by Judith Robinson
Russia's Value Added Tax (VAT) is levied on almost all goods and services imported into Russia or manufactured there. U.S. companies encounter the VAT in two common types of transactions: at the Russian border customs post if they are exporting to Russia, and at the first point of sale beyond their factory gates if they are involved in manufacturing operations. As a result, the VAT is a major concern for any U.S. company doing business in Russia today.
The VAT is currently levied at a 20 percent rate. Until this year it was also coupled with a 3 percent "special tax," which has now been abolished altogether. Along with the profit and excise taxes, the VAT is a major source of revenue for Russia's federal budget. Although many other taxes now in force will change with the adoption of the new Russian Tax Code, which is likely sometime next year, survival of the VAT is a safe bet. Indeed, there have been public discussions among Russian officials about raising it to 21 percent. For all companies engaged in import or production of goods in Russia, the VAT will remain a significant consideration in business planning.
When You Have to Pay
VAT is paid on U.S. exports at customs entry points. To calculate the amount of this tax, the
declarer starts with "customs value" of the goods, which in Russia means their market value plus
insurance plus freight. This is the same as "cost-plus-insurance-plus-freight" (CIF). This amount
can be stated in rubles or hard currency, but must be paid in rubles at the Central Bank of
Russia's official exchange rate on the day the Russian Customs Service receives the customs
declaration. The customs value, any import tax obligations, and, if applicable, the excise tax, are
added together. The sum is then multiplied by 20 percent for the VAT amount.
Inside Russia, the VAT is paid on value added as goods move from raw materials to sale of finished goods. VAT paid on the costs of raw materials, supplies, and services which are deductible from profit taxes can be recovered, so the tax really amounts to VAT paid by buyers (including VAT paid on excise taxes), minus VAT paid by suppliers on the raw materials, supplies, and services. U.S. companies face a rather cumbersome administrative procedure to collect their refunds, however.
Exemptions
There are exemptions to the VAT. An extensive but constantly changing list is maintained by the
State Customs Committee, which at present includes high-technology equipment (particularly if
that equipment is used for manufacturing or research and development) and specialized and public
transport, telecommunications, and medical equipment. If the importer can prove that the
imported equipment is designed to produce goods or means of production, exemptions may also
apply. Foodstuffs and children's goods carry a 10 percent VAT.
From the standpoint of some Western exporters to Russia, the VAT changed for the better late last year with passage of "Amendments to the Russian Federation Law on the Value Added Tax." As of this year, VAT on grain, raw sugar, fish meal, and fish and related products for industrial purposes and for production of medicines was halved to 10 percent.
For in-country producers, VAT that has been paid for imports of fixed capital and nonmaterial assets is refundable once they are in operation. Effective this year, VAT paid on these assets can be subtracted from taxes owed to the government budget at the moment the assets are put on the books. Commodities deposited in kind into the charter fund of an enterprise with foreign participation are presently exempt; the previous one-year limitation was removed in March 1996.
Additional Changes
U.S. companies contending with the Russian VAT should be aware of other recent changes that
may benefit them. In particular, small enterprises involved in some lease transactions are
presently exempt from VAT, an exemption accorded lease/purchase arrangements for vehicles,
computers, and other investment goods (BISNIS Bulletin, April 1996, Page 3).
The recent amendments also revise rules for determining VAT on service transactions between Russian and foreign entities. As a result, some U.S. service providers may face a squeeze on the rates they charge their Russian customers. The Russian Government will now collect a percentage of the cost of the services purchased, and, presumably, Russian clients won't be willing to pay as much for such services as in the past.
New methods of VAT reimbursement offer advantages for transactions involving modernization of existing enterprises and projects not requiring capital construction. The amendments also clarify definitions of jobs and services. Exports of goods, jobs, and services are exempt from the VAT, as well.
VAT is no longer levied on direct intercompany loans from a parent company to local subsidiaries, although indirect loans through third-country subsidiaries still are. VAT paid on the purchase of fixed capital assets ("charter capital contributions") can now be refunded once the assets are operational. The Joint Commercial Tax Dialogue of the U.S.-Russia Business Development Committee, urged several VAT reforms in its January 1996 report, including exemption of intercompany loans and capital transactions, as well as streamlining of the refund process. Recent changes represent partial progress toward meeting these recommendations. For more information, consult an attorney or tax professional. For a list of U.S. law firms doing business in Moscow, call the BISNIS FlashFax, and order document #6571.
Judith Robinson covers legal issues for BISNIS.
**Provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)