- Jon Hellevig
- May 27, 2015
Awara Russian Tax Guide: Value Added Tax (VAT) in Russia
The following article is an excerpt from Awara Russian Tax Guide, the first comprehensive book offering a full overview of all Russian taxation laws and rules. Awara Russian Tax Guide provides insight into the general framework of the Russian tax laws, the Tax Code and its principles. It describes the general rules of the Tax Code Part I and each type of tax and tax regime of Tax Code Part II, among them: Profit Tax, VAT, Personal Income Tax, Property Tax, Employer’s Social Contributions. The book also covers the now so important case law and taxation principles set by court precedents.
Value Added Tax (VAT) in Russia
In economic terms, VAT is an indirect tax which is included in the price of goods and is paid by the purchaser to the seller. The latter is to transfer the amount of tax to the government. But in legal terms it is the seller, not the purchaser, who is deemed to be the taxpayer of VAT (i.e. the one who carries the legal liability of its payment).
The taxpayers for VAT purposes are all Russian legal entities and individual entrepreneurs with certain exceptions which we will consider below. Foreign legal entities have the obligation to register as taxpayers in Russia when their presence in Russia meets certain criteria. There is no special requirement to register as a VAT taxpayer, rather the obligation to pay VAT follows by virtue of law for any registered taxpayer (notwithstanding what has been the original reason for tax registration). It should be noted, though, that a foreign legal entity may also be required to pay VAT even without having a Russian presence in cases when their operations are subject to VAT in Russia under the place of supply rules (see details of place of supply rules further down in this chapter). In this case, the Russian counterparty (buyer) acts as a tax agent under the reverse charge rules withholding VAT from payments to the foreign legal entity and transfers them to tax authorities (see details of reverse charge VAT further below).
If a foreign legal entity has several subdivisions in Russia in various towns or municipalities, then it may choose to conduct its VAT compliance reporting and tax payment for all the subdivisions through one of them. The local tax office at each of the locations must be notified in writing about the choice (art. 174).
Exempt Categories of Taxpayers
Certain categories of taxpayers are relieved from obligations of a VAT payer. These are:
• Small businesses meeting certain criteria (see below for details);
• Companies and individual entrepreneurs accredited as participants at Skolkovo innovation center (see below for details);
• Companies and individual entrepreneurs applying the simplified system of taxation (for details see chapter Simplified System of Taxation);
• Companies and individual entrepreneurs applying the tax regime of unified tax on imputed income (but only in regards to the activities subject to the tax on imputed income) (for details see chapter Tax on Imputed Income);
• Foreign organizers, marketing partners or broadcasting companies for Sochi 2014 Olympic Games and Paralympic Games with the relevant confirmation of such exempt status.
By law small businesses are relieved from the obligations to act as a VAT payer. This exemption is granted to small businesses with sales revenue of less than 2 million rubles over a period of three consecutive months (art. 145). The exemption is not available for VAT on imported goods payable at customs and for those taxpayers, which are liable for the excise tax (in regards to the excisable products). A taxpayer applying the exemption is not required to charge VAT or submit VAT returns, but such a taxpayer has to pay the VAT charged by its suppliers when the suppliers apply the normal VAT regime.
In order to exercise the right to this exemption, the taxpayer must notify the local tax office of the intention to make use of the exemption according to the established form and by submission of a number of supporting documents (accounting balance, sales ledger, etc.).
In practice, the tax authorities are reluctant to grant this VAT exemption to taxpayers and often are inventive in finding reasons to decline the right. For example, the tax authorities are of the opinion that it is not possible to exempt a company from the VAT obligations in the case when the company has had no revenue at all over the three-month period (letter of the Ministry of Finance N 03-07-14/11 of 28.03.2007). We believe, however, that this is groundless insofar as the Tax Code does not set any requirements as to a minimal revenue threshold in order to qualify for the exemption. Our conclusion has found support in court practice (ruling of Federal Commercial Court in Ural Federal District, N Ф09-3020/07-С2 on case N А60-34201/06 of 02.05.2007).
The exemption is valid for a period of 12 successive months commencing from the month of submission of the application with possible extensions for further 12-month periods. Once exempted, taxpayers may not withdraw from such exemption before the end of the 12-month period it is granted for, except in cases of loss of the right to the exemption as a result of exceeding the revenue thresholds or selling excisable goods.
But there are risks inherent to the application of this exemption. If the sales revenue exceeds the threshold limit, then from the first day of the month in which the threshold is exceeded, all revenue will be deemed VATable requiring to reverse the earlier VAT-free transactions. Naturally, it would in such a case be difficult to convince the customers to change the nature of the transaction and remit the required VAT.
In September 2010, the Tax Code was amended to introduce a range of tax incentives for participants in the Skolkovo innovation center project. Among other benefits the participants may be exempt from paying VAT. Overall, this exemption is similar to that granted to small businesses.
Tax rates (Article 164):
Standard rate 18%
Reduced rateÂ 10%
• Sale of basic foodstuff;
• Sale of certain kinds of products for children;
• Sale of medical supplies and medicines;
• Sale of periodicals (excluding advertisement and erotic), scientific literature and text books
Applicable for (providing certain conditions are met):
• Exports of goods;
• Sales to diplomatic missions and their personnel, including family members;
• Sale of goods (works, services) in the field of aerospace;
• Transportation of passengers and baggage where either the point of departure or destination is outside Russia;
• Services for transportation of goods in connection with export and import;
• And other cases, which mainly are auxiliary to transportation services but also some other cases.
