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VAT IN RUSSIA
The VAT legislation in Russia last underwent significant change as a result of the introduction of Chapter 21 of the Second Part of the Tax Code, effective as of 1 January 2001. This paper represents a general introduction to VAT in Russia. It is for general guidance only and, whilst it is believed to be correct based on the law as of 1 December 2002, is not to be relied on as advice in any specific circumstances.
1. Introduction
VAT in Russia is charged on the realization of goods, works and services on the territory of Russia and on the import of goods into Russia. For VAT purposes, "realization" is deemed to include barter operations and the free of charge transfer of ownership of goods, of the results of work performed, or the rendering of services.
VAT is payable by all legal entities and individual entrepreneurs. However, legal entities and individual entrepreneurs may be exempted from VAT should their taxable revenues be less than RUR 1 million during the three preceding months.
VAT is levied on revenues (including advance payments) received on the sale of goods, works and services. In some cases, in accordance with Russian transfer pricing regulations, the tax authorities may adjust the prices for tax purposes. With regard to imports, the taxable base is defined as the customs value of the goods, plus customs duty and excise tax when applicable.
1.1 Territorial Scope
VAT is levied on the realization of goods, works and services on the territory of the Russian Federation (hereinafter, "Russia" or the "RF").
There are specific rules to determine place of realization (see specifically 3.0 below). Historically, Russia treated sales of goods to buyers in member states of the Commonwealth of Independent States (the "CIS") as domestic sales subject to VAT, but has since agreed that such sales (except for oil, natural gas and gas condensate) should be treated as exports and subject to a 0% rate (see 5.03 below).
1.2 Taxpayers
Taxpayers consist of:
• Organizations, including foreign legal entities carrying on activity in Russia;
• Individual entrepreneurs;
• Individuals, who, in accordance with the Customs Code of the Russian Federation, are considered taxpayers in respect of goods imported or export operations.
1.3 Taxable Operations
The following operations will give rise to VAT liability:
• The sale of goods, works and services on the territory of the RF; there are complex rules governing the place of realization of services, as to which see specifically section 3.0 below;
• The self-supply of goods (work performed and services rendered) within the territory of the RF for a company's own consumption, the expenses incurred through which are non-deductible for Profit Tax purposes;
• Self-construction and installation work;
• The import of goods into Russia.
2. Tax Rates and Exemptions
2.1 General
Russia currently has the following VAT rates:
• 20% - the standard rate for goods, works and services;
• 10% - for certain non-excisable food products and children's goods, in accordance with a number of lists endorsed by the government; medicines and medical products; newspapers and magazines, and books related to education, science and culture (provided they are not of an erotic or advertising nature) and also certain services related to their production.
• 0% - for exported goods and certain directly related services (see 2.3 below for other zero-rated supplies)
2.2 Exempt supplies
Certain goods and services are exempt from VAT, including:
• The leasing of premises to foreign legal entities and physical persons accredited in Russia (subject to certain conditions);
• Vital medical goods and equipment included in a list established by the government, as well as certain medical services;
• Public transportation services;
• Insurance, lending and specified banking services;
• Transactions involving securities (including shares, bonds and promissory notes), with the exception of broker and other intermediary services;
• Educational services rendered by non-commercial, educational organisations;
• Services in the field of culture and art;
• The sale of their own products by agricultural organisations, if the revenue from agricultural products amounts to at least 70% of the total revenues;
• The provision of a loan in monetary form
The practical impact of exemption differs from zero rating in the treatment of related input tax. Broadly, input VAT related to exempt supplies is not recoverable; input VAT related to zero-rated supplies is recoverable. See 3.0 below.
Taxpayers who make both taxable supplies (20%, 10% or 0%) and VAT exempt supplies must keep separate accounting records for each. If they do not, they may not be entitled to offset any VAT related to taxable supplies as input VAT, or to expense (and hence to deduct for profits tax purposes) any VAT related to exempt supplies.
