VAT in Russia in 2019

VAT in Russia in 2019

In Russia Value Added Tax or VAT (Налог на Добавленную Стоимость or НДС in Russian) has to be paid by organisations and individual entrepreneurs that apply the General Taxation System in Russia. Unlike, for example, Corporate Tax in Russia, VAT in Russia is for 100% paid on a Federal level and not on a regional level. The fact that VAT is such an important source of income for the Russian Federal Government is one of the reasons that the control on VAT payments from a federal level in is becoming ever stricter.

VAT is a so-called indirect tax, which is paid for by the end consumer.

There are three different VAT rates in Russia: the zero rate, the 10% rate and the General Rate. In Russia the General Rate of VAT has been raised on 1 January 2019 and currently amounts to 20% (used to be 18%). The rules about VAT in Russia are laid down in chapther 21 of the Russian Tax Code.

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History of VAT in Russia

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VAT was first introduced in Russia on January 1st 1992. Back then the highest rate was a whopping 28%. A year later, on January 1st 1993, the rate was lowered to 20%. And on January 1st 2004 the rate was reduced to 18%. On 1 January 2019 the maximum VAT rate has been raised back to 20%.

Who has to pay VAT to the Russian Tax Authorities

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At the end of the day VAT in Russia is usually paid for by the end consumer. The end consumer doesn’t hand over the money to the Tax Authority though, that is done by the taxpayer of VAT, which according to Article 143 of the Russian Tax Code are:

  • Organisations
  • Individual entrepreneurs
  • Persons recognized as taxpayers of value added tax (hereinafter referred to as tax) in connection with the movement of goods across the customs border of the Customs Union

Who does not have to pay VAT

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Organisations and Individual entrepreneurs that apply the Russian Simplified Taxation System do not have to pay VAT to the Russian Tax Authority (they do have to pay tax to their suppliers on the General Taxation System and cannot recover this VAT from the Tax Authority). Other organisations in principle do have to pay VAT, but, if they meet certain conditions, they can apply for a VAT exemption.

Taxpayers who can apply for a VAT exemption

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According to Article 145 and Article 145.1 of the Russian Tax Code, VAT taxpayers can apply for an exemption to pay VAT in the following cases:

  • Organisations and Individual Entrepreneurs who, during the last three months had a total turnover of less than 2 million rubles (this does not apply to organisation and Individual Entrepreneurs that apply the Single Agricultural Tax) (paragraph 1)
  • Organisations and Individual Entrepreneurs who apply the Single Agricultural Tax and who have a gross turnover of no more than 90 million rubles in 2019, 80 million rubles in 2020, 70 million rubles in 2021 and 60 million rubles in 2022 and the years thereafter.
  • An organisation that has received the status of participant in the Skolkovo project for a period of 10 years or until the moment they earn over 300 million rubles of net profits a year.

Income that is derived from importing goods into Russia is not exempted from VAT, provided that VAT applies to this category of imported goods in the first place of course (paragraph 3).

What is subject to VAT in Russia

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Russian accountants often ask themselves the question: does VAT apply in this particular situation? In order to think along with them the following subsection will be of help.

In accordance with Article 146 point 1 of the Russian Tax Code, VAT taxes the sale of goods, works and services on the territory of the Russian Federation.

A good (товар) is defined in Article 38 point 3 of the Tax Code as any good that can be sold or is supposed to be sold. Be aware though, this definition of goods differs from the definition provided for by the legislation of the Eurasian Customs Union!

Works are defined in Article 38 point 4 of the Tax Code as work recognized as an activity with a material result and can be sold in to meet the needs of an organization and (or) individuals. This is also a tax-specific definition. The same term may have different meaning in other laws.

Services are defined in Article 38 point 5 of the Tax Code as an activity, the results of which has no material expression.

As a general rule of thumb you can say that, unless you are dealing with import, if no change of ownership has taken place place of the goods, works or services, there has been no sale, and. consequently, also no VAT will be charged.

In Article 146 point 2 of the Tax Code it is determined that transferring goods (works or services) for one’s own needs (для собственных нужд) is also subject to VAT. This term is not further defined in the Russian Tax Code. But from jurisprudence and explanatory letters from the Tax Office it can be concluded that 2 conditions have to be met in order for a transfer of goods to be qualified as for one’s own needs:

  1. There has been an actual transfer of goods (works, or services) between structural subdivisions of a company
  2. The costs of acquiring (manufacturing) the goods (works, services) to be transferred does not reduce the company’s taxable income. This This conclusion follows directly from the wording given in subparagraph 2 of article 146 of the Tax Code of the Russian Federation 

Both of the above conditions have to be met. Even if one of them doesn’t apply, the transfer in question is not subject to VAT.

