Payment Agents in Foreign Trade Settlements: Legal & Tax Risks

 

January 6, 2025

BRACE Law Firm ©

 

Russian importers currently face difficulties in purchasing and paying for goods from foreign sellers. At present, more than 100 credit organizations are under sanctions, including: VTB, Sovcombank, Novikombank, Promsvyazbank, Otkritie Bank, Rossiya, as well as Alfa-Bank, Sber, Rosbank, Gazprombank, and others. Many foreign banks refuse to accept payments from Russia, fearing retaliatory restrictions. To settle with suppliers under foreign trade contracts, importers are turning to the services of payment agents.

In this article, we examine the procedure for interacting with payment agents, taxation issues, and the inclusion of agent fees in the customs value of imported goods.

What is a Payment Agent?

A payment agent is an intermediary firm that processes payments from one country to another through its accounts. Most often, this is a group of companies with accounts opened in various countries. Both foreign and Russian companies can act as agents.

Foreign trade payment agents help businesses conduct settlements under international contracts. As a rule, they only transfer payments and rarely provide full contract support.

Collaborating with a payment agent provides significant advantages for foreign trade participants. By using the services of a payment agent, clients can solve several important tasks:

• making payments to foreign partners, which is critical for maintaining stable business ties;
• performing all necessary banking operations related to payment for import and export deliveries;
• paying for foreign goods with their subsequent delivery to Russia, which helps improve logistical and customs procedures, as well as services provided by foreign companies.

Current Russian currency legislation does not prohibit residents from engaging third parties — both residents and non-residents — as payment agents for settlements under foreign trade agreements (contracts). However, such engagement is possible provided that the procedure for submitting supporting documents and information to authorized banks during currency operations is followed, as established by Bank of Russia Instruction No. 181-I dated August 16, 2017, On the Procedure for Residents and Non-residents to Submit Supporting Documents and Information to Authorized Banks during Currency Operations, on Uniform Forms of Accounting and Reporting for Currency Operations, and the Procedure and Deadlines for Their Submission (the "Instruction No. 181-I").

To confirm the fact that services were rendered by a non-resident agent, the resident may submit to the authorized bank, along with a certificate of supporting documents, transfer and acceptance certificates, invoices, pro-forma invoices, and/or other commercial documents executed within the framework of the agency agreement.

How to Choose a Jurisdiction for Processing Payments?

We recommend choosing a payment agent from friendly countries to reduce the risks of payment delays or rejections.

Practical experience since 2022 shows that a significant part of Russian importers and exporters work with payment agents from such friendly countries as:

• The Republic of Kazakhstan;
• The Kyrgyz Republic;
• The Republic of Uzbekistan;
• The United Arab Emirates;
• The Republic of Serbia;

At the same time, it should be remembered that companies and banks from friendly countries face the risk of so-called "secondary sanctions"—measures that may be imposed against companies violating the sanctions regime by conducting transactions with entities on sanctions lists. To avoid such risks, a thorough check must be conducted for signs that a counterparty is included or may be included in sanctions lists.

Since such checks are inevitable when conducting payments in the currencies of unfriendly countries, and correspondent banks from those countries may suspend or cancel the payment, we recommend avoiding such transactions.

How to Choose a Payment Agent?

The simplest way to find optimal intermediaries is to participate in target public associations and business communities (logistics companies, customs brokers, bank employees) that have been involved in foreign trade for a long time. Often, banks themselves create alternative payment agent structures using established connections in different countries. If a bank cannot execute an international payment, it recommends a friendly structure.[1]

Before starting work with a payment agent, it is necessary to verify its legal status, experience, and business reputation.

To verify the legal status, you should independently order an extended report on the specific company and conduct independent due diligence regarding the entity. Often, a payment agent is a foreign company or associated with one, which may complicate the verification. However, it is necessary to conduct it in any case due to the significant risks of the transactions being performed. Based on the results of this verification, a full understanding of the possible risks at the time of the transaction and crisis situations that may arise after the conclusion of the transaction and during its performance is formed. Information such as accounting, personnel, and tax records is analyzed.

