Tax & Accounting Blog

“Having your cake and eating it too” – Russia plans to change Place of Supply rules for services delivered electronically

Blog, Indirect Tax, ONESOURCE April 21, 2016

Earlier this year a bill passed through the Russian Duma without delay, which would change the Place of Supply Rules for services delivered electronically. The bill would affect both B2B and B2C transactions of digital content and software, web hosting, domain registration, voice services, information processing, remote television, radio, and support software, search engines, and advertising provided by the suppliers outside of Russia to Russian consumers. These measures are expected to bring in more than $600 million in tax revenue, but they are currently on hold by an order that came down from the very top.

At a glance, the proposed legislation is very similar to the legislation that has changed the Place of Supply Rules for the foreign providers of electronic services in Europe, South Korea and Japan. However, in Russia´s haste to address its own ¨Google tax¨ conundrum, the protection of the local firms providing similar service and such important details as VAT refunds, filing, paying, and registration rules were overlooked all together. With the ¨Google”measures in place, domestic firms would be subject to a disproportionate tax burden and a competitive disadvantage. Vladimir Putin´s newly appointed top internet cop, German Klimenko wants to see Google pay their dues in Russia even if it inspires them to pull out all together. In his opinion, they are not providing anything that Yandex or are incapable of and have proved themselves unworthy of the trust of the state, due to their compliance with western sanctions based on the Russian involvement in Crimea.

At the moment Google and other similar foreign firms are not paying VAT in Russia and the issue is regarded as an international issue. The European Union has met the ¨Google tax¨ problem with regulations, which force these firms to pay tax at the location of the buyer, instead of at their, often advantageous, place of registration.

In Russia the hope is to revisit the ¨Google tax¨ bill in a way that does not cause an outflow of manufacturers to areas beyond Russian jurisdiction or create issues of excessive domestic taxation. The revised bill will consider domestic ¨zero tax ¨ provisions and incentives for firms, like Yandex,  developing high-tech products in Russia.