What Russian companies need to know about the “Google tax” law?17 February, 2017
One of the most notable of the recent novelties in the Russian tax legislation is the so-called “Google tax law”. It obliges foreign companies to pay VAT on sales of electronic services and will take effect fr om January 1, 2017.
Do I need to learn about the “Google tax” law?
head of financial
“Google tax” would have to be paid by foreign companies that provide services in electronic form in the territory of the Russian Federation. The key condition is that the buyer of content is located in Russia; location of the seller is not important. It only seems that the law will not affect domestic business, but in practice, it’s the Russian companies who may become subject to VAT: it’s a common practice of foreign service providers to engage local agents who become part of the payment chain.
These intermediaries, who are tax agents fr om the legal point of view, will be obliged to pay VAT to the federal budget. Even the organizations who don’t work with foreign companies directly, but act as intermediaries between other Russian companies and the end users of the services, are considered tax agents. According to Russian law, it is the intermediary delivering services to customers in Russia who is obliged to calculate, report and pay the VAT to tax authorities. This intermediary would be the one to pay the “Google tax” at its location.
How does the new law define the “services in electronic form”?
Following is the list of services in electronic form to help you understand whether your company is subject to the “Google tax”:
- software, computer games, updates and additional functionality; Internet advertising platforms;
- technical, organizational and information solutions, including provision of a trading platform;
- support of e-resources;
- storage and processing of information (provided that the person submitting the information has access to it);
- provision of computing power in real time;
- hosting services;
- provision of domain names, access to search engines, and rights to use e-books and other electronic publications;
- provision of information, educational materials, images, music;
- collecting website statistics on the Internet.
The new law also explains what services are not considered “electronic”:
- selling goods or services online combined with offline delivery;
- selling computer games and other software on physical media;
- E-mail consultation;
- Internet service provision.
The “Google tax” will not apply to the granting of exclusive rights to inventions, utility models, industrial designs, computer programs, databases, integrated circuit layouts, and trade secrets (know-how), as well as the right to use these results of intellectual activity on the basis of a license agreement. This means that the law in question does not apply to the granting of exclusive rights to the results of intellectual activity.
The place of rendering services is…?
Not all foreign companies providing e-services are obliged to pay VAT – the crucial condition is that the purchase is made in Russia. If at least one of the following conditions is met, then the place of supply of the services is considered the Russian Federation:
- place of residence of the service consumer is the Russian Federation;
- location of the bank or electronic money operator used to pay for the services is the Russian Federation;
- the buyer’s IP address is registered in the Russian Federation;
- the international dialing code in the customer’s phone number is the IDC for the Russian Federation.
Service providers must also submit registries of operations with information about the conditions and cost of the rendered services. However, the law does not specify the form of these registers, and their content raises questions. For example, it is difficult to define the place of residence of the physical buyer – online stores would never require passport details from their customers. IP-address of the service consumer does not give any clear information about his location either: the seller of the e-services can only see the country wh ere the proxy server is located, and the buyer can choose to route the traffic through any location. Even the IDC will not help since it’s not obligatory to give one when purchasing services.
It would seem possible to determine the buyer’s location by his bank, but that’s only a half-measure – payments are often made from foreign bank accounts. And let's not forget about the international law. If an individual purchases an e-service in Russia, but the service provider’s national legislation considers the service to be provided in the territory of his state, then the seller himself determines the buyer’s location.
Google tax: to pay or not to pay?
The new law leaves the foreign companies little choice: either to pay the “Google tax” in Russia (with the risk of double taxation) or become familiar with all the legal intricacies of each country the organization does business in. Further litigation with Russian tax authorities is a distinct possibility. The need for registration with the tax authorities is another “perk” of the new law: companies selling e-services without intermediaries must register within 30 calendar days after the law comes in power. In this case, opening a Russian subsidiary or having one would be a useful aid. A foreign company who doesn’t have a Russian office risks to fall into a vicious circle. The documents for registration with the tax authority are filed electronically via the taxpayer’s account, but the account is only available from the date of registration with the tax authority. To apply for registration, the company needs to get a digital signature first. And to get one, the company needs a TIN (taxpayer identification number), which proves the point.
The strict adherence to the law would require the companies to (a) submit a paper application for tax registration, (b) apply through a representative or (c) send the application by registered mail. After receiving the application, the tax authority must register the foreign organization within 30 days and report back to the newly registered taxpayer by e-mail provided in the application. The tax authority shall provide paper documentation upon a written request.
Russia is not the only country to have passed the “Google tax” law. The current situation on the IT market is that most companies are registered and pay taxes in three countries with the most favorable tax regimes – Ireland, Netherlands and Luxembourg. However, the European Commission is considering to put a stop to this scheme and require the service providers to pay taxes in the EU countries wh ere the purchase of the service was made. Revenue from such sales will be invested in the development of IT-business within the EU.