Currently, there is no clear algorithm for conducting such a counterparty check. The Federal Tax Service points to formal approaches to verification based on documentary confirmation of the manager's powers, copies of documents, and information about the counterparty's actual location.[2]

One should request the payment agent's incorporation documents, financial statements, and an extract from the trade register of the foreign state. This extract contains the date and number of the company's registration, address, information on directors, shareholders, authorized capital, and whether the company is operational and pays taxes.

It is also necessary to check whether the agent has worked with the group of goods being purchased, the supplier's country, the currency, and the receiving bank. Fewer risks and delays arise with an agent who has extensive experience. However, in practice, verifying experience is the most difficult task because payment agents often do not disclose payment details, citing confidentiality. Therefore, it is incorrect to rely solely on requested documents and received information; as mentioned above, it is critically important to conduct independent due diligence before performing transactions.

The methods for collecting information are diverse and can be categorized by the counterparty's areas of activity:

• corporate risks: one must verify the legality of the legal entity's creation, the availability of necessary incorporation documents, authorized capital, as well as the management team and affiliation checks;
• operational and financial risks: this analysis involves collecting information on the counterparty's obligations, accounts receivable, and signs of bankruptcy. Furthermore, the counterparty's financial indicators are evaluated, and the methods for attracting assets and the prospects of investment activity are analyzed;
• tax risks: the most significant element of a counterparty check is verification for compliance with tax legislation;
• legal risks: when verifying the legality of an organization's activities, it is necessary to check the counterparty's ownership rights to assets, encumbrances, and identify signs of illegal or criminal activity;
• management risks: this evaluates the effectiveness of the management policy, the competence of personnel and managers.[3]

In foreign trade communities, one may encounter fraudsters offering payment agent services. They may contact importers from anonymous accounts without photos or company names upon seeing a request for payment delivery abroad in a community.[4]

For a business, cooperation with payment agents has several disadvantages. First and foremost is the loss of control over its own funds for five to seven business days. This is the period usually specified in agency agreements for payment execution.[5]

Furthermore, no payment agent can provide a 100% guarantee that funds will be credited to the supplier, regardless of the transfer scheme or whether they work alone or involve sub-agents. It is recommended to discuss the money movement route, payment delivery times, and possible risks with the agent, and to establish in the agreement the procedure for actions if the payment does not reach the supplier due to the agent's fault or for reasons beyond their control. Usually, if the payment fails due to the agent's fault, they either redirect the funds or return the payment along with the commission. If the payment fails for other reasons, the agent retains the commission and returns the money intended for the supplier.[6] It is also recommended to apply additional security measures, such as transaction insurance. Another protection option is settlement via letters of credit. This method is suitable for both importers and exporters. The final tool is an escrow (nominal) account. In this case, the bank freezes the money until all conditions of the cross-border transaction specified in the contract are met.[7]

To ensure stable operations with payment agents, it is worth finding several agents at once. If one stops operations, refuses to work, or cannot fulfill obligations on time, having backup options will prevent a breach of contract with the supplier.

How is Payment Made Through a Payment Agent?

No two money transfer schemes are identical. When conducting each operation, the agent evaluates the complexity of the goods, the current situation in the global banking system, and exchange rates in different banks. Based on all these factors, a decision is made on how to deliver the payment to the final recipient.

• As a rule, a payment involving a payment agent proceeds as follows:
• the buyer transfers rubles to the agent, including the commission;
• the agent converts rubles into the currency of the contract with the supplier;
• the agent sends the currency to the supplier's account, deducting its fee;
• the supplier receives the money for the goods or services under the foreign trade contract.

The commission includes the agent's fee, currency conversion costs, and bank transfer fees. Taking all expenses into account, it averages from 3% to 20% of the payment amount.

Situations exist where the agent leaves the rubles in Russia and transfers them to some Russian exporter under a different transaction, while transferring its currency from a foreign bank account to your supplier. It is also possible that rubles pass through several foreign accounts and are converted multiple times before reaching the supplier. One can send the agent the exact currency the supplier is to receive to avoid overpaying for conversion. However, there may be problems sending, for example, dollars or euros. Check with your bank to see if it is ready to send foreign currency to the agent's bank.[8]

We advise monitoring every stage of the transfer until the supplier confirms receipt of payment and the agent provides all closing documents.

