Google Tax

Foreign online service providers and VAT in Russia

An updated special procedure for paying VAT on electronic services via the Internet provided by foreign companies to Russian customers is unofficially called «Google tax» in Russia.

The new norm is regulated by Article 174.2 of the Tax Code. This article is for taxpayers — foreign companies that do not have separate divisions on the territory of Russia but sell electronic services to Russian consumers using the Internet.

Until January 1, 2019, Russian companies and entrepreneurs, in case of purchasing services in electronic form from non-residents, acted as tax agents for VAT payment. They withheld VAT from the cost of services and transferred it to the budget.

In 2019 the procedure changed. Russian buyers of electronic services are no longer tax agents of their foreign partners. A foreign supplier must independently get the tax registration in Russia and pay VAT on electronic services to the Russian budget.

First of all, it is important to understand that the «Google tax» applies specifically to foreign companies — non-resident companies that provide digital services to Russian citizens on the territoryof Russia. They are required to pay VAT in the amount of 16.67%.

The largest category of digital services provided to Russians by foreign companies is online advertising. In half of the cases, advertising cabinets are registered by a company outside of Russia, and any user can go there, register, and start buying advertising campaigns, clicks, etc. This is one of the largest categories of services provided to Russians. And with this kind of service, companies have to pay a «Google tax.

Freelancer exchanges and other similar online platforms are also the payers. The tax is levied on, for example, listening to music, watching movies, using game services, providing domain names, hosting, supporting websites and web pages, and so on.

However, goods and services ordered on the Internet but actually received offline are not taxed.

If the customer has received goods or services without using the Internet, although the order was made online, they are not subject to digital tax.

In addition, the law on the «Google tax» does not include consulting services by email, the implementation and licensing of software, computer games, and databases on physical media, as well as providing access to the Internet. In case of the provision of such services by foreigners, the calculation and payment of VAT are carried out in the general order, and it must be done by the Russian side.
Foreign companies are interested in tax registration so that they can work safely on the territory of the Russian Federation.

In addition, companies in the b2c segment and advertising cabinets cannot make their users become tax agents. In the b2b segment, Russian companies are also interested in digital tax payments by their foreign partners, as this gives them the right to receive a tax deduction.

Such companies as Apple, Google, Airbnb, and Amazon pay digital tax in Russia. After the introduction of the tax, some of them increased the prices for their services. Other companies, such as Apple, kept the prices the same but included 18% VAT in the cost of services. Such mechanic are typical for many countries where a digital tax has been introduced.

All in all, paying Russian VAT is quite difficult for foreign companies. For example, a non-resident company does not often have a legally registered person in Russia and a bank account, and it has to make a SWIFT transfer to the details of the tax service. This causes difficulties, as Russian banks reject payments from foreign accounts due to their incompatibility with the SWIFT format — there are no full details in foreign payment orders.

There were difficulties with this at launch, and later measures were proposed to allow Russian companies to become tax agents for foreign sellers of electronic services.

To avoid the risks associated with non-payment of tax by a foreign supplier, a Russian company may seek the help of intermediary banks or consulting companies that process payments from non-residents. The partner bank will take over the tax calculation and transfer it to the Federal Tax Service, after which it will provide the company with a fiscal receipt.

Currently, more than half of the foreign companies that sell software in Russia receive tax consulting services. Russian banks and consulting agencies process the foreign companies' payments. The Federal Tax Service does not care who pays the tax to the budget — an agent, an accountant of a legal entity, or a consultant.

It is in the interests of the Russian company to make sure that the foreign partner is aware of all legal norms and to check everything before entering into a contract. Further, the tax is paid either bya foreign company or by a Russian intermediary company (bank, consulting agency). Some more important information:

  • to check the tax status, a non-resident company can pass an online test on the official website of the Federal Tax Service;
  • before paying tax, a foreign company must register with the tax service (no later than 30 calendar days from the date of the start of the services' provision);
  • you can apply for registration remotely, then the company will be assigned a TIN and given accessto the personal account;
  • you can communicate with the Federal Tax Service through your personal account (there is an English version);
  • the tax is calculated on the last day of the quarter in which the payment for services was received. The cost of services in foreign currency must be converted at the exchange rate of the Central Bank of the Russian Federation;
  • details for paying VAT by a foreign company can be found in your personal account;
  • payment of tax is made before the 25th day of the month following the reporting quarter;
  • you need to report to the tax authority every quarter.

Even though the Organization for Economic Cooperation and Development is working on a unified international approach to digital tax, the problem of taxation of international IT corporations is not yet resolved. Large companies such as Facebook and Google provide digital services worldwide and pay income tax only at the head office registration.

Thus, many countries are losing tax revenues, and some have already introduced their own digital taxes.

Local regulators need to adapt to the new realities of the digital economy, and until the Organizationfor Economic Cooperation and Development comes to a global consensus, it is beneficial for countries to develop their own measures to introduce a digital tax. This will replenish the country’s budget and support domestic digital companies, which pay more taxes than foreign IT giants.