Subject of taxation
VAT applies to the following kinds of transactions (art. 146 (1)):
• Sales (including barter) of goods, works and services and transfer of property rights in Russia;
• Alienation without consideration (free of charge) of goods, works and services;
• Imports into Russia (VAT payable at customs);
• Transfer of goods and services acquired or produced for company’s own consumption, that is, which are not intended for business use (reselling or included in resalable goods and services). This category includes construction and assembly works.
• Transfer of goods and services for own consumption are subject to VAT only if the associated expenses are not deductible for profit tax purposes. However, construction and assembly works are VATable even though the corresponding expenses would be deductible for profit tax.
It is worth noting that according to the Tax Code, the transfer of goods and services is subject to VAT, not the purchase or production of goods and services for own consumption. The Tax Code does not define the notion of transfer. Tax authorities have filled this gap by stating that goods and services for own consumption are subject to VAT only if they are transferred to taxpayers’ subdivisions. If goods and services for own consumption are not transferred to subdivisions, VAT is not levied (letter N 03-1-08/204/26-В088 of the Russian Ministry of Taxes and Levies dated 21.01.2003; letter N 03-04-11/132 of the Ministry of Finance dated 16.06.2005).
The rule is that all imports are taxed at customs at the general VAT rates. The Tax Code (art. 151) provides, however, for different treatment of imports of goods in accordance with the various customs regimes as set forth in the Customs Code of the Customs Union of Russia, Kazakhstan and Belorussia (Customs Union). A customs regime is a set of rules applicable to imports depending on the purpose or use of the goods in Russia.
VAT rules according to the various customs regimes may differ as follows:
1. Release for free circulation and for processing for internal consumption
– VAT payable in full
– The taxpayer pays the VAT amount, from which he was previously exempted or which has already been recovered
3. Transit, customs warehouse, re-exportation, duty-free shop, free customs zone, free warehouse, destruction, denouncing in favour of the Government, or carriage of stores
– No VAT charged
4. Controlled processing on customs’ territory
– No VAT is charged provided that the finished goods are re-exported within certain periods
5. Temporary importation
– Partial or full VAT exemptions available
6. Processing outside Russian customs territory
– Partial or full VAT exemption available
Imports of the following types of goods are exempt from VAT at customs (art. 150):
• Medical supplies according to a list approved by the Russian government;
• Goods imported for the official or personal use of diplomats
• Technological equipment for the purpose of manufacturing (including components and spare parts) where similar equipment is not produced in Russia as set forth in a list issued by the Russian government;
• Ships to be registered in the Russian International Ship Register;
• And other types.
VAT is paid from all revenue earned from sales of goods, works and services (and transfer of property rights). Such revenues constitute the VAT tax base (arts. 153, 154). The tax base is the value of the transactions as expressed by the parties to them. However, the tax office may challenge the expressed price and demand an adjustment to market prices according to the general rules for transfer pricing (see chapter Transfer Pricing). The tax base for barter and in-kind transactions is their monetary market value.
Advance payments are also included in the tax base (art. 154). As the tax base for advance payments is determined as the amounts received including VAT, VAT is therefore calculated by subtracting the VAT amount from the received advance payments. To do so, advance payments are multiplied by 18/118 or 10/110 respectively depending on whether the sale is subject to VAT at a tax rate of 10% or 18%. However, no VAT is levied on advance payments for the following goods (art. 154(1)):
• goods taxable at zero rate;
• goods exempt from VAT;
• goods undergoing a long production cycle (more than six months) subject to certain conditions.
The tax base for services and goods transferred for own consumption is based on the price applied for the sale of identical or similar goods and services by the taxpayer. In the absence of relevant comparable data, market prices are used (art. 159). The tax base on construction works for own use is based on the actual expenses incurred.
An agent (commissioner or middle man) pays VAT only on the part which constitutes the agency fee and not on the part due to the principal.
The tax base for imported goods and services is determined as the sum of the customs value of the goods, customs duties and excise duties (when applicable, art. 160). The customs value of goods is the monetary value on the basis of which customs duties and taxes are calculated. In this sense, the customs value is a nominal value and may be different from the price of the goods set in contracts. The customs value of goods consists of the purchase price and additional costs (e.g., cost of transportation, cost of packaging, etc.).
There exist special rules for determining the tax base for certain types of transactions as listed below:
• Tolling arrangements (art. 154(5));
• Agricultural production bought from persons who are not VAT taxpayers (art. 154 (4));
• Purchase of cars from individuals (who are not individual entrepreneurs; art. 154(5.1));
• Sale of goods (work, services) under conditions of future (forward) transactions, i.e. transactions implying supply of goods upon expiration of the term established by the relevant contract (art. 154 (6)) Financial derivatives (options, futures) (art. 154.6) ;
• Transfer of property rights (art. 155);
• Commission, agency or commission agency contracts, and also the sale of pledged property by pledge-holder (art. 156) ;
• Transportation and international communication services (art. 157);
• Sale of an enterprise as a whole (art. 158);
• Withholding by tax agents (art. 161);
• Rules for calculating VAT in connection with certain settlements (art. 162);
• Legal entities undergoing reorganization (art.162.1);
• Sale of goods subsidized by the state (art. 154.2)
Date for Determining Tax Base
Under article 167 of the Tax Code the tax base is determined at the earliest of the following two dates:
1) date on which the goods are dispatched (work done, services rendered, property rights transferred), or
2) date of receipt of payments or partial payments for the future supply of goods, services, or transfer of rights.