When signing the contract, it is necessary to ensure that the foreign supplier agrees to accept money in the manner proposed by the payment agent. If the foreign trade agreement is not governed by Russian law, there may be specific features regarding the acceptance of performance from third parties. If the supplier refuses or is unable to accept the performance of obligations from an intermediary for a third party, the buyer company will be forced to pay the agent a commission for the mere fact of attempting the payment.[9]

If the contract is registered with an authorized bank, the performance of settlements under a foreign trade import contract concluded by a resident with a non-resident using the services of a non-resident agent — with whom the resident has concluded an agency agreement — is reflected in the bank control statement as follows. Payments by the resident to the non-resident agent intended for subsequent transfer to the non-resident seller as payment for goods under the foreign trade contract are reflected using the operation type codes specified in Instruction No. 181-I: 111002 (advance payment) or 112003 (deferred payment). The resident's payment to the non-resident agent as an agency fee is subject to reflection with operation type codes 211004 (advance payment) or 212005 (payment for work performed/services rendered).

Documents for Working with a Payment Agent

To be able to transfer funds to one's supplier through an intermediary, one must provide for such a possibility in the supply contract or conclude a supplementary agreement to the foreign trade contract. The supplementary agreement can be made between the buyer and the supplier or as a tripartite agreement involving the agent.

It should contain the following terms:

• the name and details of the payment agent;
• a statement that the supplier agrees to accept the transfer from the agent;
• the scheme for delivering money to the supplier;
• the currency of the transfer to the supplier.

If the contract specifies one payment currency and the agent can only send another to the supplier, the agreement should state the currency and the date on which the exchange rate is calculated. The conversion rate may change slightly or may rise sharply; therefore, the exchange rate can be fixed in the agreement.

An agency agreement should also be concluded directly with the intermediary. When drafting and negotiating a contract with a payment agent, special attention should be paid to the following sections:

• the subject of the agreement, where it is recommended to specify the details of the foreign trade contract, so the bank can record payments under it in the bank control statement;
• the procedure for performance;
• the amount of the agency fee. The terms and deadlines for paying the fee must also be clearly stated in the agreement. This may be a monthly, quarterly, or other form of payment depending on the specifics of the activity and the agreements between the parties;
• the settlement procedure;
• the liability of the parties, including for payment delays (it is necessary to regulate in detail the liability measures that may be applied to the payment agent in case of non-performance or delay in processing the payment);
• the currency clause;
• the force majeure clause (this clause should be checked especially carefully, as in some cases it may contain significant exceptions where the payment agent will not bear liability);
• the sanctions clause (if necessary).

If the payment does not reach the supplier, the procedure for the parties' actions in such a situation must be fixed in the agreement.

One of the terms of the agreement may be the agent's right or prohibition to conclude sub-agency agreements with other persons. If such a right is granted, the agent is responsible to the principal for the sub-agent's actions. An agency agreement may provide for the agent's obligation to conclude a sub-agency agreement with or without specifying the specific terms of such an agreement.

Recall that in an agency agreement with a foreign company, the parties may, both at the conclusion of the agreement and subsequently, choose by agreement between them the law applicable to their rights and obligations under this agreement (Article 1210 of the Civil Code). If the applicable law is not determined by the parties, then according to Article 1211 of the Civil Code, the law of the agent's country applies to the agency agreement.

Furthermore, an agreement with a non-resident payment agent is subject to currency control if the amount of obligations under it equals or exceeds the equivalent of 3 million rubles.

VAT and Corporate Income Tax under a Payment Agent Agreement

Under an agreement with a payment agent, a Russian organization does not act as a VAT tax agent when paying the fee to the payment agent.

The object of VAT taxation includes, among other things, the sale of goods (works, services) in the territory of the Russian Federation, as well as the transfer of property rights (Article 146 of the Tax Code of the Russian Federation).