In Article 146 point 3 it is declared that building and assembly works for one’s own use are also subject to VAT.

Import into Russia

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In accordance with Article 146 point 4 the import of goods into Russia or into territories under Russian jurisdiction is also marked as an activity, which is subject to VAT. The details of levying VAT upon import are laid down in Article 151 of the Tax Code. VAT is levied on almost all import into Russia, there are, however, exceptions. Like, for example, the import of certian medical equipment into Russia (Article 150 point 2 Tax Code).

Importing goods from Member States of the Eurasian Customs Union (EACU)

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When importing goods into Russia from Belarus, Kazachstan, Armenia, Kyrgyzstan, tax payers don’t have to pay tax to the Russian Tax Authority, but to the the Tax Authority from the country of origin. That VAT Declaration from a EACU member state then needs to be shown to the Russian Custom Authorities for custom clearance.

What is not Subject to VAT in Russia

Operations that are not deemed to be a sale

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In accordance with Article 146 paragraph 2 and Article 39 Paragraph 3 of the Tax Code operations that are not a sale of goods, works or services, are exempted from VAT. The following shall not be deemed to constitute the sale of goods, work or services:

  • the performance of operations associated with the circulation of Russian or foreign currency (except for numismatic purposes);
  • the transfer of fixed assets, intangible assets and (or) other assets to noncommercial organizations for use in carrying out their main statutory activities which are not connected with entrepreneurial activities;
  • The transfer of assets, where such transfer has the nature of an investment (in particular, contributions to the charter (pooled) capital of companies and partnerships, contributions made under a simple partnership agreement (joint activity agreement), share contributions to the mutual funds of co-operatives);

Gifts to the Russian state or local governmental bodies

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Article 146 paragraph 2, point 2 makes certain transfers of ownership to a Russian State Body or a Local Government not taxable. These are for example the transfer of:

  • Kindergartens
  • Sanatoria
  • Power-supply systems
  • operations involving the sale of plots of land (shares therein);

Some controversial cases

The following controversial things have been declared subject to VAT by the Russian Tax Authority:

  • To let people use computers free of charge (письмо Минфина РФ от 04.02.2011 N 03-07-11/27)

Conditions under which VAT may be recovered from the Russian Tax Authorities.

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The conditions under which VAT may be recovered from the Russian Tax Authorities apply, above all, to buyers of goods and services.

The following conditions must apply in order to recover VAT in Russia:

  1. You need to have a VAT invoice, on which on a special line is indicated the VAT rate that applies and the amount of money that corresponds to this percentage. For example: total amount is 100 rubles, including 10% VAT, 10 rubles.
  2. The goods (services works) for which you want to apply for a VAT recovery must be further used in activities, which will also be subject to VAT. For example, if you’re a producer of candy and you buy the ingredient sugar for usage in your production process to produce candy for which VAT will also be paid when it will be sold.
  3. The goods, services or works for which you want to reclaim VAT are correctly processed in your bookkeeping documents and can be traced back to original basic source documents.

If for example your supplier gave you no VAT invoice, or one with a mistake in it, you won’t be able to recover your VAT. The Russian Tax Authorities are very strict with this.

Offsetting VAT (зачет НДС)B

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The VAT that one pays to his suppliers is called incoming VAT (входящий НДС in Russian). The VAT that one charges to its buyers is called outgoing VAT (исходящий НДС in Russian).These are not official terms from the Russian Tax Code, but they are used a lot nonetheless.

In accordance with Article 171 of the Russian Tax Code the outgoing VAT can be deducted from the incoming VAT in order to calculate the amount of VAT that has to be paid to the tax office. But this VAT may only be deducted if:

  • The goods (services, etcetera) have been obtained in order to use them in economic operations that are subject to VAT
  • The purchased goods are taken into account
  • The buyer has a VAT invoice (счет-фактура in Russian) from the seller as well as supporting primary documentation
  • Not more than 3 years have passed since the goods (services, etcetera) have been put on the company’s balance sheets

The 0% rate

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This rate is mainly used in case of export of goods, services or works from Russia abroad. When exporting, the seller can recover the VAT he paid in Russia from the Tax Authority.