If goods are not shipped or transported, the date of transfer of title is deemed as the date of dispatch.
The law does not expressly define what should be considered as the date of dispatch of goods, but the tax authorities suggest considering the date on which the first primary document is issued to a buyer or carrier as the date of dispatch (letters of Ministry of Finance N 03-07-09/23 of 28.07.2011, N 03-07-08/44 dated 17.02.2011). Hereby certificates of transfer, consignment bills, etc. are considered as such primary documents. This conclusion is, however, disputed in regards to the situation when goods are shipped before title to goods is transferred, for example, when the relevant agreement provides for a later date of transfer of ownership. We would like to remind that VAT is in essence a tax imposed on sales (art. 146) which can be deemed completed only after the transfer of the title to the goods (art. 39). This means there can be no VATable transaction prior to the transfer of the ownership right to the goods. But the tax authorities have declined this argument as well (letter of Ministry of Finance N 07-02-06/14 of 09.02.2011; N 03-07-11/379 of 08.09.2010). There is no established court practice on this issue, but some courts support the position held by the tax authorities stating that the date of shipment is to be considered the date on which the documents confirming the transfer of goods are drawn up, even if this occurs before the transfer of ownership right to the goods.
Transactions onto Which VAT Is not Applied
For certain types of transaction VAT is not charged. These can be divided into four main categories of transaction as per below:
• Export and other zero-rate transactions (art. 164(1));
• When the place of supply rules exclude Russian VAT (arts. 147, 148);
• Goods and services exempt from VAT (art. 149);
• Exempt imports of certain types of goods (art. 150 see details below).
The main difference between zero-rate VAT and the goods (services) exempt from VAT is that in case of exempt goods (services) the corresponding input VAT is not recoverable but deducted as an expense from the profit tax base (art. 170 (2)).
VAT exempt goods and services are goods and services which according to the main rules would be taxable but have for various social and political reasons been exempt.
Export and Other Zero-Rated Transactions
The zero-rate VAT applies to the following types of transactions:
• Exported goods and goods placed under the customs regime of free customs zones;
• Services for export of goods as listed in article 164 of the Russian Tax Code (e.g. international transport);
• Goods, works and services to be used by diplomatic missions and diplomats;
• (see art. 164 for a full list).
Zero-rate on exports does not, however, apply automatically and is subject to the submission of a relevant VAT tax return and a number of supporting documents to tax authorities. Such supporting documents are (art. 165):
• a relevant export contract;
• a customs declaration stamped by the Russian customs authorities. Instead of customs declarations, taxpayers may submit to tax authorities a compilation list issued by customs officials enumerating all the relevant customs declarations;
• copies of transport, shipping and other documents stamped by customs authorities confirming the export of goods from Russia.
In order to retain the right to the zero-rate the taxpayer must submit the required documents to the tax office no later than 180 calendar days from the date on which the goods were placed under the customs regime of export (art. 165 (9)).
Failure to meet the deadline will result in the relevant transactions being taxed with the general rates of VAT instead of the zero-rate. However, there is a possibility to refund this VAT in case of subsequent compliance with the requirements (art. 165.9).
The VAT returns must be submitted at the end of each quarter (art. 174), while the supporting documents may be collected during the tax period. Hereby it is disputed whether a taxpayer is entitled to apply zero-rate VAT if it provides the supporting documents together with the tax return which is filed at the end of quarter during which such a 180-day period has already elapsed in respect to certain transactions. The Ministry of Finance has stated that a taxpayer may claim zero-rate VAT in this case, provided a complete set of documents is actually collected before the expiration of the 180-day period and filed together with the tax return for the period (letter of the Ministry of Finance N 03-07-08/136 of 03.06.2008). In support of this position, the Ministry of Finance refers to article 167. 9 of the Tax Code under which the tax base for exported goods is determined on the last day of the quarter in which the complete set of documents has been collected to support the validity of application of zero-rate VAT. In a ruling the Federal Commercial Court in the West Siberian District (ruling N Ф04-4348/2008 (8866-А27-14 of 16.07.2008) has, however, rejected this position and argued that the supporting documents will actually have to be filed within the 180-day period.
Exports within the Customs Union
Kazakhstan, Belarus and Russia form members of a Customs Union, which adheres to a common Unified Customs Code. The Customs Code of the Union came into force on 01.07.2010. The Customs Code of the Union provides for simplified export and import procedures between the countries of the Union. There are no longer any procedures for customs clearance of goods exported from one of the member state to another.
When a Russian company exports goods to the countries of the Customs Union, the zero-rate VAT is applicable (Item 1 of Protocol dated 11.12.2009 “On the procedure for collection of indirect taxes and mechanism of control over their payment for export and import of goods in the Customs Union”). On the whole, the procedures for applying the zero-rate VAT regime on exports to Custom Union states is similar to the procedure for applying zero-rate VAT on exports to other countries as described above. However, when goods are exported to Belarus or Kazakhstan, there is no point of customs clearance. Thus no customs declarations are submitted and correspondingly no confirmation of the fact of export is received from the customs authorities. To cure this dilemma the governments of the Union’s states have issued a special list of documents required to confirm the applicability of zero-rate VAT for exports to Belarus and Kazakhstan. On the whole, this list is similar to the list of documents to be provided to confirm zero-rate VAT upon exportation of goods outside the Customs Union. However, to confirm the validity of application of zero-rate VAT, instead of customs declarations, taxpayers provide an application for import of goods and payment of VAT by the buyer in a country of the Customs Union (one original copy). The buyer must complete this application on a special form, which must be stamped by the tax authorities in the country of export in which the buyer registers goods (the application form for import of goods and payment of indirect taxes was approved by Protocol dated 11.12.2009 “On exchange of information in electronic form between tax authorities of member states of the Customs Union about the paid amounts of indirect taxes”).