When selling goods (works, services) for which the place of sale is the territory of the Russian Federation, the tax base is determined by tax agents in the case of the sale of these goods (works, services) by foreign tax-paying entities (Clause 1 of Article 161 of the Tax Code):

• those not registered with the tax authorities or registered with the tax authorities only in connection with the presence of real estate and (or) vehicles belonging to them in the territory of the Russian Federation, or in connection with the opening of a bank account;
• those registered with the tax authorities at the location of their separate subdivisions in the territory of the Russian Federation (except for the sale of goods (works, services) through a separate subdivision of a foreign organization located in the territory of the Russian Federation).

According to tax legislation, organizations and individual entrepreneurs purchasing goods (works, services) in the territory of the Russian Federation from the foreign persons specified in Clause 1 of Article 161 of the Tax Code are recognized as tax agents. Tax agents are obliged to calculate, withhold from the taxpayer, and pay the corresponding amount of tax to the budget regardless of whether they perform the taxpayer's duties related to the calculation and payment of tax and other duties established by Chapter 21 of the Tax Code (Clause 2 of Article 161 of the Tax Code).

The procedure for determining the place of sale of services is established in Article 148 of the Tax Code. Thus, the territory of the Russian Federation is recognized as the place of sale of works (services) if the activities of the organization or individual entrepreneur performing the works (rendering the services) are carried out in the territory of the Russian Federation (regarding the types of works performed (services rendered) not provided for by Article 148 of the Tax Code) (Subclause 5 of Clause 1 of Article 148 of the Tax Code).

Since the services of a payment agent are not named in the specified article, the territory of Russia is not recognized as the place of sale for such services provided by a foreign organization, no object of VAT taxation arises, and consequently, the Russian organization is not required to perform the duties of a tax agent.

The procedure for taxing the income of a foreign organization from entrepreneurial activity in the Russian Federation is determined by the norms of Clause 1 of Article 246, Article 247, Article 309, and Article 310 of the Tax Code, based on the provisions of which a foreign organization receiving income from sources in the Russian Federation is recognized as a corporate income tax payer, and the tax on income received by such an organization is calculated and withheld by the Russian organization or a foreign organization carrying out activities in the Russian Federation through a permanent representation, or an individual entrepreneur paying income to the foreign organization, upon each payment of income specified in Clause 1 of Article 309 of the Tax Code in the currency of the income payment.

At the same time, in accordance with Clause 2 of Article 309 of the Tax Code, income received by a foreign organization from the sale of goods, other property, property rights, and from the performance of works (rendering of services) in the territory of Russia is not subject to taxation at the source of payment if such activity does not lead to the formation of a permanent representation in the Russian Federation in accordance with Article 306 of the Tax Code.

In view of the above, income of a foreign organization in the form of an agency fee for providing services to transfer payment to a foreign supplier for delivered goods is not subject to taxation in the territory of the Russian Federation, except for cases where such services are provided to a related party (Subclause 9.4 of Clause 1 of Article 309 of the Tax Code).

In such a case, the procedure for taxing the specified income is determined taking into account the norms of treaties or agreements on the avoidance of double taxation concluded between Russia and the state of which the agent is a resident. To apply the provisions of an international treaty, the foreign company must provide a document confirming tax residency in the country with which an international treaty or agreement is in force, as well as a document on the right to receive income, which may be executed in the form of a confirmation letter or notice. Such a document confirms that the counterparty is the beneficial owner of the income.

It should be noted that the withholding of tax on the income of foreign organizations received through the mediation of a payment agent, if such withholding is required in accordance with the provisions of the Tax Code, does not depend on whether settlements involve a foreign or Russian intermediary. [10]

Inclusion of the Agency Fee in the Customs Value of Imported Goods

When making payments through agents, the need to include the payment agent's fee in the customs value of imported goods, as well as the documentary confirmation of the customs value, becomes relevant for foreign trade participants. Customs authorities approach the assessment of payment agents' activities differently when determining the customs value. The Federal Customs Service (the "FTS") and the Ministry of Finance of Russia have presented their positions on this issue, which, unfortunately, do not contain a unified approach.[11]

The determination of the customs value of goods in the event of their import using services provided by intermediaries (agents) is regulated by the provisions of Articles 39 and 40 of the Customs Code of the Eurasian Economic Union (the "CC EAEU"), as well as the Regulation on Adding Fees to Intermediaries (Agents) and Fees to Brokers to the Price Actually Paid or Payable for Imported Goods (the "Regulation").[12]

The customs value of imported goods is the transaction value, i.e., the price actually paid or payable for these goods when sold for export to the customs territory of the EAEU.

