It is official; Russia is joining the list of countries that are subjecting foreign electronic services providers to VAT.
The Council of the Federation approved the VAT Law for foreign companies selling online services to Russian consumers on June 29, 2016.
The law will affect almost all areas of services in the IT market. 14 types of electronic services will be subject to VAT such as: programs, applications and games; databases; advertising platform; online auctions; a platform for placing offers for the sale of goods and services; data storage; hosting providers; domain registration; automated search services; digital goods (digital books, music, audio-visual products, graphics); site statistics and etc.
“Google Tax” will affect not only foreign IT-service providers (such as Apple Store and Google Play), but also domestic companies that sell games, downloadable software and databases (Mail.RU, Kaspersky Lab). The bill was proposed by the deputies Andrei Lugovoi and Vladimir Parahin in December 2015, but the draft was criticized due to the fact that the Russian market players could be seriously affected by the additional commitments. The Russian developers of mobile applications and games sell products through foreign intermediaries (App Store, Google Play or the like.). Currently, sites such as Google Play and AppStore do not pay VAT on purchases of Russian Internet users.
In January of 2017 the largest online retailers such as Google, Apple, Microsoft and eBay will fall under the new law and will have to register with Russian Tax Authorities and pay Russian VAT of 18%. The increase in the tax burden of the foreign IT companies will lead to higher prices for their products. In the past Russian IT companies complained that Russian consumers were opting out for purchasing through Google Play and AppStore because the price of the download didn’t include VAT. Now things will change.
Introduction of VAT on foreign electronic services providers can bring as much as 52 billion rubles to the Russian budget in 2017; however it can also lead to great outflow of Russian manufacturers of games and applications in other jurisdictions.
Today, a lot of Russian companies sell mobile games through an agreement with a foreign app store. Consequently, even if the game is purchased by a Russian user, the company will have to pay VAT twice: the first time on their own, as a registered Russian Taxpayer and a seller and the second, under the Tax Code Art. 174.2, the foreign online retailer will be obliged as an intermediary to withhold VAT from the recipient of the income from the sales on the online store and submit to the tax authorities as a tax agent.
To find out how “Google Law” will affect Russian market of electronic services we will have to wait and see how foreign companies will respond to new rules. Director of the Russian Association of the Electronic Communications, which members include Google, Microsoft, Mail.RU and Kaspersky Lab announced that association finds new law to be very balanced and its members have not demanded any lobbying action from the association.