It is proposed to change the procedure for paying VAT for services.
These rules can increase the burden on the banking industry.
The Ministry of Finance recommended to facilitate the payment of value-added tax on the export and import of services. A draft of key areas of tax, budget and customs tariff policy for 2022-2024 was initiated.
When a Russian company purchases services from a foreign company or, conversely, carries out work commissioned by foreign companies, the question arises in which state VAT is payable. At the moment, the Tax Code takes into account various aspects of determining the place of sale of services. For example, the construction and repair of real estate is taxed in the country at the location of the property, and services in the field of tourism, culture and sports are taxed in the country where the service is provided. Services not specified in the Tax Code are subject to VAT on the supplier’s territory.
The Ministry of Finance allows to introduce a general rule – all services are subject to VAT taxation in the buyer’s country. The documents of the Ministry of Finance mention that this innovation will change the existing procedure for determining the place of implementation of works (services). It is proposed to introduce a single rule for all member states of the Eurasian Economic Union (EAEU).
From the point of view of accounting and administration, a unified approach will dramatically simplify the establishment of definitions regarding the taxation of services. Different rules depending on the type of services provided lead to ambiguous interpretations of law enforcement practice. In some variants, there are cases of double taxation – sometimes VAT is charged from the same service both in Russia and abroad.
A similar law now operates in the European Union when VAT is paid in the buyer’s country. Due to the difference in approaches, organizations incur additional costs when VAT is payable both in their own country and in the buyer’s country.
In addition, the Ministry of Finance calls for the introduction of an obligation for Russian organizations to pay VAT for foreign service providers as a tax agent. Also, the Ministry of Finance wants to allow foreign firms to pay VAT on their own, in case of their voluntary tax registration in Russia.
This prospect will be unconditionally positively received by the business community. They emphasize that such organizations need to be allowed to accept input VAT for deduction. At the moment, foreign firms without branches and representative offices in Russia do not have such a right. Foreign organizations that involve local subcontractors in the provision of services in Russia will benefit from VAT deduction.
It is also necessary to simplify the voluntary tax registration for foreign firms. Simplified registration is already available for foreign electronic service providers to Russia. Since 2019, foreign organizations providing services in Russia must pay VAT directly, and not through tax agents in Russia.
Dangers for banks
In the European Union, the buyer’s country is the place of sale of services for VAT purposes. In part, it makes sense to keep this approach in Russia. These changes can lead to an increase in the tax burden for individual industries. The most significant changes may be for the financial sector of the economy.
At the moment, banks mostly do not pay VAT when buying financial services from abroad, since these services are provided in the supplier’s country. Also, banks and insurance companies do not accept VAT for deduction, as they use a special tax accounting procedure that allows not to distribute VAT, but to take it into account when calculating income tax.
In the case of the usual procedure for paying VAT for everyone, banks will have to make payments without the possibility of making a deduction. If the amendments are adopted, banks will need to pay VAT for financial services from abroad. At the same time, VAT will not be able to be deducted, since they use a special VAT accounting procedure. For other industries, these amendments will not be so significant if the company has the right to accept VAT for deduction.
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