New rules for VAT on electronic services for companies from the EAEU member states and Ukraine

15/12/2021

At November 12, 2021, the Eurasian Economic Commission (hereinafter – “EEC”) approved amendments to the rules governing VAT taxation of electronic services for companies from the EAEU member states. The amendments will enter into force once they have been approved by each EAEU member state and the corresponding Protocol on their introduction into the Treaty on the Eurasian Economic Union has been drawn up.

The amendments define the concept of “electronic services”, a list of which is to be approved by the EEC Council, provide for the procedure for paying VAT when they are rendered to individuals, and outline the cases in which the recipient of the electronic services should pay VAT through the mechanism of a tax agent (reverse-charge procedure).

In the event that certain services with a place of supply in an EAEU member state are treated as electronic, there will be certain tax and commercial risks for supplying companies, namely:

  • The obligation to register for VAT in the country where the electronic services are purchased;
  • The need to arrange for VAT returns to be submitted and for VAT to be paid in the country where the electronic services are purchased.

In case of failure to register, submit VAT returns and pay VAT, tax authorities may levy penalties for the absence of the registration, demand payment of VAT arrears as well as charge appropriate fines and penalties.

We recommend determining the impact of these changes to those companies that operate in the EAEU.

Here is an overview of the main rules in place for supplying companies as well as emerging issues and planned changes at national level in the EAEU member states and in Ukraine.

Armenia

There is no separate provision on VAT for electronic services in Armenia. The Tax Code of Armenia defines certain electronic services, namely: information processing, collection and compilation of information processing, transmission (research), research, including experimental and technological (technological). There is no special registration for foreign companies providing electronic services with the tax authorities, but they may be registered with the tax authorities for VAT purposes in Armenia, if they conduct economic activities

It is anticipated that with the approval of amendments to the rules governing the VAT treatment of electronic services for companies from the EAEU member states, proposals will be made to amend the Tax Code. Amendments to the Tax Code are currently being prepared to provide for the calculation and payment of VAT on electronic services provided by non-resident companies to Armenian individuals or individual entrepreneurs.

Belarus

Since 2018, foreign companies rendering electronic services to Belarus individuals are obliged to pay VAT for such services.

This not only ensured equal treatment of Belarusian and foreign companies providing electronic services in Belarus, but also added to the country’s budget. Thus, from “Google Tax”, there were collected BYN 47 million in 2020 and a total of BYN 88 million over three years. The annual growth rate of such payments is more than 40%.

VAT at the rate of 20% is charged from foreign companies:

  • Rendering electronic services to, and making settlements for them directly with individuals;
  • Collecting payments from individuals purchasing electronic services being subject to Belarusian VAT.

An individual is recognized as acquiring electronic services in the Republic of Belarus if at least one of the following four conditions is met:

  • His/her location is Belarus;
  • The bank or e-money operator through which the payment is made is located in Belarus;
  • The IP address of the device is registered in Belarus;
  • The international country code of the telephone number used to purchase or pay for the electronic services are assigned to Belarus.

A foreign company rendering electronic services is required to register with the Inspectorate of the Ministry of Taxes and Levies in Minsk. Registration takes place remotely via the online platform of the Ministry (http://nalog.gov.by/en/e_nds_en/).

A foreign company rendering electronic must comply with the obligations to:

  • Keep tax records of turnovers from the sale of electronic services in Belarus;
  • Including VAT into the price since the tax base is the cost of services including VAT;
  • Submit tax returns quarterly by the 20th day of the month following the reporting quarter, and no later than the 22nd day of the same month pay 20% VAT on the revenues from sales of electronic services;
  • Provide information and data for inspection to the tax authority of the Republic of Belarus.

It should be noted that many large foreign companies, such as Apple Distribution International, Google Commerce Limited, some Facebook group companies, Amazon, Booking, Netflix International B.V., Wargaming Group Limited, Alibaba.com (Europe) Ltd and others are registered in Belarus as VAT payers.