In practice, the Tax Authority spends a lot of time controlling your documents before confirming that you’re indeed allowed to apply the 0% rate. It is, for example, not sufficient to show evidence that you send your goods from Russia abroad. You also have to provide the Tax Office with details about your client and present them with a contract that has been signed by both parties.

Forgo one’s right to apply the 0% rate

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Like I said, it takes a lot of time and effort to have your right to apply the 0% rate confirmed by the Russian Tax Authorities. That’s why some companies, for who export is not the main source of income in Russia choose to forgo their right to apply the 0% rate in order not to have to deal with the paperwork involved in applying the 0% rate.

Example of a declaration of a company to forgo its right to apply to 0% VAT rate

The 10 % rate

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The 10% rate of VAT applies to the following categories of products (and services):

  • Food products: meat, bread, eggs and others (but not luxury food products like caviar, art. 164
  • Goods for children: textbooks and other types of books
  • Medical goods
  • Goods works and services for official use of international organisation in Russia

The 20 % rate

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The general rate of VAT in Russia is the 20 % rate. If it doesn’t fall under the 0 % or the 10 % rate, this is the rate that applies.

When should VAT be paid in Russia?

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VAT should be paid to the tax authorities at the end of a quarter. The payment terms for 2019 are as follows:

PeriodBefore what date the VAT should be paid
4th Quarter 201825 January 2019
25 February 2019
25 March 2019
1st Quarter 201925 April 2019
27 May 2019
25 June 2019
2nd Quarter 201925 July 2019
26 August 2019
25 September 2019
3rd Quarter 201925 October 2019
25 November 2019
25 December 2019

Problems with contracts with old VAT rates

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As I have indicated, the VAT rate in Russia has been raised from 18 to 20% in 2019.

This naturally raises a few questions with regard to contracts that have been signed before 2019.

Should a contract signed before 2019 be amended?

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Obviously the new VAT rate is something that applies automatically to a contract between two Russian parties. It isn’t dependent on whether parties bothered to put into a contract that from January 1st 2019, a VAT rate of 20% applies. What, however, is dependent on the contract, out of whose pocket this 2% different is going to come.

Favourable for the seller

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First of all this depends on how the contract price is formulated in the contract that you signed before 2019. If, according to the contract, the contract price does not include taxes, this means the contract price will just be increased by 2% and that will be paid for by the buyer.

Favourable for the buyer

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If, however, there is no specification in the contract as to whether the contract price includes VAT or not , Russian courts take the position that the contract price includes VAT. If the contract price includes VAT, the extra 2% of VAT will have to be paid for by the seller, if he didn’t amend the contract on time! If you are acting as the seller and you want to avoid this scenario, you should definitely amend your contracts.

Advance payments made in 2018 for goods delivered in 2019

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Partial advance payments are often part of a Russian agreement on delivery of goods. But what if such an advance payment was made in 2018 for goods that were delivered in 2019?

The moment the goods were delivered and, consequently, the VAT invoice was issued are decisive in order to determine what VAT rate applies. If the goods were delivered in 2019, the 20% rate will apply. So what to do with the prepayment with a 18% VAT rate?

The general rule regarding prepayments received in 2018 for good to be delivered in 2019 is that in 2018, the seller should pay VAT to the Tax Office according to the interest settlement rate of 18/118. Once goods are delivered, 20% VAT should be paid for them and to offset the VAT paid one can use the 18/118 rate again.

Conclusion

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As will probably be clear to you after reading this blog post, VAT is a complicated subject. I hope this blog post will help you to gain a basic overview of VAT in Russia. Of course there are many questions left unanswered, it is impossible to come up with an answer to all questions about VAT in just one blog post. You are always welcome to contact us for a free first consultation. At Van Rhijn & Partners we can help analyse your Russian contracts for VAT related matters and assist you with your reporting requirements to the Russian Tax Office.

With inflation already high in Russia, many are worried about the effect the increase in VAT will have on price levels. At least some Russian companies have announced that ,in spite of the increase in VAT, they will not raise prices, because they are afraid to loose market share. I, however expect, eventually they all will have to raise their prices.

Ivo van Rhijn is a lawyer and a slavist.

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