Dec 15, 2015
Russia digital VAT looks set to become a reality by 2017.
But why is Russia making this move now?
First, some context. At the start of December 2015 it was revealed that Russia plans to introduce a new value-added tax (VAT) on digital services provided by foreign companies in January 2017.
This new 18% VAT (the standard rate) will mirror similar taxation intentions in the European Union (EU), and is aimed at non-Russian digital service companies supplying Russian consumers. However, there will be Russian-specific issues for foreign companies such as registration and reporting.
A draft law proposing the new VAT was passed by the Russian State Duma at the start of December 2015. It seeks to change the place of supply rules govern digital services, i.e. types of consumer-oriented services downloaded via the internet. Examples of these digital services are digital downloads such as games, songs, and images; cloud computing and hosting; and downloading software such as anti-virus software.
This draft law also abolishes a VAT exemption for the licensing of software and databases. If this law passes the remaining legislative checks then it will come into effect on January 1, 2017.
An Ernst & Young tax alert laid out precisely what foreign digital service suppliers need to do if they have Russian-based consumers:
“[It] is intended that electronic services will be subject to VAT in Russia if a customer of such services is located in Russia. Foreign companies providing business to business (B2B) and business to consumer (B2C) electronic services will be, therefore, liable for Russian VAT. For B2C transactions, foreign suppliers will have to register with the Russian tax authorities under special procedure and pay VAT directly.”
It is not clear yet as to what type of registration service will be used in Russia. The EU incorporated the VAT Mini One-Stop Shop (MOSS) system when its place of supply rules changed on January 1, 2015. In South Africa the foreign digital service supplier must register as an eFiler prior to the remittance of any outstanding VAT bills.
What it does mean is more complexity for international digital service suppliers when it comes to settling and paying taxes abroad. This fact that there is a lack of standardization among international tax authorities introducing new digital tax laws is an issue explored in this Taxamo white paper.
Russia digital VAT mirroring international approach
The introduction of this new Russia digital VAT follows the lead of countries such as Norway, Iceland, South Africa, Japan, South Korea, and the EU in taxing cross-border supplies. New Zealand plans to introduce a new digital goods and services tax (GST) in October 2016, while Australia is on track to do likewise in July 2017.
In October 2015 this type of taxation was approved by the Organisation for Economic Co-Operation and Development (OECD) as the preferred method of taxing the growing digital economy. The OECD released their long-awaited Base Erosion and Profit Shifting (BEPS) report in October 2015 and Action 1 dealt with the challenge of taxing the digital economy.
Modern taxation mechanisms are just not calibrated to tax the digital economy as these mechanisms were implemented in the pre-digital era. These moves by numerous jurisdictions is the first foray into bridging the gaps between digital economy services and international taxation.
From the Russian tax authority’s point of view one of the key drivers behind the planned introduction of the proposed new law is the potential revenue at stake. It is quite significant.
Foreign digital services companies’ income from Russian consumers of digital services was RUB 240bn (€3.25bn USD$3.53bn) in 2014, and is estimated to be RUB 300bn (€3.85bn USD$4.24bn) in 2015.
As traditional tax bases begin to erode tax authorities across the globe are recalibrating their tax collection systems to include new types of services. There has been a domino effect of tax authorities adopting approaches similar to the Russia digital VAT and this trend is not likely to change in the coming years.
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