Indirect taxation of foreign activity performed by countries of the Customs Union

The procedure of the application of indirect taxes in the Customs Union is governed by the Agreement “On the Principles of Levying Indirect Taxes on the Export and Import of Goods, Performance of Work, and the Rendering of Services in the Customs Union” which was concluded in Moscow on 25 January 2008, and two respective Protocols.

The law of the Customs Union provides for a uniform tax treatment of goods both originating and not originating on the territory of the Customs Union, and governs the tax treatment of imports and exports among Customs Union member-states.

This law also provides for the VAT treatment of services/works, for which the place of supply is the territory of the Customs Union.

In respect of sales of goods, the law of the Customs Union establishes the following principles:

The export of goods is subject to a 0% VAT rate and is exempt from excise taxes.

Upon the import of goods, indirect taxes shall be payable to the tax authorities where the importer is registered.

A special procedure is established to confirm the application of 0% VAT rate and exemption from excise taxes with respect to the export of goods. A new document is to be filed to confirm 0% VAT rate or exemption from excise taxes: an Application for the import of goods and the payment of indirect taxes. This document should be filed by the importer of goods.

The new law provides for the possibility to offset VAT/excise tax due from the budget with respect to the taxpayer’s current activity against VAT/excise tax payable upon the import of goods from Customs Union member-states.

Currently not all documents related to the movement of goods among the Customs Union member-states are developed – this may (повлечь за собой) difficulties in the foreign trade activity of Russian companies.

The provisions with respect to processing services are ambiguous. We expect that processing services may be associated with significant difficulties in the application of the 0% VAT rate, especially when goods produced during processing are not exported from the Customs Union, or if they are processed under a contract with a company which is not resident in a Customs Union member-state.

Apart from the changes to the tax treatment of the (товарооборот) between countries of the Customs Union the new law also provides for changes in the tax treatment of services. In particular, the protocol establishes rules to determine the place of supply for services:

The protocol introduces a definition of marketing services which are “services related to research, analysis, planning and (прогнозирование) in the area of producing and circulating goods, works, services in order to choose measures to create the necessary economic conditions for producing and circulating goods, works, services (including the characteristics of goods, works, services), and (разработки ценовой и рекламной стратегий).

The protocol introduces definitions of the place of supply for audit and design services.

Transport services deemed as supplied at the place of activity of a company (предоставляющей эти услуги). However, the application of VAT rates on transport services is (регулируется) by Russian domestic law. Given that Chapter 21 of the Russian Tax Code has not been amended in respect to the new customs clearance procedure for the movement of goods among Customs Union member-states, shipping companies may face difficulties in applying the 0% VAT rate, e.g., in respect of services for the transport of goods imported from (стран, не относящихся к СНГ) to Kazakhstan by a Russian carrier.

The Russian tax legislation needs be changed to accommodate the general changes introduced by the Customs Union legislation. As far as we know, there are intentions to amend Chapter 21 of the Russian Tax Code so that it is in line with the above changes. Changes to the Russian Tax Code may reduce any potential risks and uncertainties associated with indirect taxation within the framework of the Customs Union.

What should taxpayers be considering at this stage?

We believe that in light of the creation of the Customs Union, many companies which engage in foreign trade activity should reconsider the current rules of doing business and analyse the need for various changes, in particular:

reconsider the (применяемый таможенный режим), the (логистика импорта товаров), find new places for customs clearance, consider the option of minimizing the sale of goods from Russia to the (государства-члены Таможенного союза);

develop a procedure for confirming the application to a 0% VAT rate and exemption from excise taxes, and a procedure for (взаимодействие с партнерами) with respect to the issuance and receiving an Application of the importer on the payment of indirect taxes;

reconsider the VAT tax treatment for services/works performed or purchased from the Customs Union memberstates and (изменить договорные отношения) accordingly.

The PricewaterhouseCoopers Customs and Indirect Taxation Department will be happy to assist with any questions related to creation of the Custom Union, in particular:

prepare more detailed information on the customs procedures and regimes prescribed under the Code and give recommendations on any potential consequences associated with the introduction of the new customs clearance procedure;

analyse (товарный поток) from a viewpoint of minimizing tax costs;

develop a strategy and prepare an application to offset VAT against import VAT amounts;

prepare comments regarding confirmation of the 0% VAT rate and (взимание от акцизных пошлин);

analyse the necessity for amending contracts on services/works in connection with the new rules to determine the place of supply of services/works;

provide other recommendations on any issues related to the establishment of the Customs Union.