About the Author
|Ekaterina Nebozhina, |
Ekaterina Nebozhina holds a degree from Volgograd State University in Accounting, Financial Analysis, and Audit. She has published on a range of topics as “Consolidated Accounting of the Flow of Funds in an Agricultural Holding” and “Significance of Asset Revaluation in a Foodservice System.” Prior to joining the Alinga team, Ekaterina worked as an economist in an agricultural holding and also as an accountant for a chain of grocery stores. She now serves in Alinga’s accounting department.
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Value-added tax is one of the most complex taxes for Russian companies in terms of accounting. Organizations often run into different accounting problems for this tax.
When acquiring goods (work, services) from foreign entities that are not registered with the tax authorities in the Russian Federation, the VAT tax base is determined by the tax agents. In this case, the tax agents are the organizations (individual enterprises) that are receiving the goods (work, services). However, it should be noted that the tax agent needs to withhold VAT from the revenue paid to the foreign business partner only if the place where the goods (work, services) were sold was in the Russian Federation.
When working with a foreign company that is not registered with Russia’s tax authorities, the accountant’s first task should be to determine the location where the goods (work, services) were sold.
Article 147 of Russia’s Tax Code must be used to determine the location where the goods were sold. The location is recognized as the Russian Federation if at least one of the following circumstances hold true:
the goods are located in the Russian Federation or in other territories under its jurisdiction, and are not shipped or transported;
at the time that shipping or transportation begins, the goods are located in the Russian Federation or other territories under its jurisdiction.
Therefore, when acquiring imported goods, the Russian company should not act as a tax agent when making payments with foreign suppliers.
According to Article 148 of the Tax Code, the place of sale for work (services) is considered to be the Russian Federation if:
The work (services) are directly associated with real estate property (with the exception of aircraft, marine vessels, inland waterway vessels or spacecraft) located in the Russian Federation;
the work (services) are directly associated with movable property such as aircraft, marine vessels or inland waterway vessels located in the Russian Federation;
the services that are actually performed in the Russian Federation are in the sphere of culture, art, education (training), physical education, tourism, recreation or sports;
the purchaser of the work (services) engages in business activities in the Russian Federation. The conditions of Article 148, Point 1, Subpoint 4 of the Tax Code are applied when:
- transferring or issuing patents, licenses, trademarks, copyrights or any other analogous types of rights;
- rendering services (executing work) for developing computer programs and databases (computer software or information products), adapting or modifying them;
- providing consulting, legal, accounting, auditing, engineering, advertising, marketing, or information processing services, as well as performing any research and development activities;
- providing personnel if employees work at the purchaser’s place of business;
- leasing movable property, with the exception of land-based motor vehicles;
- providing services from an agent hired on behalf of the main party to the contract (organization or individual);
- transferring emission reduction units (rights to emission reduction units).
If it is confirmed that the place of sale is the Russian Federation, the tax agents incur the following obligations in accordance with Article 161, Point 2 of the Tax Code:
determine the VAT tax base;
calculate and withhold the corresponding amount of VAT from the foreign taxpaying entity and pay this amount to the Russian government;
submit a tax declaration to the tax authorities in the area where they are registered no later than the 20th of the month following the elapsed tax period (Article 174, Point 5).
The VAT tax base is determined by the tax agent as the amount of income from the sale of the goods (work, services) with the tax factored in (Article 161, Point 1 of the Tax Code). The 18/118 (Article 164, Point 4) tax rate is applied here.
Article 174, Point 4 of the Tax Code says that, when acquiring goods (work, services), VAT should be paid to the government at the same time that funds are paid (transferred) to the foreign business partner. If the tax agent did not issue instructions to pay the tax from an open bank account, the bank does not have the right to accept the instructions from the tax agent to transfer funds to the foreign company.
Article 24, Point 3, Subpoint 1 of the Tax Code requires that tax agents calculate the corresponding taxes, withhold them from the funds paid to the taxpaying suppliers and transfer these amounts to the state budget (or extra-budgetary funds) in an accurate and timely manner. If the taxpayer fails to or improperly discharges these obligations, the tax agent will be held liable in accordance with Russian legislation (Article 24, Point 5 of the Tax Code).
Unlawfully failing to transfer (or not fully transferring) tax that the taxpayer is subject to withholding and transferring will result in a fine in the amount of 20% of the amount that was subject to transfer (Article 123 of the Tax Code).