In practice, tax authorities may impose additional requirements for the documents required to confirm the applicability of zero-rate VAT.
Place of Supply
Place of supply rules are intended for determining whether goods or services are considered to be supplied in Russia or abroad, with the idea that the goods (services) supplied in Russia are taxed with Russian VAT.
Place of Supply of Goods
The rules for determining place of supply of goods for VAT purposes are given in article 147 of the Tax Code. It is to be noted that these VAT rules applied are independent from the general rules of Russian Civil Law for defining the place of sale which allow for the parties of the transaction to contractually agree the place of supply (Civil Code art. 316).
Sale of goods is subject to VAT in Russia if they are sold on the domestic market or exported abroad from Russia. In cases when the goods are located abroad at the moment of sale, the sale is not subject to VAT in Russia, but such goods are still subject to VAT at customs when they are imported into Russia (see above for more details).
Place of Supply of Services
The rules for determining the place of supply of services for VAT purposes are given in article 148 of the Tax Code.
According to the place of supply rules, no Russian VAT is applied when services are considered to be performed (or goods sold) abroad.
According to the general rule, Russia is considered to be the place of supply of services if the party giving the service (performing works) operates in Russia (the seller’s place of economic activity is Russia). The law provides specific and formalistic criteria for determining when parties performing work are considered as being present in Russia.
Parties performing work (sellers) are deemed to be present in Russia when they meet any of the following criteria (art. 148 (2)):
• The seller is registered in Russia;
• The seller’s foundation documents (charter) specify Russia as itsÂ place of economic activity;
• Russia is the official seat of management or place of actual management;
• The party performing work has a permanent establishment in Russia (if services are provided through this permanent establishment);
• An individual entrepreneur acting as a buyer resides in Russia.
However, there are several exceptions to this rule. The place of supply of services is deemed to be Russia in the following cases regardless of whether the party performing work operates in Russia:
• Services directly related to immovable property in Russia (excluding aircraft, marine vessels and vessels for domestic navigation, space craft), e.g. construction, repair and maintenance, lease;
• Services related to movable assets located in Russia (including aircraft, marine vessels and vessels for domestic navigation), e.g. installation, assembly, processing, handling, repair and maintenance;
• Services performed in Russia in relation to culture, arts, education, fitness or tourism, leisure and sports;
• Transportation and related services in any of the cases below:
(a) Services are provided by Russian companies, provided that the departure or destination points are located in Russia
(b) Services are provided by foreign companies, provided that both the departure and destination points are located in Russia
• When the place of economic activities of the buyer of services is located in Russia (applies only to a restricted list of services as detailed below)
Buyer’s Place of Economic Activity in Russia
Certain services as detailed below are considered to have been provided in Russia when the buyer is present in Russia (the buyer’s place of economic activity is Russia). To determine the place of activity of a party performing work, the law provides specific and formalistic criteria for determining when a buyer should be considered as being present in Russia. These criteria (as per below) are essentially the same as those used to determine the place of activity of a seller of services.
Buyers are deemed to be present in Russia when they meet any of the following criteria (art. 148 (4)1):
• The buyer is registered in Russia;
• The buyer’s foundation documents specify Russia as its place of economic activity;
• Russia is an official seat of management or place of actual management;
• The buyer operates a permanent establishment in Russia (if services are provided through this permanent establishment);
• The buyer is an individual residing in Russia.
However, the rules on buyer’s place of economic activity are only valid in relation to certain types of services as detailed in the law (art. 148 (4)1). These are:
• Transfer of immaterial rights (patent, license, trademark, copyright, etc.)
• Services in consulting, law, accounting, audit, engineering, advertising, market research, data processing, research and development work
• Development of software and databases
• Providing personnel (staffing) to a buyer of works at the buyer’s location
• Leasing of movable assets (except for land automotive vehicles)
• Transfer of emission reduction units under the Kyoto Protocol
The above list does not seem to provide for a broad treatment. The narrow treatment of the list is emphasized by further specification of engineering services and data processing services that can be included in the definition. However, services that are auxiliary to the main service follow the place of supply rules of the main service.
Services and Goods Exempt from VAT
Certain types of services and goods are exempt from VAT (arts. 149,150). These are presented in below table:
GOODS AND SERVICES EXEMPT FROM VAT
• Rent of premises and apartments to foreign accredited representation offices (and branches) and their accredited foreign nationals (this exemption is extended to diplomatic representations and nationals from countries that extend the same treatment in their respective countries to Russian organizations)
• Public transport
• Rent of apartments
• Banking services
• Charity contributions
• Medical services, medicine and medical equipment (detailed list of exempted goods and services issued by the Russian Government).
• Education services (non-commercial)
• Securities trade (with certain exceptions)
• Loans and interest on loans
• Repairs during warranty period when no additional payment is charged
• Importation of certain technological equipment (detailed list issued by the Government; art. 150 (7))
• Sale of shares (art. 149 (2-12))
• State duties and levies for licenses, registrations, etc., customs fees for storage
• Culture and arts services (in certain cases)
• Sales of residential real estate (including shares of joint ownership)
• Sale of certain types of intellectual property rights
• And others (arts. 149,150)
When an activity that is exempt from the tax requires a license then the exemption is valid only under the condition that the seller holds a valid license.
