VAT on Electronic Services in Russia and the EAEU

 

September 8, 2024

BRACE Law Firm ©

 

The digitization of the national economy has affected all industries and spheres of life, leading to the emergence of electronic business models. In this context, a critical issue is the inclusion of foreign companies that provide or order electronic services into the tax system.

In Russia, Value Added Tax ("VAT") has applied to these services under special rules since 2017, and has earned the unofficial moniker "Google Tax."

Amendments to the Treaty on the Eurasian Economic Union dated May 29, 2014, established the procedure for collecting VAT when a taxpayer in one country of the Eurasian Economic Union (the "EAEU") provides electronic services to a taxpayer or an individual in another EAEU member state.

Which Services are Classified as Electronic Services?

Article 174.2 of the Tax Code of the Russian Federation (the "Tax Code") defines "electronic services" as services provided automatically over a telecommunications network using information technology.

With the signing of the Protocol on Amending the Treaty on the Eurasian Economic Union dated May 29, 2014, on December 9, 2022 (the "Protocol dated December 9, 2022"), a common definition for the procedure of collecting indirect taxes on electronic services was established for all EAEU countries. This protocol entered into force on the date the depository received the final written notification through diplomatic channels regarding the completion of internal state procedures by the member states. Specifically, Russia ratified the Protocol dated December 9, 2022, via Federal Law No. 328-FZ dated July 24, 2023, and it entered into force on March 4, 2024. Under the Protocol dated December 9, 2022, services in electronic form are services provided via an information and telecommunications network (communication network), including the Internet, the provision of which is impossible without the use of information technology.

As the procedure for collecting indirect taxes on electronic services has only recently taken effect, judicial practice regarding its application has not yet formed.

The services listed in the Tax Code are generally similar to those included in the List of Electronic Services in EAEU Countries, established by Decision of the Council of the Eurasian Economic Commission No. 97 dated September 27, 2023, On the List of Services in Electronic Form. The list of electronic services provided in the Tax Code is exhaustive and includes:

• Granting rights to use software for any type of electronic device (including computer games and online games, except for those prohibited under the laws of the buyer's EAEU member state) and databases via an information and telecommunications network, including the Internet, including by providing remote access to them, as well as updates and additional functionality;
• Providing advertising services in information networks, including through the use of software for any type of electronic device and databases functioning in information networks, as well as providing advertising space (space) in information networks;
• Providing services for placing offers to purchase (realize) goods (work, services), or property rights in information networks;
• Providing technical, organizational, information, and other capabilities via information networks using information technologies and systems to establish contacts and conclude transactions between sellers and buyers (including providing a real-time online trading platform where potential buyers offer their price through an automated procedure and parties are notified of a sale by an automatically generated message);
• Maintaining a presence in information networks for personal or commercial purposes, supporting users' electronic resources (websites or pages in information networks), providing other users with access to them, and allowing users to modify them;
• Storing and processing information (provided that the person who submitted the information has access to it via information networks);
• Providing real-time computing power for placing information in an information system;
• Providing domain names and hosting services;
• Providing administration services for information systems and websites in information networks;
• Providing services performed automatically via information networks when the buyer enters data, such as automated data search, selection, and sorting services, and providing such data to users via information networks (including real-time stock exchange summaries and real-time automated translation);
• Granting rights to use electronic books (publications) and other electronic publications, information, educational materials, graphic images, music with or without text, and audiovisual works via information networks, including by providing remote access for viewing or listening;
• Providing services to a customer for searching for and/or providing information about potential buyers;
• Providing access to search engines in information networks;
• Providing services for maintaining statistics on websites in information networks.

The following are not considered electronic services:

• The sale of goods (work, services) if, when ordered via an information and telecommunications network (including the Internet), the delivery of goods (performance of work, provision of services) occurs without the use of such a network;
• The sale (transfer of rights to use) of software for any type of electronic device (including computer games) or databases on tangible media;
• Providing access to an information and telecommunications network, including the Internet.

What Taxes apply to the Import and Export of Electronic Services?

The export or import of electronic services is subject to VAT and Corporate Income Tax.

To pay VAT, one must determine the place of realization of the services. As a general rule, the place of realization is determined by the provider's place of business, unless Article 148 of the Tax Code establishes a special procedure for a specific type of service. A special procedure for determining the place of realization exists for services, including electronic services, under contracts with counterparties from EAEU member states. The territory of a member state is recognized as the place of realization of work or services if a taxpayer of that member state acquires services in electronic form; in other words, the place of realization is determined by the buyer.

Under the procedure for collecting indirect taxes established by the EAEU Treaty (as amended by the Protocol dated December 9, 2022), when exporting electronic services to an EAEU member state, the organizations and/or individual entrepreneurs purchasing the electronic services must calculate and pay (withhold) VAT in accordance with the laws of their own member state, unless the laws of the state where the services are realized require the seller to register with the tax authorities of that state. If such an obligation exists, the exporter of services must register with the tax authority of the member state recognized as the place of realization.

When importing services, the tax agent must calculate, withhold, and pay VAT to the budget (Clause 4, Article 173 of the Tax Code). Tax agent obligations arise even for non-payers of VAT, such as individual entrepreneurs or organizations using the simplified taxation system (Clause 2, Article 161 of the Tax Code).