In accordance with the Rules for Applying the Method of Determining the Customs Value of Goods based on the Transaction Value of Imported Goods (the "Rules")[13], when determining the customs value of goods based on the transaction value of imported goods, it is necessary to proceed from the fact that a transaction is understood as a set of various deals, and the transaction value must include the corresponding value indicators for each of the contracts on the basis of which the import of goods into the customs territory of the EAEU was carried out, i.e., both directly under the purchase and sale transaction and under other contracts, the costs for which are included in the customs value of the goods.

According to Article 39 of the CC EAEU, the price actually paid or payable (the "PAPP") is the total amount of all payments for these goods, made in any form (directly or indirectly) or payable by the buyer directly to the seller or to another person for the benefit of the seller. Payments may be made directly or indirectly in any form not prohibited by the legislation of the EAEU member states. Payment can be made not only by transferring funds but also by settlements using financial instruments. These payments can be made not only directly, i.e., directly to the seller, but also indirectly, i.e., to a third party for the benefit of the seller (Clause 5.1 of the Rules).

In accordance with Article 40 of the CC EAEU, when determining the customs value of imported goods based on their transaction value, the fees to intermediaries (agents) and fees to brokers are added to the price actually paid or payable, except for the fee for purchase paid by the buyer to its agent (intermediary) for providing services related to the purchase of imported goods on its behalf outside the customs territory of the EAEU. The fee to intermediaries (agents) is included in the customs value of the goods in the amount in which it is paid or payable by the buyer but is not included in the PAPP for the imported goods (Clause 2 of the Regulation).

The FTS notes that it is necessary to establish whether the agent acted in the interests of the buyer or the seller, as EAEU legal norms define that the fee for purchase paid by the buyer to its agent (intermediary) for providing services related to the purchase of imported goods on its behalf outside the customs territory of the EAEU is not included in the customs value, as the payment of such a fee is not and cannot be the seller's costs (Clause 5 of the Regulation).[14]

Accordingly, if it is established by the results of customs control that the payment agent acts in the interests of the seller, then the expenses for the agent's (intermediary's) fee are added to the customs value.

The decision on whether to include or not include additional charges in the structure of the customs value of imported goods is made on the basis of documents reflecting the essence and content of the transaction regarding the imported goods and an analysis of all the conditions and circumstances accompanying the sale of goods for export to the customs territory of the EAEU.[15]

The Ministry of Finance, expressing its position, considered two possible models for the provision of services by a payment agent.[16]

In the event that the buyer of imported goods, in addition to the foreign trade contract for the supply of goods ("Contract 1"), concludes a contract with a payment agent ("Contract 2"), the resolution of the question of whether to include the costs under Contract 2 in the customs value of the goods depends on whether Contract 2 is part of the set of contracts on the basis of which the goods were imported into the customs territory of the EAEU.

Thus, goods purchased in accordance with Contract 1 can be purchased regardless of the use of payment agent services. On the part of the seller of the goods, there are no requirements for the conclusion of additional contracts by the buyer and other interested parties providing for payment for the goods through payment agents specified by the seller. The conclusion of such contracts, including Contract 2, is carried out at the initiative of the buyers of the goods due to difficulties, and in some situations, the impossibility of transferring payment directly to the seller of the goods.[17]

Thus, in the case under consideration, there are no grounds for including the costs under Contract 2 in the price actually paid or payable as the total amount of all payments for these goods made or payable by the buyer directly to the seller or another person for the benefit of the seller.

If, however, the goods purchased in accordance with Contract 1 cannot be purchased without Contract 2, which is concluded based on the seller's requirements, then the costs under Contract 2 are subject to inclusion in the price actually paid or payable.

Considering the provisions of customs legislation and the provided comments of state bodies, to make a decision on whether to include or not include the payment agent's fee in the customs value, it is necessary to establish:

• on whose behalf the agent acts;
• who pays for the agent's services;
• the nature of the agency payment—does the agent receive the fee specifically for the purchase of goods.[18]

To minimize risks, it is necessary to specify in detail in the contracts the terms for engaging the agent, as well as in whose interests the agent acts.

