A law increasing VAT up to 20% has been adopted and new social insurance contribution rates have been approved

The State Duma adopted on July 24, 2018 a law increasing VAT from 18% to 20% and setting new rates for social insurance contributions. These changes will enter into force on January 19, 2019. 

In this article, we indicate which VAT rates will become effective on January 01, 2019, outline the changes that will affect foreign companies and report on the new social insurance contribution rates. 

Will the previous VAT concessions remain unchanged? 

The previous VAT concessions have remained in the new law. The following products deemed of social nature will remain subject to the reduced VAT rate of 10%: essential food products and children’s products, printed periodicals and books related to education, science and culture, as well as medicines and medical products. Zero VAT will continue to be applied to domestic interregional air transportation. It follows that a third of the standard basket of consumer products will, according to the Ministry of Finance, will remain subject to the preferential VAT rate of 10%.

VAT rates in the Russian Federation from January 01, 2019

20%

20% VAT is the standard VAT rate in the Russian Federation and is applied by default when the transactions at hand are not in the statutory list of operations subject to 10% or 0% VAT.


10% 

The Russian Tax Code provides that 10% VAT applies in the following cases: sale of certain food products, sale of children’s products as statutorily listed, sale of medical products, sale of printed periodicals related to education, science and culture, etc.


0% 

The Russian Tax Code provides that 0% VAT applies in the following cases: sale of goods exported from the Russian Federation under the customs procedure of export, provision of services for international transportation of goods, sale of products related to space activities, etc.

What are the rules to remit tax for the 4th quarter of 2018? 

VAT is paid quarterly, and although VAT for the 4th quarter of 2018 must be remitted in 2019, the payable amount of VAT should be calculated based on the old rate of 18%.

Will the procedure for VAT refund be changed? 

Changes are planned but not yet implemented. The government is going to increase the number of enterprises to which VAT will be refunded on a fast-track basis. This will be achieved by reducing the threshold amounts for paid taxes. At the moment, only companies that have remitted RUB 7 billion in taxes over 3 years can use the fast-track procedure for VAT refund. This threshold will soon be decreased to RUB 2 billion.

The timeframe for desk audits for VAT refund will also be reduced.

VAT has been applied in Russia only since 1992, and VAT rates have been changed several times since. From 1992 to 1993 inclusive the standard VAT rate was 28% to be reduced down to 20% in 1994 and further more down to 18 % in 2004. As you can see, 20% VAT used to be applied in the past

VAT. Changes for foreign companies

From January 01, 2019 onwards, foreign companies providing e-commerce services to Russian individuals and legal entities will be required to calculate and pay VAT on the cost of services rendered. 

Foreign companies are currently required to accrue and pay tax only if they provide e-commerce services to individuals , but from January 01, 2019 onwards, it will be necessary to accrue and pay VAT regardless of the status of the entities purchasing e-commerce services. 

So, from January 01, 2019 onwards, foreign organizations providing services in electronic form will be required to: 

  • Register with the Federal Tax Service as a taxpayer 
  • Obtain a taxpayer identification number (INN)
  • Pay tax
  • Submit tax return quarterly

Applications for registration with the Federal Tax Service can be submitted online on website of the Federal Tax Service. This service is also available in English.

VAT is the most complex tax. Most disputes with Russian tax authorities arise from matters related to VAT accruals, VAT deductions, VAT refunds (return, offset), issuance of primary documents, and the reliability of counterparties involved as VAT payers. Companies should pay particular attention to the recording of VAT while performing their financial and business activities in Russia. We recommend taking into account the increase in VAT rate when budgeting for 2019 and paying special attention to the accrual and payment of VAT for the 4th quarter of 2018.

Social insurance contributions

It has been reported in many media that from January 01, 2019 onwards the total rate of social insurance contributions to extra-budgetary funds will decrease from 34% to 30%, but the new law has actually kept social insurance contributions at their current level. At the moment, the total rate of social insurance contributions for employers is also 30%, but this is a preferential rate that will be applied until 2021. By adopting the aforementioned new law, the Russian government proposes not raising the rate to 34% in the future and freezing it at 30%. Returning to a higher rate would hit business hard. The law thereby protects both businesses and individuals.

The “transition period 2017-2020” during which a rate of 22% instead of 26% would have applied for social contributions to the Pension Fund has been abolished.

Now, the rate of 22% for compulsory pension insurance will constantly be applied to the set base for accrual (i.e. on salaries up to RUB 85,000 per year), while the rate of 10% will be applied over the set base (i.e. on salaries over RUB 85,000 per year).