On 15 June 2016, the State Duma of the Russian Federation adopted in the final reading the bill 'On the Introduction of Amendments to Part One and Part Two of the Tax Code of the Russian Federation (regarding taxation of certain operations carried out through the Internet)' (hereinafter - the 'Law'), which the mass media called the 'Law on the Tax on Google', since it obliges, inter alia, non-Russian IT companies such as Google and Apple, to pay the value added tax (VAT) from the sale of content through their application stores, thereby equalising their position with Russian companies.
According to the explanatory note to the bill, in international practice the VAT taxation rules for e-services are based on the fact that such services shall be taxed in the territory of the state where the users reside, in accordance with national legislation. The relevant rules apply in the European Union, South Korea and Japan.
The Law supplemented the second part of the Tax Code of the Russian Federation (Tax Code) with Article 174.2 that establishes the rules of calculation and payment of VAT in the event of rendering by foreign entities of e-services, in particular, by means of provision of the services through the information and telecommunication network, including the Internet, in automated way using information technologies. These services include, in particular:
- granting the rights to use software (including computer games), and databases;
- advertising services;
- services on the placement of purchase (sale) offers for goods (works, services), property rights;
- provision of technical, organizational, informational and other opportunities with the use of information technologies and systems to establish contacts and transactions between buyers and sellers;
- provision and/or maintenance of commercial or personal presence in the Internet, maintenance of users' web resources (websites and/or pages of websites), provision an access thereto for other network users, enabling users to modify them;
- storage and processing of information, provided that the person submitting the information have the Internet access thereto;
- provision of domain names, web hosting services;
- administration of information systems and websites;
- granting the right to use e-books and other electronic publications, information, educational materials, graphic images, music and audiovisual works;
- provision of services for search and/or submission of information on potential buyers to a client;
- provision of an access to Internet search engines.
The Law provides that for the purposes of VAT taxation of the sale of e-services, the place of sale of the services to a purchaser who is an individual but does not have a status of an individual entrepreneur, shall be deemed the territory of Russia, if:
- the purchaser's place of residence is Russia; or
- a bank servicing the account used by the purchaser to pay for the services, or a bank of the e-money operator, through which the purchaser pays for the services, is located in the territory of Russia; or
- the purchaser's network address used in purchasing the services is registered in Russia; or
- an international country phone code used to purchase or pay for the services is assigned to Russia.
Foreign entities that provide e-services to individuals where the place of sale of the services is the territory of Russia, shall be obliged to calculate and pay VAT, unless a tax agent is obliged so obliged.
A tax agent is deemed a mediator involved in the financial settlements directly with individuals under contracts of agency, commission, or other similar contracts with foreign entities that provide e-services to such individuals.
The tax base when providing e-services by foreign entities to individuals if the place of e-services sale is the territory of Russia (except for provision of such services through a separate subdivision of a foreign entity located in Russia) shall be determined on the last day of the tax period when the payment (partial payment ) for the services is received.
The VAT amount shall be calculated by foreign organisations - taxpayers on the basis of the tax rate of 15.25%.
The Law establishes the obligation of a foreign organization rendering e-services to individuals, if the place of e-services sale is the territory of Russia (except for provision of such services through a separate subdivision of a foreign entity located in Russia), and making settlements directly with such individuals, as well as foreign company – tax agent (except for a foreign entity operating through a separate subdivision located in Russia), to apply for the registration with a Russian tax authority not later than 30 calendar days from the date of commencement (termination) of the provision of the respective services.
The tax authority shall register a foreign entity within 30 days after the receipt of the application and other required documents and send the notice of registration to the foreign entity on the same day.
From the date of the tax registration a foreign entity shall be granted an access to the personal taxpayer account.
A foreign entity registered with the tax authority shall be obliged to submit to the latter the documents, including tax returns and information provided for by the Tax Code of the Russian Federation, according to forms approved by the Federal Tax Service of Russia, through its personal account. When the taxpayer's personal account cannot be used for the submission of documents and information, the latter shall be submitted by the foreign entity in e-form via telecommunication channels through an operator of the e-document flow.
Under the Law, provision of e-services by foreign entities, if the place of e-services sale is the territory of Russia, shall not lead to the formation of a permanent establishment of the respective foreign entity in Russia.
However, if the 'input' VAT arises for such foreign entities – providers of e-services, they will not be able to allocate it for deductions.
Furthermore, the Law provides for the rules of in-house tax audits of foreign entities that provide e-services.
There is an opinion that the Law does not contain any control mechanisms and hence the VAT payment will depend solely on the good faith of foreign companies is wrong. It should be noted in this connection that the liability provided for by the Tax Code for the violation of the procedure for tax registration, failure to submit tax returns, non-payment or underpayment of taxes, as well as the criminal liability for tax evasion has not been cancelled so far.
The Law enters into force on 1 January 2017 (subject to signing thereof by the President of the Russian Federation upon approval of the Federation Council, and the official publication).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.