The procedure for paying VAT is discussed in the corresponding section below.

Since exporting services generates income, it is also subject to Corporate Income Tax. Importing services may result in expenses that reduce the Corporate Income Tax base. All costs associated with importing services must be supported by documentation to be recognized as expenses.

How do Double Taxation Treaties Regulate this Issue?

Double taxation of income and/or property is generally eliminated by offsetting taxes paid in one country against similar taxes due in another country. Additionally, certain income or property may be exempt from tax in one of the countries.

To understand the mechanism in each specific case, one must first determine if a Double Taxation Treaty ("DTT") exists between Russia and the other country, which are concluded based on a model agreement.[1] Russia has such agreements with all EAEU member states.

When paying remuneration to a foreign counterparty, you must also check whether your organization is obligated to withhold tax from the income. Generally, if the subject of the transaction is the provision of services, no withholding tax is required upon payment. The exceptions are those services/works listed in Clause 1, Article 309 of the Tax Code, which do not include any electronic services.

The procedure for eliminating double taxation is defined in each DTT and generally applies to taxes such as Corporate Income Tax, Corporate Property Tax, and Personal Income Tax.

There are no special international provisions allowing Russian taxpayers to offset foreign tax paid against Russian VAT obligations, or vice versa. Russian VAT payers may only deduct amounts of Russian VAT. VAT charged by a foreign counterparty under the laws of their country of residence cannot be claimed as a deduction. A deduction can be claimed for tax charged by a foreign counterparty registered in Russia as a VAT payer. It is also possible to deduct VAT that a Russian organization withheld from the income of a foreign counterparty and paid to the budget. Russian organizations using the general taxation regime may include VAT charged by a foreign counterparty in the cost of the acquired work or services.

Who Pays VAT on the Import and Export of Electronic Services?

Under Clause 10.1, Article 174.2 of the Tax Code, if a foreign company provides electronic services to a Russian organization or individual entrepreneur and the place of realization is the Russian Federation, the purchasing tax agent pays the VAT, except for buyers who are individuals. For electronic services provided to individuals, VAT is determined as a 16.67% share of the tax base (Clause 5, Article 174.2 of the Tax Code) and is paid by the foreign company itself (Clause 10, Article 174.2 of the Tax Code).

Under these rules, which were in effect until recently, the issue of VAT payment remained unclear when a foreign organization from an EAEU member state provided electronic services. While all EAEU countries already have procedures for collecting VAT on electronic services, the EAEU Treaty did not previously contain specific provisions regarding electronic services.

What has Changed in the Regulation of Electronic Service Exports and Imports?

If foreign sellers who are residents of Armenia, Belarus, Kazakhstan, or Kyrgyzstan provide electronic services to Russian buyers, the Procedure for Collecting VAT on Electronic Services in the EAEU, established by the Protocol dated December 9, 2022, must be applied.

A taxpayer from one EAEU country (e.g., Kazakhstan) providing services to a client in another EAEU country (e.g., Russia) must now register for tax purposes in the country where the services are provided (Russia) as a VAT payer under that country's rules, if such registration is required by that country's laws.

If the taxpayer in the above example from Kazakhstan fails to fulfill the obligation to register for tax in Russia, the organizations and individual entrepreneurs purchasing the electronic services must calculate and pay the VAT according to their own state's laws. Individuals who do not have the status of an individual entrepreneur are not subject to this obligation, as they are not VAT payers in any case.

Determining the Place of Business of the Buyer of Electronic Services

An organization purchasing electronic services is recognized as conducting business in the territory of a member state if any one of the following conditions is met:

• The organization conducts activities in the member state based on state registration;
• The services are provided to a branch, representative office, or permanent establishment of the organization located in that member state (which is not the place of state registration of the organization), or are purchased for and consumed by such a branch, representative office, or permanent establishment;
• The location of the organization's permanent executive body (place of management) is in that member state (which is not the place of state registration), and the organization actually conducts business activities and consumes the services in that member state.

An individual, including an individual entrepreneur, purchasing electronic services is recognized as conducting business in the territory of a member state if any one of the following conditions is met:

• The buyer's place of residence (place of permanent or primary residence) is in that member state;
• The bank where the account used by the buyer to pay for services is opened, or the electronic money operator through which the buyer pays for services, is located in that member state;
• The buyer's network address used to purchase the services is registered in that member state (belongs to the corresponding address space);
• The international country code of the phone number used by the buyer to purchase or pay for services is assigned by that member state.

If the place of business of an individual purchasing electronic services could be recognized as the territory of more than one member state, the seller determines the place of business based on which member state meets the greatest number of the specified conditions.

If an equal number of conditions are met in multiple member states, the seller independently determines the individual's place of business based on the approaches it applies to an unrestricted circle of electronic service buyers.

The place of business of an individual entrepreneur purchasing electronic services is determined based on the conditions applied to organizations, if established by the regulatory legal acts of the member state where the individual entrepreneur is registered, adopted after the VAT collection procedure entered into force.

