Following criticisms by representatives of foreign businesses working in Russia, Russia’s Federal Tax Service (FTS) has prepared a draft letter in favor of restoring the old rules governing the payment of the so-called “Google tax” (VAT on e-services) by foreign e-service providers.
As reported by the business daily Vedomosti, the new rules came into effect on January 1, 2019, making many foreign companies operating in Russia suspend all of their cross-border payments.
Because of the new rules, international companies in Russia had to register with the FTS and were obliged to pay themselves the tax which used to be paid by their customers.
The ‘Google tax’ in Russia is the VAT that is paid by foreign companies operating in Russia for the e-services they provide to Russian businesses, Vedomosti reported earlier. Such services may include the transfer of rights to use programs, web advertising, website support, storage and processing of information, website analytics, hosting services, access to search engines, etc.
According to Andrey Grachev, head of tax practice at Eversheds Sutherland, e-services rendered from outside of Russia are used by all the Russian subsidiaries of international companies and by half of large Russian businesses.
Andrey Ermolaev, head of dispute resolution at KPMG in Russia, estimates that the B2B market of such services in Russia is four times as big as the B2C market.
“Tangible inconveniences”
In November 2018, some of foreign businessmen working in Russia called on the Russian government not to change the procedures of the tax payment. In particular, Frank Schauff, CEO of the Association of European Businesses (AEB) in Russia, said that the new rules would create “tangible inconveniences,” which could pose an extra barrier for doing business in Russia.
Russian companies could also be affected as they risked not to get their VAT credit, for which the VAT was required to be specified in a bill issued by the foreign e-service provider.
As the FTS finally agreed to restore the old rules, the obligation to pay the tax is now levied again on the shoulders of Russian business customers. The letter says that if a seller did not specify a VAT in a bill to its customer (including, among other things, its failure to get registered with the FTS), and the customer paid the tax in Russia themselves and included it in its VAT credit, then Russian tax officials will have no grounds to demand that foreign companies pay the tax again or dispute their VAT credit.
As EWDN reported earlier, starting from January 1, 2017, foreign companies selling e-content via the Internet in Russia are required to register private offices in Russia, submit information on their sales in the country, and pay an 20% value-added tax.
These rules, nicknamed ‘Google tax law,’ were introduced in 2016 via amendments to the Russian tax code. They apply, in particular, to Apple, Google and Microsoft, which generate revenues through their application stores in Russia, as well as to such service providers as Gett and Uber.
