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Russia: Deadline for input VAT recovery, services supplied outside Russia (Q3 2019)

Russia: Deadline for input VAT recovery

The deadline for submitting value added tax (VAT) returns for the third quarter (Q3) of 2019—which is the first VAT period when input VAT related to services (work) deemed supplied outside or exported from Russia may be recovered—is 25 October 2019.

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New rules, effective 1 July 2019, allow Russian companies to recover in most situations input VAT related to certain services that are charged to foreign customers (such as marketing, advertising, consulting, legal, and certain other services). Before 1 July 2019, this VAT was not recoverable and was an extra cost that typically has been included into the service fee charged to the foreign company. Read TaxNewsFlash

The new measures may have the following effect:

  • An opportunity to mitigate additional VAT cost on services rendered by a Russian company (e.g., subsidiary) to a foreign company
  • 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-VAT-able substance of services, for instance, due to lack of supporting documents (including deliverables) or contradictory explanations provided by the employees during the examination)

The rules can be illustrated as applying in two typical situations and industries:

  • Situation 1 – A Russian subsidiary renders marketing, consulting or other services to a foreign group company. This is often relevant to software, technology, industrial products, and financial companies.
  • Situation 2 – A Russian company renders consulting, advertising, engineering, construction (outside Russia), software development, electronic or some other services to foreign third-party customers as a main business. This is usually relevant to infrastructure (construction and engineering), professional services, and IT companies.

Main areas of focus include:

  • Transition to the new rules. The changes need to be implemented in the documents and processes. This is mainly about technical changes to be included in the input VAT allocation policy (a document required by the law) and other documents used for input VAT allocation (e.g., input VAT allocation registers). However, there may be issues in the transition period (e.g., if input VAT is incurred before 1 July 2019, but it is related to the services rendered after 1 July 2019).
  • Review of the non-VAT-able status of services. The tax authorities would most likely scrutinize the substance of services to challenge their non-VAT-able nature and assess VAT. The risk of VAT assessment may be great if the quality of supporting documents is poor (e.g., if the templates were developed a few years ago and have been never reviewed and updated) and the employees provide explanations to the tax authorities that contradict to the documents.
  • VAT refund. There may be an issue with the documents supporting recovery of VAT that previously was not recoverable especially if a VAT refund is claimed (i.e., if input VAT exceeds output VAT). In this situation, the tax authorities will conduct in-house tax audit, verify the agreements with suppliers and primary documents supporting the VAT refund, verify the suppliers (whether they pay VAT or could be qualified as “missing traders”), interview employees, etc.

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