The tax exemptions are not valid in regards to the fees and commissions of agents or other commissioners.
Input and Output VAT, Tax Deductions
VAT is calculated and paid as the difference between output VAT (collected from clients) and input VAT (paid to suppliers). Input VAT is deducted from (or credited against) output VAT and the difference is remitted to the government. Special rules apply for the deduction of VAT depending on the nature of operations.
In order to deduct input VAT certain conditions must be met, (art.172(1)) as follows:
– goods (services) must have been acquired for transactions subject to VAT or for resale;
– relevant VAT invoices have been received from suppliers;
– transactions are duly recorded in the company accounts (bookkeeping). Transactions are recorded in a company’s accounting on the basis of primary documents. Certificates of transfer, waybills, etc. are considered as such primary documents.
According to the general rule the payment of Input VAT is not a prerequisite for VAT deduction against output VAT. However, there is an exception to this rule in regards to certain transactions where the actual payment of VAT has been set as a prerequisite for deduction. This concerns, for example, deducting VAT paid on imported goods and cases of reverse charge VAT.
It is worth noting that taxpayers are not required to provide tax authorities with documents supporting the validity of input VAT deductions, except when tax authorities request such documents (Constitutional Court ruling N 266-О of 12.07.2006).
Liability to Ensure Trading Partner Acts in Good Faith
Court practice has developed a rule according to which a taxpayer must ensure that its contractor acts in good faith in terms of its tax compliance practices. In other words, the deduction of input VAT may be denied to a taxpayer if the taxpayer acted without due care and should have been aware of the tax violations committed by its counterparties. This rule is one of the special implications of the tax anti-avoidance doctrine known as unjustified tax benefit. Unjustified tax benefit has been established to prevent taxpayers from getting tax benefits (tax exemption, tax deductibility, etc.) when getting such benefits is the primary or sole purpose of the taxpayers’ operations. This rule is aimed at avoiding tax evasion in the spheres of VAT and profit tax by making VAT and profit tax deductions at one party depending on the good faith of the other, in particular in regards to companies which have been set up only for the purpose of participating in a tax scheme (“fly-by-night companies”, “one-day companies”, “odnodnevky”).
The Supreme Commercial Court has in a ruling provided a list of circumstances that could indicate a bad faith supplier for tax purposes (Ruling No. 53 of the Plenum of the Supreme Commercial Court of 12 October 2006 “Concerning the Evaluation by Commercial Courts of the Legitimacy of the Receipt by a Taxpayer of a Tax Benefit”). This list is not exhaustive.
The Ministry of Finance has issued guidelines for actions to be taken by the taxpayer in this respect (letters of the Ministry of Finance No. 03-02-07/1-430 dated 13 December 2011, No. 03-02-07/2-231 dated 31 December 2008.). Such measures may include:
– Verify the powers of the person acting on behalf of the counterparty and document the results of such a verification.
– Ensure that the representative of the contracting company has not been convicted of a tax or administrative violation.
– Request the foundation documents (charter, trade register certificate, from verified official sources)
– Request licenses (when applicable)
– Ensure that the counterparty is in fact in possession of relevant premises: office, production facilities, retail outlets (as appropriate)
In practice courts may judge on the good faith in choice of choice of contractors considering any set of circumstances (see e.g. (decision of the Federal Commercial Court of the Moscow District on case No. A41-32101/10 of 7 December 2011).
It is important to note, though, that the contractors bad faith does not in itself entail that the taxpayer has received an unjustified tax benefit if the taxpayer can show due diligence in choice of contractors.
Deduction of Input VAT in Connection with Exports
VAT is not charged on export of goods, or to be more precise, export is taxed at zero-rate (art.164(1)). When manufacturing goods for export companies pay VAT to their suppliers, and thus acquire input VAT. But as the export transactions are taxed with a zero-rate, then no output VAT accumulates with which to offset the Input VAT, therefore the taxpayer is left with the option to recover the Input VAT from the government.
It is noteworthy that under current court practice the deduction of input VAT incurred in connection with producing VAT exempt goods for export is denied (ruling No.8870/04 of Supreme Commercial Court of 14.12. 2004, letter of Ministry of Finance N 03-07-08/32 of 02.02.2011). At the same time, there have been a court resolutions according to which taxpayers are entitled to deduct Input VAT upon export of VAT exempt goods ( Commercial Court in the North-West district on case N А56-2177/2007 datedÂ 03.10.2007).
Recovery of Excess Input VAT
VAT is calculated and paid as a difference between input and output VAT. Input VAT is deducted from output VAT and the difference is remitted to the government. But if input VAT exceeds output VAT, then the difference can be recovered by the taxpayer (art. 176). Offsetting and refunding are two possible forms of VAT recovery (art. 176(1)).
If the taxpayer is indebted on other form of federal taxes or penalty and fines on such, then the VAT recovery is effected by first offsetting the excess input VAT against such arrears (art. 176.4). But VAT may not be offset against any arrears on regional or local taxes.
If there are no VAT or other federal tax arrears, then the tax authorities must confirm that VAT may be recovered, that is, either refunded or offset. Taxpayers are entitled to choose how to effect the recovery, as follows:
(a) offset the recovered VAT against future VAT or other federal tax payments, or;
(b) request a VAT refund in cash (art. 176.6).
The law does not differentiate between the procedures for offsetting VAT and for VAT refund. In practice, however, it has been quite difficult to receive actual cash refunds for excess VAT, while there have not been corresponding problems with the procedures for offsetting.
