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"Export" of Services: deadline for first reporting of recovered input VAT

Deadline for first reporting of recovered input VAT

The deadline for submission of VAT returns for Q3 2019 is 25 October 2019. This is the first VAT period when input VAT on the “export” of services (or work) can be recovered (recovery of input VAT on services or work deemed as supplied outside of Russia).

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Evgenia Wolfus

Partner, Head of Indirect Tax, Tax & Legal

KPMG in Russia

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Changes:

Starting on 1 July 2019, the new rules (in most cases) allow Russian companies to recover input VAT related to services rendered to foreign customers without VAT (such as marketing, advertising, consulting, legal and some other services). Before 1 July 2019, this VAT was not recoverable and was an extra cost.

Impact:

  1. Opportunity to mitigate extra VAT cost on the services rendered by a Russian company (such as a subsidiary) to a foreign company;
  2. Risk of VAT assessment on the services rendered by the Russian company to the foreign company (e.g. if the tax authorities challenge the non-VATable substance of the services, e.g., due to a lack of supporting documents (including deliverables) or contradictory explanations provided by employees).

Typical cases and industries:

Case 1 – A Russian subsidiary renders marketing, consulting or other services to a foreign group company. This is often relevant to software, technology, industrial products, FMCG, and financial companies.

Case 2 – A Russian company renders consulting, advertising, engineering, construction (outside Russia), software development, electronic or some other services to foreign third party customers as its main business. This is usually relevant to infrastructure (construction, engineering), professional services and IT companies.

Main areas to focus on:

  • Transition to the new rules. The changes should be implemented in documents and processes. These are mainly technical changes to be included in the input VAT allocation policy (an obligatory document required by law). However, there may be issues in the transition period (e.g. if input VAT is incurred before 1 July 2019, but is related to services rendered after 1 July 2019).
  • Review of the non-VATable status of services. The tax authorities will most likely pay an even greater attention to such services and may challenge their non-VATable nature and assess VAT. The risk of VAT assessment may be high if the quality of supporting documents is poor (e.g. if templates were developed a few years ago and have never been reviewed and updated) and the employees provide explanations to the tax authorities which contradict the documents.
  • VAT recovery/refund. There may be an issue with the documents supporting recovery of VAT which previously was not recoverable, especially if a VAT refund is claimed (i.e. if input VAT exceeds output VAT). In this case the tax authorities will conduct an in-house tax audit, review the agreements with suppliers and the primary documents supporting the VAT refund, check the suppliers (whether they pay VAT or can be qualified as “missing traders”), and interview employees, etc.

To learn more on this matter, please refer to our leaflet below.

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