20% VAT. What to do in 2019?

By Elena Rybnikova, Head of Internal Audit, Expertise and Methodology Department

The upcoming VAT rate increase was a hot topic which was greatly discussed at our Business Practice event. What can be done during the transitional period? What are the correct dates to determine the tax base? How to draft contracts correctly? These questions were raised; we answer them below.


Elena Rybnikova
Head of Internal Audit, Expertise and Methodology Department

Tax base determination

The earliest of the following dates is the date that should be used to determine the tax base for VAT:

1. Day of shipment of goods/day of transfer of work, services, or property rights;

2. Day of payment, partial payment of upcoming delivery of goods, performance of work, provision of services, transfer of property rights.

Letter of the Department of Tax and Customs Policy of the Russian Ministry of Finance No. 03-07-05/55290 dated August 06, 2018: no exceptions for goods (work, services, and property rights) sold under contracts concluded before January 01, 2019, including those providing for advance payments.

 2018 год        January 01, 2019          Comments
Shipment of goods (transfer of work, services)

18% VAT

Payment for shipped goods, work performed, services rendered

18% VAT

The payment for subsequent VAT accrual is made according to last year’s rules.

Advance payment for shipment of goods (transfer of work, services)

18% VAT

Shipment of goods (transfer of work, services)

20% VAT

VAT is accrued twice, i.e. before and after January 01, 2019 and accrual rules are applied according to the old and new versions of the Russian Tax Code.

In practice, if goods are shipped in 2018 but paid in 2019, then there is no “gap” in VAT rates in such case.

But, if a party has paid an advance in 2018 as per the contract terms, then both parties will accrue VAT on advance payments issued/received in 2018. Upon shipment in 2019, VAT will be accrued at the new rate of 20%, and a “gap” of 2% will arise in such case.

According to a literal reading of the new provisions, these 2% should be paid to the budget by the seller, and the buyer should apply for deduction of the increased VAT paid by the seller in the first quarter of 2019. Advance payments made at 18% will be refunded upon shipment.

Contracts

  • Contracts concluded before January 01, 2019 should be closely reviewed, especially if they expressly provide for 18% VAT, because if such contracts are not amended, then buyers could continue paying 18% VAT, and sellers will have to pay at their own expense 2% VAT to the budget to make up for the difference.
  • When the price specified in a contract is indicated exclusive of tax, tax must be charged on the price of goods, work or services. This difference may be covered by both the buyer and the seller. The buyer may pay the difference with no additional agreement to the contract as recalculation is due to changes to the law. But if the buyer does not want to make such payment, the difference will have to be covered by the seller. In this case, it will be necessary to amend the contract by drafting an additional agreement providing for a fixed price inclusive of VAT.
  • When a contract does not expressly provide whether or not VAT is included in the price, it will be necessary, in such case, to review the provisions of the contract as well as the circumstances of its conclusion, including business correspondence. It will be necessary to find out whether tax is included in the contract price or whether the contract price is exclusive of VAT. If VAT is included in the contract price, the supplier should itself calculate and subtract the VAT amount. If the contract price is specified exclusive of VAT, the supplier should charge VAT on the price and present the tax amount to the buyer.

Our recommendations

  1. If possible, we recommend transferring some of January deliveries to December 2018. This will allow charging 18% VAT. For the same reason, it makes sense to sign statements of acceptance of work performed or services rendered in December 2018.
  2. 20% VAT should be applied only to goods, work, services or property rights delivered after January 01, 2019. The contract date does not affect the applied VAT rate.
  3. We recommend drafting additional agreements to existing contracts to change the VAT rate or adding in contracts the following wording “subject to VAT as prescribed by applicable Russian law.”
  4. If you do not wish to increase prices for goods, work or services due to the increase in VAT rate, then you could offer discounts, bonuses or rebates of 2% to your buyers by providing for new arrangements in additional agreements to existing contracts.