The procedure on VAT recovery consists of the following steps:
1. Submission of a VAT return
2. Desk tax audit.
After receipt of the VAT return, the tax office will conduct a VAT desk tax audit (art. 176.1). Such a desk tax audit must be conducted within 3 months from submission of the tax declaration (art. 88.22).
During a desk tax audit, the tax office may request additional data and supporting documents from the taxpayer to prove that the input VAT has been duly deducted (art. 88.8). In practice, the control is less rigid when the taxpayer claims an offset of tax as opposed to claiming a cash refund.
During such a desk tax audit the tax office may in practice also summon the taxpayer for questioning, which is frequently done especially when the taxpayer claims a refund (art. 31.1(4)).
Based on the results of the desk tax audit, the tax office will decide whether to allow the reimbursement (in full or partially) or decline it. This decision must be taken within 7 days from completion of the audit.
3. Request for actual refund
Tax authorities are known to require that a taxpayer additionally file a request to pay the recovered VAT to a certain account, and argue that without receipt of such a request no refund can be done.
By virtue of law it is not quite clear whether offsetting of input VAT is subject to any time limit. Tax authorities attempt to impose a three-year limit by virtue of article 173.2 of the Tax Code although this article only restricts the period for filing a VAT return indicating the VAT to be recovered but not offset per se (letter N 03-07-11/408 of the Russian Ministry of Finance dated 13.10.2010). This position held by tax authorities has found support in court practice (decision No. А13-9919/03-21 of Federal Commercial Court in the North-West district of 13.09.2004)
Until year 2002 offsetting of input VAT was conditional to the goods or services having been acquired for production activities (i.e. as input in the production of goods or services for sale). But even after the change of law the original provision lives on in the practice of tax authorities who often still insists on its applicability. It is also noteworthy that according to tax authorities, deductions of input VAT go hand-in-hand with the deductibility of expenses for profit tax purposes. Tax authorities indeed usually claim that taxpayers may not deduct input VAT if the expenses incurred upon purchase of goods on which the above input VAT is paid are not deductible for profit tax purposes. This position held by tax authorities is disputable since the law does not tie deductibility of input VAT to deductibility of expenses for profit tax purposes.
Tax authorities also attempt to deny VAT recovery in periods in which no taxable transactions have been undertaken (letter of Ministry of Finance of Russia N 03-07-14/124 of 14.02.2011). This position is not legally founded since there is no such prerequisite in the law. The latter position has found support in the Supreme Commercial Court (ruling of presidium of SupremeÂ Commercial Court N 14996/05 on case N А06-2102у-4/04 of 03.05.2006).
Declarative Procedure for VAT Refund
The declarative procedure for VAT refund allows taxpayers to recover tax before completion of a tax desk audit as per above.
Only taxpayers, who meet specific criteria may apply this procedure (art. 176(2)). These criteria are as follows:
1) The total sum of VAT, profit tax, excise duties and Mineral Extraction Tax paid by the taxpayer over the 3 preceding years amounts to at least10 billion rubles, or;
2) The taxpayer submits together with its tax return an irrevocable bank guarantee securing the recollection of funds possibly reimbursed in excess of the actual amount as a result of using this method.
The conditions of the bank guarantees are set forth in the Tax Code (art. 176.1(6)). Ministry of Finance has issued a list of eligible banks.
Within 5 days from the receipt of an application from the taxpayer, the tax office must verify whether the taxpayer has any tax arrears, and then decide whether to offset or refund (in full or in part) the amounts claimed.
VAT Recovery on Capital Construction
VAT paid in connection with capital construction (including installation and assembly) of fixed assets can be deducted (or offset) on the last day of each quarter. Completion of works and recognition as fixed assets in the accounting balance are not required (art. 167(10)).
VAT Rules Concerning Foreign Suppliers
Payments in favour of foreign suppliers that are not registered in Russia as taxpayers are subject to a so-called reverse charge VAT, which is made by the Russian customer acting as a tax agent (arts. 161(1-2), 166 (1,3)). In this case, it is thus the client that must withhold the VAT from the payments due under the contract and remit it to the government simultaneously with effecting the payment to the foreign supplier (art.174(4)). It is presumed that the contract price does include VAT, if there are no provisions to the contrary in the contract.
The reverse charge VAT withheld from the foreign supplier represents input VAT for the tax agent (the client) and can therefore be deducted according to the normal rules (art. 171(3)).
When a foreign company acts as a buyer, it is entitled to deduct the input VAT paid to Russian suppliers, but to do so the following three conditions must be met:
(i) the foreign company has registered with Russian tax authorities.
(ii) the input VAT has accumulated in relation to the production of goods or services which have been further supplied to a Russian purchaser;
(iii) the Russian purchaser has withheld VAT;
Treatment of Input VAT in Connection with Exempt Sales
The treatment of input VAT follows special rules when the sale of goods or services is exempt from VAT as per article 149 or when no VAT is levied in accordance with the place of supply rules (arts. 147,148), and in some other cases. In these cases input VAT is not deducted from Output VAT and instead the corresponding VAT amount is to be attributed to deductible expenses for profit tax purposes (art. 170).
If a taxpayer has made sales of both the normal nature subject to VAT and VAT exempt sales, then the input VAT will be included in expenses in proportion of exempt sales to sales subject to VAT. In this case, taxpayers have to keep separate accounting records for both kinds of sales, or else risk losing the right to offsetting or refund.
