Tag Archives: Russia

Taxation of Ecommerce Transactions: Spotlight on Russia

The Russian ecommerce sector will continue to experience significant growth, whether serving the B2C or B2B markets.  And Russia has much to gain by supporting a robust ecommerce marketplace, for example, broadening the labour market for skilled workers and increasing the tax base,  Absent specific tax legislation, existing tax laws will be applied to ecommerce transactions.  Yet existing tax laws are often inadequate to address the new business and transaction models arising from ecommerce transactions.

The issues arising from the B2C market and the B2B market are clearly different, as are the type of taxes that may be imposed.  First, income tax imposed on profits arising from the ecommerce transactions, and second, in the case of B2C transactions, VAT.

The application of the existing framework for income taxation on transactions taking place between parties where both are located in Russia is identical to a transaction occurring without the benefit of the internet.  With increasing ease, companies can target consumers in any country, their reach is borderless.  In order fall subject to Russian profit tax, a foreign company must have a permanent establishment in Russia  A permanent establishment is deemed to arise where there is a remote place of business through which the foreign enterprise carries on business on a regular basis.  Although applied primarily where there is a building or other structure, or in the absence of a specific business location, where the business has employees.

In December 2010, the Moscow State Commercial Court held that a representative office of Bloomberg LP, through which employees gathered data which was entered into a database, access to which was subsequently sold through a UK office, constituted a permanent establishment.  Given this ruling, it is not unlikely that the same court would characterize a server located in Russia as a permanent establishment.  The permanency of a server, owned by a foreign company, that directs, stores, and filters customer traffic and through which transactions are completed will not be ignored by tax authorities.  Such characterization would follow similar rulings in other countries.

In terms of VAT, there are no specific tax rules that impose VAT on internet transactions.  Existing VAT legislation can be easily applied to an ecommerce transaction where both the buyer and seller are located within Russia.  VAT, an indirect tax, is generally imposed on goods at the place of consumption, but for services the imposition of VAT will depend on the place of supply.  This is perhaps an overly broad explanation, the Russian Tax Code does makes a distinction between certain types of services and the imposition of VAT on services is reliant on such distinction.  However characterized, foreign businesses are not required to collect and remit VAT.  Since the burden falls on Russian based businesses, then, a disparity arises.  Other countries, including the US have been grappling with this same issue.  Amazon.com is a prime example, it is not required to collect and remit sales tax in the state where the consumer is located if it has no physical presence in that state, providing an advantage over its competitors.  The question remains, in an ecommerce transaction where services are being supplied, such as, access to internet services, including, digital products, is the “place of supply” where the consumer is located or where the server or service provider is located.  This is an area of significant debate, one which will not end soon.  As ecommerce expands its reach, lawmakers will resolve some of the ambiguities present in application of outdated laws.  Until then, be aware of where the ambiguities create the biggest risk for your ecommerce business.

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Russia To Tax Offshore Companies

Once again President Vladimir Putin is putting pressure on Russian owned offshore companies to pay taxes.  In his state of the nation address, Putin announced Russia would be taxing offshore companies.  This continues the government’s crusade against offshore-declared income.  In 2012, the Federal Tax Service developed draft amendments to the Tax Code which would effectively terminate previously held deductions for costs paid to offshore companies, thereby reducing taxable income.  The amendments allowed for the recapture of the deductions if the taxpayer could prove that they had no control over the recipient of the payment.  There was significant push-back and watered-down versions were subsequently proposed to ease the burden on large companies and maintain an attractive market for foreign investors.

But Putin seems intent on pushing for further amendments that will result in retaining capital in Russia and minimize tax evasion.  Currently, gains and profits arising from assets held by offshore companies that are not repatriated to Russia are not taxed.  The use of offshore companies to hold assets has become more commonplace.  The use of a holding company in a country with a double tax treaty, Cyprus, for example, provides the benefits of minimal withholding rates.

The question remains, whether new tax laws imposing stricter control on Russian controlled offshore companies, if vigorously applied, will lead to a mass exodus of businesses from Russia and keep foreign investors away.

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