FOCUS: Russia wants to impose VAT on IT firms, tie tax to buyer’s location

By Yekaterina Yezhova

MOSCOW, Mar 9 (PRIME) -- The government plans to support local Internet companies and can soon make tax conditions – which currently favor foreign ones – equal for all IT firms by the introduction of the value-added tax (VAT). Analysts said the tax is unavoidable as the Internet market is thriving, but still raises worries.

“At present, Russian and foreign companies find themselves in different conditions as taxes are charged according to the place of registration. If a firm officially resides outside the country, it pays almost no taxes in Russia,” Viktor Markov, a senior analyst at Zerich Capital Management, told Russian Connection.

“In this situation, digital content and services of foreign companies are cheaper than domestic analogues. At that, volumes of digital services keep growing.”

The State Duma, the parliament’s lower house, approved in late February in the first out of three mandatory readings a bill seeking to impose the VAT on all companies selling access rights to databases and other digital content.

“Following the E.U., South Korea and Japan, Russia plans to introduce special rules of taxing electronic services. At that, the rules embrace almost all services rendered via the Internet or any similar network in an automatic regime. According to the bill, a place of provision of electronic services will be determined by the location of a buyer,” the Russian Association for Electronic Communications (RAEC) said in its official opinion on the bill.

Deputy Vladimir Parakhin, one of the bill’s authors, said that VAT rules for electronic services are well documented in international practice.

The budget loses tax revenues, he said. “According to the modest preliminary estimates, we speak about at least 50 billion rubles per year, which could be spent on social payments, on other necessary clauses of the budget,” Parakhin said.

If finally endorsed, the initiative will bring an extra 52.8 billion rubles to state coffers in 2017, including 52.6 billion rubles thanks to adding foreign companies to the list of VAT payers.

The initiative offers to grant domestic firms, supplying electronic services to foreign companies, certain compensations: they can claim a VAT credit to the amount spent on provision of such services, as they are sold outside the country.

The bill is aimed at improving rules of charging taxes from sales of access to databases, software, movies, games, and music, carried out by foreign companies to Russian clients through the Internet, according to the bill’s authors.

“The bill balances interests of the government, business and consumers. The government will get extra taxes from foreign companies, whose revenue in Russia accounts for some 2% of their total earnings and the tax won’t create any additional financial problems for them,” RAEC said.

“For the Russian business, the abolition of the VAT benefit for licensing of computer programs and databases will be partially offset by compensations when exporting electronic services and additional benefit on the profit tax, that not only the tax base will be in sync with European rules, but also tax credits.”

To become law, the bill must be further approved by the Federation Council – the parliament’s upper house – in one reading and later signed by the president.

Bill’s weak sides

Effectiveness of the initiative will depend on respect of rules by foreign taxpayers and control over fulfillment of obligations, RAEC said.

“The government’s stance on the bill can expand the tax base of Russian IT companies without the tax credits, which are usually applied in the Internet industry abroad. The wording of the document should be discussed with industry experts in order to improve competitiveness of the domestic Internet industry,” the association said.

Markov at Zerich said that if the bill is approved, conditions for foreign and Russian companies will become more homogenous and boost competitiveness of domestic firms. “On the other hand, the initiative reveals big problems and the adoption of the law could fail to give anticipated results promptly,” he said.

“The initiative will hike prices of services and digital content. However, volumes of electronic services expand so quickly that companies can optimize business processes and reduce prime costs. The industry of electronic services evolves rapidly and taxation problems should be tackled sooner or later.”

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