When exempt sales represent less than 5% of all sales, it is not required to include input VAT in expenses as per the aforementioned rule and in this case input VAT may be offset according to the ordinary procedure (art.Â 171). Notably the tax authorities argued prior to 1 October, 2011 that this 5% rule did not apply to commercial organizations reselling goods. But with amendments to the Tax Code of that date this issue was settled so as to extend by virtue of written law the 5% rule also to cover the re-sale of goods (services).
Input VAT is included in expenses for profit tax purposes in the following cases:
• Input VAT is paid (e.g. at customs) by a company (or individual Entrepreneur), which is not a taxpayer of VAT or benefits from small business exemption (or Skolkovo exemption).
• Input VAT is incurred in connection with the purchase of fixed assets and the production of goods and services, which are not subject to VAT or which are not supplied in Russia (art. 146)
• Input VAT is paid by banks and insurance companies in connection with purchase of goods (services).
One of the preconditions for deducting input VAT is that the purchased goods (services) are utilized in operations subject to VAT. If the purchased goods (services) are not intended to be used in VATable operations, then there will not be any grounds for the deduction.
If goods and services, for which input VAT has been deducted, are at some point in the future used for non-taxable purposes, then the tax must be restored (i.e. is returned to the government (art. 170 (3,4) and regarding capital construction art. 171(6)). When the goods and services in question were partially used for both taxable and non-taxable activities, then the Input VAT previously deducted must be restored in proportion to the taxable and non-taxable operations. In most cases, such restored amounts of input VAT will for profit tax purposes be included in the value of goods (services) and deducted as expenses.
Offset (recovered) Input VAT must also be restored in cases when goods (services) are used to manufacture goods, which are then sold in transactions onto which zero-rate VAT is applied. Such VAT is restored in the period before taxpayers confirm the validity of application of zero-rate VAT. As soon as zero-rate VAT is confirmed (or if it is not confirmed and taxpayers apply standard rate VAT), taxpayers may deduct the recovered input VAT.
VAT administration is quite cumbersome and places a heavy burden on a taxpayer’s organization in Russia. In order to claim VAT deductions and VAT recovery the taxpayer has to ensure compliance with a number of technical rules concerning proper documentation of transactions. The collection of all supporting documents is time consuming and demanding on company resources. The supporting documents are subject to rigid rules as to their set form. And notwithstanding serious investments in VAT administration taxpayers anyway face the risk of arbitrary rejection of the supporting documentation based on mere technicalities or problems connected suppliers. Separate accounting records and tax returns are required for taxable and non-taxable operations. Taxpayers are required to file VAT returns quarterly and pay VAT in equal installments over three months following the tax period (i.e. quarter). For a transaction liable to VAT (a VATatable transaction) the seller is required to issue a VAT invoice (in Russian “Shchyet-faktura”) following a rigidly prescribed form.
As a general rule, the VAT is added on to the price of goods, service, or property right. Sellers are required to issue and present to the buyer a relevant invoice containing the details prescribed by the law (arts. 168,169). Such invoices are referred to as VAT invoices (in Russian “Shchyet-faktura”).
In business to business transactions the VAT amount is usually indicated on a separate line in the settlement documents. In retail sales, however, VAT is normally included in the displayed prices. Labels, price tags, cash receipts, as well as other documents given to customers do in these cased not indicate the VAT separately. Hereby cash receipts must be issued in compliance with a prescribed form.
The requirements on needed data fields in a VAT invoice are presented in below table.
REQUIREMENTS TO VAT INVOICES
• Number and date of issuance
• Taxpayer’s identification number (“INN”) of buyer and seller
• Number, name and address of seller and buyer
• Name and addresses of the consignor and consignee
• Number of payment and settlement document (in case of advance payments)
• Details concerning the unit of measurement of the goods (services) sold
• Quantity (volume) of delivered (dispatched) goods (services)
• Unit price goods (services)
• Currency of transaction
• Total price, excluding VAT
• Excise tax (when applicable)
• VAT rate
• VAT amount
• Total price, including VAT
• Country of origin of goods (if goods are manufactured outside Russia)
• Number of customs declaration (if goods are manufactured outside Russia)
Some of these details are not required if a VAT invoice is issued for an advance payment.
VAT invoices must be signed by a company’s general director and chief accountant or any officers duly authorized by the company.
VAT invoices for foreign trade transactions may indicate amounts in a foreign currency.
Electronic VAT Invoices
VAT invoices may now be issued in electronic form. The relevant provisions were enacted in the Tax Code (art. 169), specifically allowing the issuance of electronic VAT invoices. Based on the law competent authorities had to approve a range of normative acts.
The Ministry of Finance issued an Order (no. 50 of 25.04.2011) that sets out: the procedures for transfer of e-VAT invoices from the seller to the buyer via an operator providing services of interchange of open and confidential information via telecommunication channels; the procedures for confirming approval and sending notifications between the operator, buyersÂ and sellers.
A Governmental Decision (no. 1137 of 26.12.2011) established the forms and methodology of: the VAT invoice; journals of received and issued VAT invoices; sales and purchases books;
Finally an Order of the Federal Tax Service (ММВ-7-6/138@ of 05.03.2012) sets the technical requirements as to the electronic format of the necessary documents. On 11 April 2012 the Ministry of Justice of Russia registered the Order and it was officially published on 12th of May 2012, coming into force on 23rd of May 2012.