Considering the relative novelty of the problem under consideration, judicial practice on this issue is not fully formed; nevertheless, there are cases in which the issue of including agent fees (including payment agent fees) in the customs value of goods was considered.

In Case No. A40-21745/2023, payment under a contract with an Iranian company was made through a third party (payment agent). The 1.3% excess over the amount in the invoice issued by the supplier is the commission of the third party (agent) for the transfer of funds. The courts agreed that the agent's fee "is not the seller's costs for the delivery of the goods." The legal consequence of the customs authority's adoption of the contested decision is the additional assessment and payment of customs duties. An unjustified increase in the customs value violates the rights and legitimate interests of the applicant in the sphere of foreign trade activity.[19]

During the re-examination of Case No. A41-69101/2023, it was also indicated that the costs for the agent for the purchase of goods outside the EAEU are among the exceptions not subject to inclusion in the customs value. [20]

In Case No. A40-19213/2023, the courts indicated that the customs authority reasonably concluded that "the payments incurred and paid by the company under the agency agreement are subject to inclusion in the structure of the customs value of the goods." During a desk customs audit, it was established that the agent is not actually such. The agent acted not in the interests of the buyer, but in the interests of the seller. The supplier and the agent "are the same legal entity, therefore, the company transfers funds as agency fees and for the supply of goods to the same legal entity."[21]

A payment agent is an effective way for foreign trade participants to make payments. At the same time, there are risks of losing funds during the transaction. To prevent this, one should carefully approach the choice of a payment agent and the drafting of the contract.

______________________

References

[1] Practical Approaches and Trends in Russian Export 2024. September 26, 2024. Eurasian Business Association website.

[2] Letter of the FNS of the RF No. AS-4-2/207 dated January 23, 2013, On the Issue of Exercising Due Diligence during the Performance of Financial and Economic Activities.

[3] Kabanova N. A., Tselykovskaya V. A. Formation of due diligence of counterparties. Journal "The Eurasian Scientific Journal", 2022, Vol. 14, No. 5.

[4] Foreign Trade Payment Agent: How to Choose, Formalize a Transaction, and Reflect in Accounting. "Spravochnaya. Tochka".

[5] Practical Approaches and Trends in Russian Export 2024. September 26, 2024. Eurasian Business Association website.

[6] Foreign Trade Payment Agent: How to Choose, Formalize a Transaction, and Reflect in Accounting. Spravochnaya. Tochka.

[7] Kostylev I. The whole truth about foreign payment agents. Journal "Financial Director", 2024, No. 8.

[8] Foreign Trade Payment Agent: How to Choose, Formalize a Transaction, and Reflect in Accounting. Spravochnaya. Tochka.

[9] Safety Rules for Settlements through Payment Agents. November 29, 2024. Pepeliaev Group website.

[10] Letters of the Ministry of Finance No. 03-08-05/84831 dated September 6, 2024, No. 03-08-05/65259 dated July 12, 2024, and No. 03-08-05/9982 dated February 7, 2024.

[11] Foreign Payment Agents: Zigzags of Customs and Tax Regulation. December 6, 2024. "Pravo Ru" website.

[12] Decision of the Board of the Eurasian Economic Commission No. 112 dated July 15, 2014. [13] Decision of the Board of the Eurasian Economic Commission No. 283 dated December 20, 2012.

[14] Letter of the FTS of Russia dated August 20, 2024, On the Consideration of the Appeal.

[15] Ibid.

[16] Letter of the Ministry of Finance of Russia No. 27-01-21/106988e dated November 1, 2024.

[17] Ibid.

[18] Foreign Payment Agents: Zigzags of Customs and Tax Regulation. December 6, 2024. Pravo Ru website.

[19] Resolution of the Arbitration Court of the Moscow District dated October 31, 2023, in Case No. A40-21745/2023.

[20] Decision of the Arbitration Court of the Moscow Region dated September 5, 2024, in Case No. A41-69101/2023.

[21] Resolution of the Arbitration Court of the Moscow District dated September 17, 2024, in Case No. A40-19213/2023.

 

January 6, 2025