2.3 Zero-rated supplies
A 0% rate is applied to (amongst other things):
• Goods exported from Russia (with the exception of oil and gas exports to the other members of the CIS) and certain directly related works and services;
• International transport services;
• Goods (work, services) used by foreign diplomatic representatives in Russia if such reciprocal benefit is applied to Russian diplomatic representatives in the corresponding country;
• The sale of precious metals by extraction companies to the State Precious Metals Fund, the Central Bank or Russian banks
2.4 Option to tax
Taxpayers who realize certain goods (work, services) which are VAT exempt have the right to refuse the exemption by submitting an application to the tax authorities at the place of their registration as a taxpayer no later than the 1st day of the tax period starting from which the taxpayer wishes the exemption to be discontinued or suspended.
Such an "option to tax" is only possible if applied to all exempt operations performed by the taxpayer. Similarly, the taxpayer may not opt to tax operations conducted with regard to only certain buyers (purchasers) of the corresponding goods (work, services). The "option to tax" is not permitted for a period of less than one year.
2.5 Margin schemes
A number of transactions are subject to tax on the margin realized rather than the full gross revenue. This includes assets which were recorded inclusive of the VAT paid.
3. Input tax
3.1 General
The amount of VAT payable to the budget is calculated as the difference between the output VAT charged on the realization of goods (work, services), and the amount of input VAT actually paid to suppliers for goods (work, services) which are acquired to be used for taxable activities.
VAT paid on the purchase of goods (work, services) is not available for offset, if the goods (work, services) are used for:
• The production and/or sale of VAT-exempt goods (work, services);
• The production and/or supply of goods (work, services) for a company's own consumption, which are subject to VAT when transferred, but which are VAT-exempt under general rules;
• The sale of services/goods, where the place of realization is outside the RF.
3.2 Repayment of tax
Should the amount of input VAT exceed output VAT, the excess amount is to be offset against other amounts of tax or penalties due to the same (i.e. Federal) budget for a period of three months; amounts not offset in this way are subject to refund upon a written claim by the taxpayer.
3.3 Time to process repayment claims
Once a taxpayer has submitted the application, the tax authorities are allowed up to two weeks to determine whether the refund is due. After the decision is made, it is sent to the federal treasury for execution. The federal treasury is required to reimburse the taxpayer within two weeks after having received such a resolution from the tax authorities.
Whilst taxpayers have this right to repayment within a specified period, budget difficulties and resistance by tax inspectors can lead to outright refusal or significant delays in repayment. The law provides for interest to be paid in respect of delay.
3.4 Adjustment of input tax credits
In the case when goods are returned (including during the warranty period) to the seller, VAT previously paid by the seller to the budget in respect of the sale of these goods may be deducted. The same rules apply when work (services) is rejected.
VAT paid to the budget from amounts of advance payments or other payments received by the seller against future goods (performance of work, rendering of services) may be deducted in the case of cancellation of the corresponding contract and the return of the appropriate amounts of advance payments.
These deductions should be made in the full amount after the appropriate adjustments in respect of the return of the goods, or rejection of the goods (work, services) have been recorded, but no later than one year from the time of the return or rejection.
4. Place of Realization rules and "Reverse Charge"
4.1 Place of Realization of services
Works and services are deemed to be "realized" in Russia, and therefore subject to Russian VAT, if they are:
• Directly related to immovable property in Russia (excluding aircraft, ships and spacecraft which are "immovable property" under Russian law);
• Related to movable property situated in Russia;
• Sport, culture, art, tourism and education services actually performed in Russia;
• Supplied to an entity with a place of activity in Russia and consist of:
1. The transfer or assignment of patents, licenses, trademarks etc;
2. Consulting, legal, accounting, engineering, advertising, information processing services;
3. Research and design;
4. The provision of staff
5. The rental of movable property
6. Support services at Russian airports and ports
• Other services provided by an entity carrying on activity in Russia.
Services which, under these rules are deemed to be realized outside Russia, are outside the scope of Russian VAT.
4.2 Reverse Charge
When works or services which are deemed to be realized in Russia under the rules in 3.01 are provided by a foreign company which is not a registered taxpayer in Russia, the Russian customer is responsible for paying the VAT due on the services. The buyer is required to physically withhold VAT at the rate of 20% of the net amount (120/20 of the gross) from the amount paid to the foreign supplier. This withholding may be an unexpected cost to the foreign supplier and can lead to commercial difficulties. The foreign company may therefore need to "gross-up" its invoices by the VAT amount. The Russian buyer can then credit the VAT paid for a foreign legal entity against its VAT liability.