On 11 April 2012 the Ministry of Justice of Russia registered the Order of the Federal Tax Service of the Russian Federation (hereinafter, “FTS”) dated 05 March 2012 no. ММВ-7-6/138@ “On the approval of electronic formats of VAT invoices, journal of received and issued VAT invoices, purchases and sales books, additional sheets to the purchases and sales books”.
A precondition for the legislation to enable the issuance of electronic VAT invoices was the enactment of the possibility to use digital signature (federal law “on digital signature” N 63 of 6.04.2011)). The electronic VAT invoice shall be signed with an electronic digital signature and transferred via a data channel operator.
Applying electronic VAT invoicing will not be compulsory and it is up to the parties of the transaction to decide upon using the system based on mutual consent and availability of compatible technical means.
It should be noted that ordinary invoices (apart from VAT invoices) do not have any official role in Russian accounting and tax law and can therefore be issued in any form that a company deems useful.
Corrective VAT Invoice (Credit Note)
Russian law and business practice was until recently ambivalent in regards to the possibility to issue credit notes (invoices cancelling earlier invoices). Neither the Tax Code nor the Accounting Law contained any clear provisions regulating the issue. But with an amendment of the Tax Code in October 1, 2011 provisions regarding a credit note in respect to VAT invoices was stipulated, referred to as a “corrective VAT invoice” (art.169).
VAT Exemption for Diplomats
The VAT exemptions for diplomatic missions and diplomats can be divided in three categories as follows:
1. VAT exemption on rent of premises and apartments
2. VAT exemption for goods imported for official or personal use
3. VAT exemption (zero-rate VAT) for goods and services bought in Russia, applicable in consideration of the restrictions described below
The Tax Code establishes the general rule for VAT exemption for diplomats (art. 164(7)). According to this provision, zero-rate VAT applies to the sale of goods and services for the official use of foreign diplomatic missions and other representations with a diplomatic status, or for the personal use of diplomatic, administrative and technical personnel and their family members.
In practice, applying zero-rate means that prices must be reduced by the amount of tax upon sale. But in many cases, particularly in retail transactions, it is impossible to buy goods or services without VAT. In such cases, the amount of tax must be reimbursed by the Treasury to the purchaser (letter of the Ministry of Taxes and Duties No.RD-6-23/670 of 17.06.2003). Government decrees No. 455 dated 22.07.2006 and No. 1033 dated 20.12.2000 establish the procedure for such reimbursement.
These VAT exemptions do not apply automatically to all diplomats and diplomatic and are only valid based on the principle of reciprocity (based on an international treaty or in the case that a corresponding tax regime applies in respect to Russia in another country). Thus the exemptions apply only to diplomats (diplomatic missions) from countries that have extended corresponding exemptions to Russian diplomats.
The Ministry of Foreign Affairs and Ministry of Finance have published a list of the countries that are parties to the respective treaties (Decree No. No. 6499/41N of 08.05.2007).
Administration Issues and Restrictions to Applicability
The Tax Code also delegates powers and authority to the Russian Government for establishing and describing in detail the procedures for the application of these VAT exemption. Under these powers, the Russian Government has issued a decree (No. 1033 of 30.12.2000) with the relevant details.
According to joint decree of the Ministry of Foreign Affairs and Ministry of Finance (No. 6499/41N) the diplomatic missions eligible for the exemption can be grouped in three categories as follows:
Category I – countries whose diplomatic missions are fully exempt from VAT
Category II – countries whose diplomatic missions are partially exempt from VAT
Category III – countries whose diplomatic missions are not exempted from VAT
The goods and services to which exemptions apply for category II countries apply are subject to a review from time to time and vary from country to country.
The extent of the exemption is separate for goods and services intended for personal use of diplomats and for goods and services intended for official use of the diplomatic mission, and is further depending on the status of the diplomat, family and other staff of the mission.
The diplomatic VAT exemptions may be illustrated by the rules applicable in relation to diplomats of the United Kingdom, which have been set following the principle of reciprocity. According to the rules the following kinds of goods and services acquired for official use are totally exempt from VAT: alcoholic products; tobacco products; fuel and lubricating substances; lease of premises; vehicles; building maintenance and reconstruction services.
Items of furniture and interior design items are exempt, provided that each separate receipt amounts to at least GBP 1,000.
The purchases for personal use by heads of diplomatic missions follow the same rules as those established for official use. And in addition to that the heads enjoy exemptions in regards to real estate. The head may acquire one car within the scope of the exemption whereas the diplomatic mission is not restricted in number of cars in this respect.
Other diplomats than heads of diplomatic missions are exempt from VAT on purchases for personal use of alcohol, tobacco, fuel and lubricates, one automobile, real estate, and the lease of premises.
Other staff of the missions and family members of diplomats do not enjoy any missions except for on purchase of one automobile.
Required Documents and Form
A diplomatic VAT exemption is valid only when certain documents have been produced and kept in support of the right to apply the exemption, as follows:
1. VAT invoice
The Russian seller of goods (work, services) is required to issue an official VAT invoice in accordance with the legal requirements.
2. written agreement
The Russian seller and the diplomatic mission are required to sign an agreement outlining identifying the goods (services) purchased and the conditions.
3. A receipt confirming payment
4. An official letter from the diplomatic mission
The Russian seller must be able to show an official letter addressed to the seller from the diplomatic mission, sealed and signed by the Head of Representation or a duly authorized deputy, which that the goods (services) are intended for official use of the diplomatic mission or personal use of the diplomats, staff and family (when applicable).
When the goods (services) are acquired for the personal use of the diplomats, family or other staff, certified copies of diplomatic cards have to be submitted.