Tag Archives: VAT

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.


VAT, Sales and Use Tax on Electronically Supplied Services

Supplying services over the internet is not a new business model, although its use has become easier and more prolific with advancements in technology.  The question of whether and where such services are subject to VAT and sales and use tax has yet to be definitively answered. The general rule was that the VAT and sales and use tax were where the services supplier is located.  But subsequent EU Directives, starting in 2002, changed that general rule.  The 2006 EU VAT Directive, Annex 11 defines “electronically supplied services” to include website supply, web-hosting, distance maintenance of programs and equipment, supply of software and updates, supply of images, text and information, and making databases available, supply of music, films and games of all kinds, and of political, cultural, artistic, sporting, scientific and entertainment broadcasts and events, and supply of distance teaching, but, significantly, excludes instances in which the services supplier and its customer communicate be means of email.  Article 7 of Council Implementing Regulation of 15th March 2011.

Therefore, it seems internet communication generally regarding commercial transactions, facilitating trading or other communications that take the place of telephone or fax are not subject to the VAT or sales and use tax rules.  The difficulty arises when the services supplied provide include both electronic communication and other components.

The EU, since 2010 has implemented the VAT Place of Supply of Services rules to more accurately impose VAT and level the playing field for EU businesses.  Where the services are provided to business located in the EU, VAT would be charged at the place where the customer has its business.  If the business customer is located outside the EU, then no VAT charge would be triggered.

If the services are supplied to a consumer within the EU, then VAT is charged in the place where the services supplier is located.  If the consumer is located outside of the EU, then no VAT is charged.  Alternatively, if the services are supplied by a business located outside of the EU and the consumer is located in any EU Member State, then VAT is charged.  This is specifically provided for in Section 34(l) VAT Consolidation Act 2010 transposed from Article 58 of the 2006 VAT Directive. However, there will be a fundamental change, as of January 1, 2015, the place of supply of electronic services will be the place where the customer is established, regardless of where the services supplier is located.

For example, if a US business electronically supplies services to an German consumer the place of supply (and of taxation) is Germany. The US business must then register and remit VAT.  There is program, designed to reduce the registration and complexity, that allows a non-EU business to register in one Member State only.  Then charge and remit VAT for all supplies of services to private consumers made within the EU.

Before making electronic services available over the internet, determine whether that supply of services will be subject to VAT or any other sales and use tax.  If your services will be subject to VAT or other sales and use tax, register and include it in the fee for services.  Remember in the EU, the fee charged to a private consumer must include the VAT charge as an inclusive price.