If goods are imported, VAT is generally paid as part of the customs clearance procedure.
5. Registration
Taxpayers are required to register with the tax authorities irrespective of whether they have any tax liabilities.
5.1 Group registration
There are no provisions for group registration.
5.2 Penalties for late registration
A penalty in the amount of RUR 5,000 is payable for late registration. In the event that registration is late by more than 90 days, a penalty of RUR 10,000 is payable.
5.3 Registration of non-resident businesses
Under general rules, all foreign businesses which undertake activity in Russia are required to register for tax purposes. VAT Law provides that foreign legal entities have the right to register for VAT with the tax authorities at the location of their permanent representative offices in Russia. The basis for registration is a written application from the foreign legal entity. However, the practical value of this "right" (as distinct from the general obligation) is limited.
5.4 Tax representatives
Overseas businesses which are registered with the Russian tax authorities are not required to have a tax representative, although, in practice, they do use representatives to facilitate communication with the tax authorities.
6. VAT Accounting and Returns
6.1 General
Under general record keeping rules, all accounting documents, including original documents, appendices, correspondence, accounting records, etc. relating to the tax accounts of a taxpayer, must be kept for a minimum of five years.
VAT law imposes stringent requirements in relation to the format and content of a VAT invoice, the documentary evidence required to support various exemptions and relieves, and the manner of accounting for VAT on different types of activity.
6.2 Frequency and submission of returns
VAT declarations should be submitted to the tax authorities on a monthly basis before the 20th of the month following the reporting month (or quarter). Taxpayers who pay tax on a quarterly basis (see 4.02) should submit their declarations to the tax authorities no later than the 20th of the month following the end of the reporting period.
There is a separate VAT declaration which must be used to report zero-rated supplies. The deadline for submission is the same as for the standard VAT declaration.
6.3 Payment of tax
VAT is payable:
• Monthly, no later than the 20th day of the following month;
• Quarterly for taxpayers whose quarterly revenues do not exceed RUR 1 million, no later than the 20th day of the month following the end of the reporting quarter.
6.4 Penalties and interest
Penalties and interest are common to all taxes, and include the following:
• Failure to submit a tax declaration - 5% of the amount payable in accordance with the declaration for each month of delay. Should the delay exceed 180 days, the penalty will be 30% of the tax amount plus 10% for each month of delay after 180 days.
• Breach of accounting rules - leads to a penalty of between RUR 5,000 and 15,000. If this violation results in an under declaration of tax, the penalty amounts to 10% of the unpaid tax amount.
• Unpaid or not fully paid tax - 20% of the tax deficiency is payable. Should the tax be deliberately unpaid, a 40% penalty is payable.
7. Miscellaneous
7.1 Sale of a business as a going concern
There is no exemption or relief for transfer of a business as a going concern. In the event of the sale of a business as a whole, the taxable base is determined separately for each type of asset. If the aggregate price of the sale is lower than the book value of the property sold, the shortfall is allocated proportionately to assets excluding receivables and securities which are not subject to revaluation.
If the aggregate price of sale exceeds book value, the excess is allocated proportionately to book value. There is no mechanism to recognize goodwill or other intangible assets which are not already recorded on the balance sheet.
7.2 Refund of tax on bad debts
The VAT Chapter of the Tax Code does not contain any provisions with regard to the treatment of bad debts.
7.3 Transfer pricing
Part I of the Tax Code introduces the idea of transfer-pricing, the concept of which was largely overlooked by Russia's previous tax laws. In general, the local tax authorities should accept the price of goods as stated by the parties to the transaction, on the assumption that the prices reflect market value. However, the Code provides for four instances in which the tax authorities are entitled to adjust the prices used:
• related party transactions;
• barter transactions;
• cross-border transactions; or
• instances when the contract price deviates by more than 20% from the market price for identical merchandise.
In any of the above, the Code empowers the authorities to adjust the price for tax purposes but only if the contract price deviates by more than 20% from the market price.
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