New "Google Tax" in Russia
On 15 June 2016, the Russian State Duma passed in its third and final reading a new law (the “New Law”) on what is being called the “Google tax”. This new law imposes VAT on sales and services in Russia provided electronically by foreign companies via the Internet. The new law, which was intended to encourage and support the domestic IT business, will unless amended enter into effect on 1 January 2017 . We recommend that all foreign IT businesses operating in Russia review its implications.
KEY POINTS OF NEW LAW
- VAT will be imposed on certain IT and electronic services (i.e. “Google tax”)
- Those services are limited to 14 categories that are specifically listed in the New Law and include: software sales, website hosting, domain registration, search engines, online broadcasts, online advertisements, cloud storage services, sales of electronic goods via the Internet, purchases of electronic goods via mobile services, including applications in the AppStore, Google Play, and other mobile app marketplaces
- VAT will be charged at the standard rate of 18%
- Only foreign IT companies are subject to the tax. There is no specific definition of the qualifications that will be used to classify a company as “foreign”. The law only states that these are “foreign companies providing software and services electronically and registered with the Russian tax authorities.”
ELECTRONIC SERVICES EXEMPT FROM VAT
The following categories are exempt from VAT:
- Sales of tangible goods and services provided directly and in person. This would include sales of clothing and devices and services not provided electronically
- Software and databases provided on a material storage device (such as compact discs, flash cards, etc.)
- Advisory services performed via e-mail
- Internet access services
WHEN IS VAT ON ELECTRONIC SERVICES PAYABLE?
VAT is due from foreign IT companies providing any of the 14 services stated above to Russian buyers inside Russia. The law concerns only foreign companies, Russian IT businesses will still benefit from a general exemption of VAT for the online marketplace.
For VAT to be payable, the buyer of the software or services must be present in Russia and will be identified by:
(a)The domicile of incorporation (for corporate buyers)
(b)The IP addresses or credit card details used to pay for the goods, applications, or services (for individual buyers)
HOW IT WORKS
According to the new law, IT falling under the definition of “foreign” and providing the abovementioned services will be obligated to create an account on the Federal Tax Service’s website in order to file tax documents on sales and tax returns. These companies will then need to inform the tax authorities of their sales numbers in Russia through their accounts.
Generally, foreign IT companies will pay the VAT due if the services were provided to individuals. If the buyer is a Russian company or sole proprietor, the buyer will be obligated to withhold and pay the VAT as the “tax agent”.
Many details remain unclear, especially regarding the method, which the tax authorities will use to determine the place of sale and to control foreign businesses. The Ministry of Finance will most likely develop detailed regulations in the near future intended to clarify vague issues, but it is difficult to estimate when this may happen.
We believe that the New Law will have an impact on all major foreign IT companies, but mostly on sales in Russia through AppStore and Google Play. This could lead to further price increases on goods and services, which may or may not have a negative impact on sales due to the already strained economic situation in Russia and the tax burden falling on the end consumer.
Hannes Snellman’s tax practice in Russia specializes in tax planning and structuring for public and private M&A transactions and financial instruments. Our Russian tax practitioners have a strong international reputation for providing sophisticated tax counselling on domestic and cross-border tax issues and provide high quality, innovative tax solutions in an increasingly complex field of law. The firm also advises on tax related aspects of acquisitions of Russian assets by foreign investors. We also provide planning services to reduce or eliminate identified tax risks and provide advice on transfer pricing and controlled transactions. We work closely with our tax practitioners in the EU and a strong network of partner firms to provide global advice to all of our clients.
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