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Russia: Full input VAT recovery on export of services, work

Russia: Full input VAT recovery on export of services

25 October 2019 is a deadline for the submission of VAT returns for Q3 2019 which is the first VAT period when input VAT related to services (work) deemed supplied outside Russia may be recovered.

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Starting 1 July 2019 the new rules allow Russian companies to recover in most cases input VAT related to services charged 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. This cost usually has been included into the service fee charged to the foreign company.

Impact:

  • Opportunity to mitigate extra VAT cost on the 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-VATable substance of services, e.g., due to lack of supporting documents (including deliverables) or contradictory explanations provided by the employees during the interrogation).

Most 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, 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 a 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 the documents and processes. This is mainly about technical changes to be included into the input VAT allocation policy (an obligatory 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-VATable status of services. The tax authorities will most likely scrutinize the substance of services to 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 the templates were developed few years ago and have been never reviewed and updated) and the employees provide explanations to the tax authorities which contradict to the documents.
  • VAT refund. There may be an issue with the documents supporting recovery of VAT which previously was not recoverable especially if VAT refund is claimed (i.e., if input VAT exceeds output VAT). In this case the tax authorities will conduct in-house tax audit, check the agreements with suppliers and primary documents supporting the VAT refund, check the suppliers (whether they pay VAT or could be qualified as “missing traders”), interrogate employees, etc.

Read an April 2019 report [PDF 306 KB] prepared by the KPMG member firm in Russia

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