier of e-services, and are involved directly in settlements with private customers. If there are several intermediaries in the supply chain, the intermediary that is directly involved in settlements with private customers would be required to register.
If a Russian intermediary is involved in the provision of e-services and proceeds settlements with private customers, it should act as a tax agent, allowing foreign intermediaries and service providers to avoid tax registration in Russia.
Amended list of e-services
E-services are defined as the following services delivered over the internet or similar electronic networks that are automated and that rely on information technologies:
- The provision of the right to use software, including online games and databases, in particular, by providing remote access, as well as updates and additional functions;
- The provision of advertising services on the internet, including the use of web-based software and databases, and the provision of advertising space on the internet;
- The provision of services for placing offers for the acquisition (sale) of goods, work and services and property rights on the internet;
- The rendering of services relating to the provision of web-based platforms for establishing contacts and/or concluding transactions between buyers and sellers, including the provision of a web-based online trading facility where potential buyers offer their price through an automated procedure and the parties are notified of a sale by an automatically generated message;
- The provision and/or maintenance of a commercial or personal presence on the internet, electronic resource support (such as a website and/or web page support), securing access to websites/web pages for other web users and the provision of facilities that allow users to modify such resources;
- Data storage and processing, where a person who provided data has access to the data through the internet;
- The online provision of a computing capacity to place information in an information system;
- The provision of domain names and hosting provider services;
- Remote system administration and support of information systems and websites;
- Services performed automatically through the internet once a purchaser inputs data; the provision of automated data searches, sorting upon request and the provision of sorted data through an information and telecommunications network (e.g. online stock exchange reports and online automated translations);
- The provision of rights to use e-books and other e-publications, information and educational materials, images, music with or without lyrics and audio-visual content through the internet, including by providing access to watch or listen via the internet;
- The provision of search services and/or information to the purchaser on potential customers;
- The provision of access to internet search engines; and
- Web-based statistics management.
The amended draft law excludes broadcast of TV and/or radio channels through the internet and telecommunications services provided through the internet from the list of e-services. In addition, the following services do not constitute e-services:
- The sale of goods and services ordered over the internet, where the supply is made without using the internet;
- The sale or transfer of rights to use software (including online games) or databases on tangible media;
- The provision of consulting services via e-mail; and
- The provision of access to the internet.
Place of supply of e-services
E-services would be subject to VAT in the country in which the customer (whether an individual or a business) is located. The amended draft law clarifies that a private customer purchasing e-services would be deemed to be located in Russia if one of the following conditions is fulfilled:
- The individual (other than a private entrepreneur) is resident in Russia;
- A bank or e-payment operator through which payment is made for e-services is located in Russia;
- The customer's IP address that is used for the purchase of e-services is registered in Russia; or
- The country code for a telephone number used for the purchase of, or payment for, e-services is assigned to Russia.
The place of supply of e-services should be confirmed by the "registers of operations" evidencing that the e-services are supplied in Russia according to the above conditions and disclosing the service fees charged.
VAT payments and filings
The amended draft law provides that a foreign supplier of e-services would be required to pay VAT, unless the obligation to pay VAT is imposed on a tax agent.
The taxable base for B2C e-services supplies made by foreign entities would be the VAT-inclusive service fees, and the VAT amount due would be calculated at a rate of 15.25% applied to the taxable base. VAT returns would have to be submitted via the taxpayers' portal or, for the period when the portal cannot be used, via telecommunications channels via an e-document operator. Requests from the tax authorities should be received and documents/information requested from registered foreign suppliers of e-services also should be submitted via the taxpayers' portal.
The returns, as well as the payment of VAT, would be due by the 25th day of the month following the reporting quarter.
The tax point would be the last day of the calendar quarter in which the full/partial payment is received.
Input VAT credit
Foreign suppliers of e-services would not be able to claim Russian input VAT for offset against the output VAT charged on taxable supplies of e-services, unless e-services are provided through the separate divisions of foreign suppliers.
Foreign companies supplying or selling e-services in Russia should assess the potential impact of the proposed VAT rules on their existing businesses; adjust their business models and documentation framework as needed to mitigate potential tax risks; and prepare to register with the Russian tax authorities, unless the registration obligation is imposed on foreign or Russian intermediaries involved in the supply chain.