Law on Introduction of Fundamental Changes to the Tax Code of the Russian Federation.

26.07.2011

Legal Update No. 253.

Goltsblat BLP advises that the Law on Introduction of Amendments to Parts 1 and 2 of the Tax Code of the Russian Federation and some legislative acts of the Russian Federation on taxes and levies have been adopted.

The amendments to be introduced to Part 2 of the Tax Code of the Russian Federation (RF TC) will take effect not earlier than one month after the law is officially published and not earlier than the first day of the next tax period for the relevant tax (1 October 2011 for VAT and 1 January 2012 for profits tax), except for the provisions for which special effective dates are established. It should be noted that some amendments to Article 148 of the RF TC apply to legal relations arising from 1 January 2011.

Here is a summary of the new law provisions:

Rules for determining the place of supply of services/works have been detailed:

1. In accordance with the new law, the place of supply of goods shall be the territory of the Russian Federation, including when goods are shipped from territories under the jurisdiction of the Russian Federation and when goods are in such territories without being shipped or transported (Article 147 of the RF TC).

2. The list of works/services which are subject to VAT depending on the buyer’s location has been supplemented with auditor services (Article 148(1)(4) of the RF TC).

3. The list of transportation services subject to VAT in Russia includes transportation services/works rendered by foreign persons not registered with tax authorities, if both departure and destination points are in the territory of the Russian Federation (save for passenger and luggage transportation services rendered by foreign persons not through a permanent establishment) (Article 148(1)(4.1) of the RF TC).

4. Services/works connected with transportation of goods placed under the customs transit procedure across the territory of the Russian Federation are now subject to VAT in Russia in relation to transportation of not only foreign, but also any other goods (Article 148(1)(4.2) of the RF TC).

5. Services/works the place of supply of which is the territory of the Russian Federation now also include:

  • services involving natural gas transportation by pipeline through the territory of the Russian Federation rendered by Russian organisations (Article 148(1)(4.2) of the RF TC);
  • services/works (referred to in Article 148(2.1) of the RF TC), performed for exploration, surveying, and production of raw hydrocarbons in subsoil areas located, fully or partially, on the continental shelf and/or within the exclusive economic zone of the Russian Federation.

A new procedure is established for issuing VAT invoices and calculating VAT for adjustment of prices for goods (works, services, property rights):

6. In the event of a change in the cost of goods (works, services, property rights) delivered, including a change in price and/or a decrease in the volume of goods (works, services, property rights) delivered, the seller should issue an adjustment VAT invoice (pursuant to Article169(5.2)) within five days of preparation of the documents referred to in Article 272(10) of the RF TC (an agreement, contract or other primary document confirming agreement (notification) of the buyer with the cost change) (Article 168(3) of the RF TC).

7. When the cost of goods (works, services, property rights) delivered decreases:

  • the seller should deduct the difference between output VAT calculated on the basis of the cost of goods (works, services, property rights) delivered before and after the cost is decreased. The deduction applies within three years of the issue date of the adjustment VAT invoice (Articles 171(13) and 172(10) of the RF TC);
  • the buyer is to reinstate VAT in the amount of difference between input VAT calculated on the basis of the cost of goods (works, services, property rights) delivered before and after the cost is decreased (Article 172(10) of the RF TC).

8. When the cost of goods (works, services, property rights) delivered increases:

  • the seller should reflect appropriate changes in the tax base for the tax period in which the goods (works, services, property rights) are delivered (Article 154(10) of the RF TC);
  • the buyer should deduct the difference between input VAT calculated on the basis of the cost of goods (works, services, property rights) delivered before and after the cost is increased (Article 171(13) of the RF TC).

The amendments provide for new grounds for reinstating VAT:

9. Previously deducted VAT may now be reinstated on the grounds that goods (works, services, property rights) are used for export sale operations. VAT should be reinstated in the tax period in which goods were shipped for export. Reinstated VAT should be deducted in the tax period in which the date of determination of the tax base with regard to export operations falls, pursuant to Article 167 of the RF TC (the last day of the quarter in which all the documents referred to in Article 165 of the RF TC are collected) (Article 170(5) of the RF TC).

10. VAT deductions should be reinstated in full, if the taxpayer is entitled to subsidies from the Federal Budget to compensate for costs connected with payment for goods (works, services) purchased, including VAT, as well as to compensate for expenses incurred in connection with payment of VAT on goods imported to the territory of the Russian Federation and other territories under its jurisdiction. VAT amounts to be reinstated should not be included in the cost of goods instead they should be included in other expenses, pursuant to Article 264 of the RF TC (Article 170(6) of the RF TC).

11. The amendments provide for the taxpayer's obligation to reinstate VAT on goods (works, services) purchased to perform construction and installation works performed during modernisation (reconstruction) of real estate property resulting in a change in the initial value of the asset. VAT may be subject to reinstatement if such real estate assets are subsequently used for the operations referred to in Article 170(2) of the RF TC. In addition, the algorithm for calculating VAT to be reinstated in the above case has been changed (Article 171(6) of the RF TC).

The amendments provide for new grounds for deducting VAT charged by contractors:

12. The amendments provide for the deduction of input VAT charged to the taxpayer by contractors (construction managers) in connection with liquidation, disassembly and deinstallation of fixed assets.

The procedure for determining the VAT base during assignment of cash receivables by the original creditor has been clarified:

13. When the original creditor assigns cash receivables arising from the contract for the sale of goods (works, services) the tax base should be calculated as the amount by which the income obtained by the original creditor in connection with the assignment exceeds cash receivables thus assigned (Article 155(1) of the RF TC).

The amendments regulate the procedure for applying a zero rate VAT on railway transportations within the Customs Union (CU):

14. A new paragraph has been added to Article 164 of the RF TC, according to which a zero-rate VAT is applicable to works/services performed by Russian railway carriers in respect of:

  • transportation of goods exported from the Russian Federation to CU member states as well as works/services directly connected with transportation with the cost indicated in shipping documents;
  • transportation of goods moved across the territory of the Russian Federation from a foreign non-CU member state (including the territory of the Customs Union) or from the territory of a CU member state to the territory of another foreign country, including CU member states, as well as works/services directly connected with transportation with the cost indicated in shipping documents.

15. In order to confirm application of a zero-rate VAT and tax deductions with regard to the above services/works, a register of shipping documents should be filed with tax authorities. Such register should include the performance date of works/services, names or codes of countries of departure, names or codes of Russian entry and exit border and/or railway stations, names and codes of countries of destination (Article 165(5)(1) of the RF TC).

The list of documents confirming export has been amended as follows:

16. The list of documents confirming application of a zero-rate export VAT now excludes a banking statement confirming receipt of the proceeds from the sale of exported goods to the foreign person into the taxpayer's account (the relevant provisions of Article 165 of the RF TC have been invalidated).

The matter regarding sum differences has been resolved:

17. Several articles of Chapter 21 of the RF TC have been amended to the effect that the VAT base determined as of the shipment date as well as VAT deductions shall not be adjusted by sum differences. VAT-related sum differences arising during subsequent payment should be included in non-operating gains (Article 250 of the RF TC) or non-operating costs (Article 265 of the RF TC) (Articles 153(3), 153(4), 172(1) of the RF TC). This novelty makes unclear the procedure for determining the tax base when prepayment is required under the contract providing for a fixed foreign currency exchange rate.

For additional information, please contact:

Evgeny Timofeev,
Partner, Head of Russian/CIS Tax Practice,
Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

Andrey Shpak,
Partner, Tax Practice,
Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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