Tax Registration and VAT Payment for Electronic Services

To pay VAT, a taxpayer providing electronic services to individuals, organizations, or individual entrepreneurs in another EAEU country (where their place of business is located) must register for tax there, if required by that country's laws.

For VAT payers providing electronic services to individuals, registration is completed via the information resource of the specified tax authority on the Internet or, if provided for by the member state's laws, through conditional registration with the tax authority of the member state where the services are realized.

Please note that all foreign persons, regardless of their country of registration, who provide electronic services to individuals and are VAT payers, as well as their foreign intermediaries acting as tax agents for this tax, must register with the Russian tax authorities no later than 30 calendar days from the date they began providing such services.

If the legislation of a member state (the place of realization) does not require the seller to register with the tax authority, the organizations and/or individual entrepreneurs purchasing the electronic services must calculate and pay (withhold) VAT in accordance with their own state's laws.

If sellers fail to register with the tax authority of another member state (when such registration is required by the laws of the buyer's place of business), the organizations and individual entrepreneurs purchasing the electronic services must also calculate and pay (withhold) VAT according to their own state's laws.

Notably, if the laws of the member state recognized as the buyer's place of business provide for tax registration only for providing electronic services to individuals (including individual entrepreneurs or non-entrepreneur individuals), but the seller also provides such services to organizations, then for the services purchased by those organizations and/or individual entrepreneurs, the purchasing organizations and/or individual entrepreneurs must calculate and pay (withhold) VAT according to the laws of the member state recognized as the buyer's place of business.

The list of organizations providing electronic services must be posted on the official websites of the member states' tax authorities, indicating the registration date, tax identification number, or registration number (if any).

When electronic services are provided through an intermediary organization (individual entrepreneur) that participates in settlements directly with the buyers based on a contract with the service provider, the intermediary shall calculate and pay (withhold) the VAT, rather than the taxpayer providing the services.

If multiple intermediaries are involved in the settlements, the one directly processing the settlement with the buyer must calculate and pay (withhold) the VAT, regardless of whether that intermediary has a contract with the seller.

The procedure for tax registration (and deregistration), the tax base, VAT rates, calculation methods, payment deadlines, tax benefits (exemptions), and the procedure for refunding (offsetting) overpaid VAT are determined by the laws of the member state recognized as the place of realization of the services.

In Russia, the form and procedure for filling out the tax return, as well as the format for its electronic submission, were approved by Order of the Federal Tax Service No. ED-7-3/933@ dated December 5, 2023. Foreign persons (including organizations and individual entrepreneurs who are residents of member states) must complete the return when providing electronic services. The return includes a title page and three sections: Section 1 lists VAT amounts due; Section 2 provides detailed info on services rendered; and Section 3 is for services exempt from VAT under Article 149 of the Tax Code.

Please note that if a tax return is not required under a member state's laws, the taxpayer must pay the VAT by the deadline without the obligation to submit a return.

During audits, the Inspectorate of the Federal Tax Service may demand from the service provider information confirming the place of realization, the completeness and timeliness of VAT payment, and payment documents (or copies) confirming the payment. Demanded documents must be submitted electronically within 30 calendar days from the date specified in the tax authority's request. Upon the taxpayer's application, the Inspectorate may extend this deadline.

The moment (date) for determining the tax base is the last day of the quarter or month (if the tax period is a month under EAEU laws) in which payment (partial payment) was received for the services provided or as a prepayment for upcoming services.

When determining the tax base, the value of the services in foreign currency is converted into the national currency at the rate of the national (central) bank of the member state on the date the tax base is determined, unless otherwise established by the laws of the member state where the services are realized.

Currently, the Federal Tax Service's online service "VAT Office of a Foreign Organization" allows foreign organizations to use the registration application form when providing electronic services.

This application can be submitted through the "VAT Office of a Foreign Organization." In the "Information on the service provided (code)" field, one must select "Other operations, the place of realization of which is recognized as the territory of the Russian Federation."

In light of these innovations, experts recommend that organizations providing electronic services take the following actions:

• Conduct a "review" of their clients;
• If clients are located in EAEU countries, clarify their status (legal entities, individual entrepreneurs, or individuals without entrepreneur status);
• Based on this status and the requirements of the national tax laws of the relevant EAEU country regarding tax registration, determine the necessity of registering in that state;
• If necessary, amend agreements and policies governing the provision of electronic services and, where applicable, notify clients that they may be assigned the duties of VAT tax agents.[2]

Furthermore, each EAEU country has its own rules for the indirect taxation of electronic services provided by non-residents: Russia since 2017, Belarus since 2018, and Armenia, Kazakhstan, and Kyrgyzstan since 2022. Therefore, if electronic services are provided to buyers in other EAEU countries, one must specifically study the local requirements of those countries regarding tax registration for VAT purposes.

______________________________

References

[1] Government Resolution No. 84 dated February 24, 2010, On the Conclusion of Intergovernmental Agreements on the Avoidance of Double Taxation and the Prevention of Tax Evasion on Income and Property.

[2] Narezhny V. The New Procedure for Paying VAT on Electronic Services within the EAEU. Russian International Affairs Council website.