All of the VAT that the organization pays to the state budget as a tax agent may be deducted; however, the organization must meet some requirements. Article 171, Point 3 of the Tax Code states that the purchasers as tax agents possess the right to these deductions if they are registered with the tax authorities and fulfill their obligations as taxpayers under the condition that the goods (work, services) were acquired to perform operations that are subject to VAT. If the organization applies special tax treatments such as the simplified tax system (STS), the unified tax on imputed income (UTII), or the single agricultural tax (SAT), or does not pay VAT in accordance with Article 145 of the Tax Code, then deducting VAT is not permitted. In such a case, “input” VAT will be included in the cost of the goods (work, services) acquired (Article 170, Point 2 of the Tax Code).
According to Article 169, Point 1 of the Tax Code, the sales invoice serves as the basis for the purchaser of the goods (work, services) from the seller to deduct the tax. The organization which acquires the goods (work, services) from the foreign business partner should prepare this document itself. The invoice is written up in one copy. The procedure for composing this document is outlined in the Federal Tax Service’s Letter N ShS-22-3/634 dated 12 August 2009.
In addition to the abovementioned, the tax agent may deduct the VAT withheld upon acquiring the goods (work, services) from the foreign partner only after recording these goods (work, services) in the accounting records and as long as they possess the corresponding primary documents. This is required by Ministry of Finance Letter N 03-07-11/54 from 29 February 2012.
Therefore, the tax agent must fulfill the following conditions in order to deduct VAT:
The organization is registered with the tax authorities and is a VAT taxpayer (Article 171, Point 3, Paragraph 2 of the Tax Code);
There are payment documents confirming that VAT was paid to the state (Article 172, Point 1 and Article 171, Point 3, Paragraph 3 of the Tax Code);
The goods (work, services) acquired from the foreign entity are to be used for business activities that are subject to VAT (Article 171, Point 3, Paragraph 3 of the Tax Code);
There is a properly processed invoice issued by the organization on behalf of the seller (Article 168, Point 3, Paragraph 2);
The goods (work, services) acquired have been recorded in the accounting records (Article 172, Point 1, Paragraph 2).
If any one of these conditions listed are not met, then the amount of VAT paid upon acquiring the goods (work, services) from the foreign partner cannot be deducted and are factored into the cost of the goods (work, services) based on Article 170, Point 2 of the Tax Code.
If all the conditions have been met, then the company has the right to deduct VAT. The only thing left to determine is when it must be deducted and the amount.
Taxpayers often get involved in disputes with auditors over the time period when they can receive a refund on VAT: deduct VAT in the same period in which the tax was actually paid, or deduct it in the following tax period, only after the funds have been transferred to the state budget.
This situation arises due to differing explanations from the authorities. In Letter N 03-07-08/84 from 07April 2008, the Ministry of Finance explains that the tax agent may deduct VAT paid to the state when acquiring goods (work, services) from a foreign entity where the point of sale was in the Russian Federation only in the period in which the tax was actually transferred to the state budget.
According to Russia’s Federal Tax Service (Letter N 3-1-10/712@ from 07 September 2009), VAT paid by a Russian organization as a tax agent for a foreign legal entity may be deducted only in the next tax period after the one in which the funds were transferred to the state budget.
In Letter N 03-02-08/89 from 11 August 2011, Russia’s Ministry of Finance emphasized that if disputes arise with the tax authorities, the organization may be exempt from paying penalty fees or fines if it abides by the explanations issued from government authorities that are authorized to interpret the law. It follows then that the tax agent can deduct VAT in the period in which the tax was actually transferred to the government.
Legal practice regarding this issue also has largely been in favor of the taxpayer. However, courts adhere to the opinion that the document serving as the basis for the tax agent (purchaser) to deduct VAT paid is the invoice and not the declaration, which is what the tax authorities require.
Finally, the amount of VAT to deduct must be determined. If all of the organization’s business activities are subject to VAT, then the entire amount of VAT is deductible. If there is separate VAT accounting, only the part of the tax paid by the tax agent is deducted (Letter N 03-07-08/190 from 15 June 2011). In order to determine the amount of deductible VAT, one must find the ratio of the amount of sales proceeds subject to VAT versus the amount which is not (Article 170, Point 4). After determining this ratio, the amount of deductible VAT can be calculated; organizations should calculate this ratio for using the quarter as the time period.
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