NEW VAT LAW
In this tax alert we look at the amendments to the VAT Law which were officially published in the Rossijskaja Gazeta of 9 April 1996. We can send you, on request, an unofficial English translation of the law.
The Law enters into force from the day of its official publication and is to be applied to "relations, which have commenced since 1 January 1996". This may be understood to mean that the new law does not apply to amounts already outstanding before 1 January 1996 but which will be received after the new law has entered into force. However, we hope that this and other transitional matters will be clarified soon by the tax authorities.
EXEMPTIONS
New exemptions include in-kind contributions to the charter capital of enterprises with foreign investment and construction of living space that is at least 40% financed from the state budget.
The current exemption for imported technological equipment now includes components as well as spare parts, which means that such equipment can now be assembled in Russia.
Resale of technological equipment will, however, still be taxable.
The wording of the new law suggests that loans and financial aid will now be exempt from VAT, as the taxable base is defined as "turnover from the sale of goods, works and services". To confirm this beyond doubt the applicable provisions in the VAT Instruction and Decree No. 2270, according to which loans and financial aid are subject to VAT, will have to be amended. Interest paid to entities other than banks may still be taxable.
The new law exempts 'banking operations' from VAT. The scope of this exemption appears to be wider than under the old law, where only 'operations with bank accounts' were exempt. The exemption may now, in particular, include commission fees for exchanging foreign currency and processing import passports, which were previously subject to VAT.
TAXATION OF SERVICES
Services related to real estate are taxable if that real estate is located in the Russian Federation. If a service relates to moveable property or is rendered in the sphere of culture, art, education, physical culture, sport or similar activity, it is taxable if the service is physically performed on the territory of the Russian Federation.
A special rule is introduced for most 'professional services': consulting, legal, accounting, engineering, advertising and information processing services, as well as for the secondment of staff, transfer of ownership or rights to patents, licenses, trademarks, copyrights and other similar rights, leasing of moveable property (except for transport vehicles of transport companies) and agency services of hiring an entity to render any of these services (hereinafter referred to as 'professional services'). If the supplier of professional services is resident in one country and the recipient in another, the service is subject to VAT if the recipient has its 'place of economic activity' in Russia.
Where the services do not fall into any of the categories mentioned under 7 or 8, they will be subject to VAT if the supplier has its place of economic activity in Russia.
The wording of the law is unclear over what level of activity would create a 'place of economic activity' in Russia. Under European Union VAT legislation, which has apparently been used as the model, a place of economic activity is considered to be an 'establishment' or 'fixed place', i.e. some form of permanent presence. For there to be a taxable event under European rules, the supply must subsequently be received by that fixed place or directly relate to it.
The wording of the new law does not give any indication that this last test would be applied under Russian VAT law. This means that Russian enterprises providing services to foreign entities will have to make a judgement whether to rely on the formal characteristics of the transaction such as to whom the service is physically supplied and the invoice submitted, or whether to consider in detail if the substance of the service relates to a place of economic activity as described above.
The same problem occurs for a Russian recipient of services if these are rendered by an unregistered foreign legal entity: if taxable, VAT should be withheld from the payment by the Russian recipient. This will apply to those professional services that were not previously taxable if performed outside the territory of the Russian Federation. On the other hand, professional services that are rendered to an entity without a place of economic activity in Russia should now be exempt from VAT, but practice will have to show whether the law is going to be applied in both ways.
Here are some examples of problem areas under the new rules:
A Russian supplier performs professional services for a foreign client. In order not to have to charge VAT, the Russian supplier must be able to determine that the foreign customer does not have a place of economic activity in Russia. The service should not be taxable if the recipient has no presence in Russia and the service provided bears no relation to present or future activity in Russia.
In other cases, all circumstances should be considered carefully before deciding not to charge VAT;
A foreign supplier that is not registered with the Russian tax authorities provides professional services to a Russian customer. As it certainly will have a place of economic activity in Russia, the Russian customer should now withhold VAT from payments to the foreign supplier. The service should, however, not be taxable if supplied to a foreign branch of the Russian customer. The current wording of the law does, however, not support this nuance.
The service is physically rendered abroad and relates to moveable property or is rendered in the sphere of culture, art etc., but the recipient has a place of economic activity in Russia. If the service falls within the scope of the 'professional services' described above, VAT would apparently be chargeable, although this may potentially lead to services which are not related to activity in Russia being theoretically subject to Russian VAT;
The service is physically rendered abroad in the sphere of culture, art. etc. or rendered, as a professional service, to a foreign legal entity without any presence in Russia (i.e. no place of economic activity) but relates to immovable property in Russia. The tax authorities might take the view that the immovable property rule prevails, even if the services relate to real estate projects that are planned or still under construction.
Providers of services as well as recipients - if the provider is an unregistered foreign legal entity and withholding VAT applies - have to make a judgement as to whether the service provided is taxable under the new rules. In most cases, a decision not to charge or withhold VAT should be taken only after careful consideration. We will issue a further Tax Alert after the Instruction clarifying the changes in the VAT Law has been issued and other points have been clarified with the tax authorities.
PURCHASE OF FIXED ASSETS
VAT incurred on the domestic purchase of tangible or intangible assets can now be deducted fully after the assets have been recorded in the books of a company. Under the old law, input VAT on assets purchased in Russia had to be written off in equal instalments over a period of 6 months, starting from the moment they were put into operation.
Legal developments are usually reported in Tax News Reporter on official publication. This may be long after the law is issued.
This publication is intended for public guidance only and should not form the basis for specific decisions.
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