02 January 2018
2 January 2018
As a result of the 'Google tax’ changes, foreign companies selling e-services to end user companies will have to register with the Russian tax authorities and pay VAT ('the Google tax’) on such transactions from January 1 2019.
Russia first applied VAT to services supplied electronically by foreign companies on January 1 2017, dubbing this change the 'Google tax’. In much of the rest of the world, such a change is referred to as applying the destination principle to e-services. The EU, as well as countries including Australia, Japan, South Africa and South Korea, have taken this measure in the past three years.
In the UK and Australia, the term 'Google tax’ applies to the countries’ diverted profits taxes, but in Russia this refers to the aforementioned VAT measure and is unrelated to corporate tax.
"The 'Google tax’ was imposed in Russia a year ago," Vasilii Markov, partner at Dentons St. Petersburg, told International Tax Review. "Electronically supplied services (ESS) rendered by foreign companies to Russian customers in business-to-consumer (B2C) mode were subject to Russian VAT. Business-to-business (B2B) transactions also were taxed by VAT, but through a withholding tax mechanism."
"The new changes to the tax code equalise tax collection mechanism," Markov said. "Now foreign companies rendering ESS in B2B should register and accrue for Russian VAT in the same manner as it does for B2C. Moreover, Russian payment agents are not considered as agents for VAT withholding in ESS."
According to Sergey Gerasimov, senior partner at Althaus Consulting, the Google tax was significant because the majority of Russian high-tech companies provide services through foreign entities and app stores and the tax burden would be felt by Russian consumers. It covers almost all areas of the digital economy, from apps and games to advertising and databases.
Before the Google tax was implemented, foreign IT companies could claim a tax benefit unavailable to Russian IT companies and a part of the reason for the new measure was to improve competition between foreign and domestic businesses.
Markov points out that the changes mean that "Russian rules are more in line with OECD BEPS Action 1 guidelines". This includes recommendations that the supplier collect and remit VAT. Following the destination principle also ensures greater neutrality between domestic and foreign sellers when it comes to transactions and the location of the supply chain.
"More and more we see countries are switching to taxation of suppliers based on the customers’ locations," he said. "And we’re also seeing more and more efforts by companies to ensure in compliance worldwide, and to evaluate impact on the supply chain in a changing environment."
Although the aim of the Google tax is to reduce the gap between domestic and foreign business, the extension of the levy will most likely increase the compliance burden for tech companies. "We already feel it in client matters," Markov said. "Nevertheless, a good point is that the changes become effective in 2019, this gives us time to prepare."
"The change requires extra actions from digital service providers to ensure they are compliant and ready to switch to the new rules," he added. "As customers in B2B transactions will require confirmation from the supplier about VAT accrued, and Russian rules are traditionally quite heavy in terms of document workflow, tuning of internal systems for ESS suppliers and document workflow may be tough."
As Russia adjusts its tax code to deal with the challenges of the digital economy, the stage is set for further tax changes coming to pass this year.
In 2017, the Energy Ministry announced that the government would overhaul the tax regime for the oil and gas sectors and institute a new profit tax on these extractive industries. Proposals for such a measure go back several years and companies have called for a profit tax as an alternative to export duties.
The worldwide slump in oil prices, coupled with sanctions, has hit the Russian energy industry hard in recent years. This will be a historic change for the industry, as traditionally the energy sector has been taxed on exports and through a special levy on mineral extraction which is adjusted to meet global prices.
The first legislation was presented in November 2017 but it is still in the early stages in that there is no defined rate at this time, however, the bill is expected to go to Parliament in early 2018 and may go on to be signed off on by the president later in the year. If this is successful, the new profit tax may come into force in 2019.
As part of its changes to the tax code, the government has approved the investment tax deduction (ITD) for those who pay the profit tax. An ITD is a lump sum deduction of up to 90% of the cost of the purchased fixed assets, but not exceeding a cap. Taxpayers cannot change their decision to apply for an ITD for three years.
There are specific rules around fixed assets with regard to ITD. If a fixed asset is written off or sold before its use life is over, the taxpayer must make up the penalties and may have to cut its sales proceeds by the asset’s acquisition value. These clauses may be applied until December 31 2027.
This change is matched by a new measure for movable assets. Movable assets booked since January 1 2013 will not face a tax rate of more than 1.1% in 2018, except in cases where those assets were received as part of corporate restructuring or winding up. This is expected to apply to movable assets which were not granted the property tax exemption in the past.
In late December, President Putin called for the tax amnesty to be renewed for businesses returning capital and eliminating the 13% profit tax on funds repatriated to Russia. This may be a response to the US tax bill signed into law by President Donald Trump given that the new system is devised to lure offshore funds back to the US.
However, the driving factor may be the state of the Russian economy given that the biggest external challenge to prosperity in recent years has come from international sanctions. The structure of the tax system is a key part of creating incentives to attract greater investment and keep most of the rewards in the country.
The above article was published on www.internationaltaxreview.com on January 2 2018 and has been republished with the approval of the Publisher.