Kazakhstan

Amendments to be introduced by Law of the Republic of Kazakhstan No. 382-VI of 10.12.20 from 1 January 2022 relate to the following operations:

  • Electronic services rendered to individuals via telecommunication network and the Internet,
  • E-sale of goods (hereinafter – “e-sale”): business activity of selling goods to individuals carried out through an internet platform.

A foreign company, through the internet site of which e-sale is performed, or which provides electronic services to individuals, is recognized as a VAT payer and obliged to register with the Kazakhstani tax authorities as a VAT payer. In order to register, the foreign company sends a confirmation letter by post on paper to the tax authority.

A VAT payer shall calculate VAT when performing an e-sale, rendering electronic services to individuals, if one of the following conditions is met:

  • The individual’s place of residence is Kazakhstan;
  • The bank, at which the bank account of the individual is opened, is located in Kazakhstan;
  • The network address of the individual used for the purchase of the electronic services is registered in Kazakhstan;
  • The international country code of the telephone number used for purchase or payment of the electronic services is assigned to Kazakhstan;

VAT on e-sale or electronic services provided to an individual is calculated by applying a rate of 12% to the value of goods and services sold electronically.

Kyrgyzstan

A draft law on tax on e-commerce activities is currently being prepared. Subject of taxation are entrepreneurial activities carried out by a taxpayer in the field of e-commerce, including activities of foreign companies. There is a requirement for taxpayers to settle all transactions relating to these activities through a specially opened bank account, including by means of an e-wallet and other virtual payment instruments linked to such an account.

Tax on e-commerce activities provides for the payment of tax at the rate of 2% instead of income tax, VAT on taxable supplies and sales tax. The e-commerce activity tax applies to revenues from the provision of electronic services and the sale of goods. If the goods sold are not owned by the trading platform operator, the tax base may not be lower than the difference between the revenue received from the buyer for the goods sold and the amounts paid to/received by the owner for the goods and services sold.

Russia

Currently, registration for VAT purposes is mandatory for electronic services rendering companies. The electronic services are listed in art. 174.2 of the RF TC: Companies rendering electronic services are required to submit quarterly VAT returns and pay VAT.

Important: the requirement to pay VAT arises in case of receiving payments for electronic services, including advance payments, from Russian buyers.

In general, VAT for electronic services is included by the service providers in the invoice issued to the Russian recipients The recipients may deduct the VAT from VAT to be paid by them for conducting activities which are subject to VAT or may ask the Russian tax authorities for a refund. In practice, the design of invoice creates difficult situations between the service providers and their Russian buyers.

Currently, it is subject of discussion to eliminate from the laws the obligation to register for VAT purposes, submit VAT returns and pay VAT if the foreign provider of the electronic services and their Russian recipient are affiliated persons.. If the obligations would be eliminated  the Russian recipient would be obliged to withhold and remit VAT on electronic services to the Russian budget.

Ukraine

  • In June 2021, the President of Ukraine signed a new law introducing provisions relating to the imposition of VAT at 20% rate on electronic services rendered by non-Ukrainian businesses on the territory of Ukraine to individuals, including individual entrepreneurs who are not VAT taxpayers. The new provisions will come into force January 1, 2022. By 31 March 2022, non-Ukrainian businesses which rendered electronic services in Ukraine during 2021 for more than UAH 1 million will be obliged to submit an application for registration as a VAT payer to the Ukrainian supervising authority via the special non-resident user portal. Once registered, companies will be required to submit quarterly simplified tax returns in Ukrainian and English.
  • According to the new provisions, electronic services are those which are delivered via the Internet, automatically, using information technology and mostly without human intervention, including through installing a special application or apps on smartphones, tablets, television receivers or other digital devices.
  • Electronic services defined by 14.1.56-5 of the Ukrainian TC include, in particular, the following: subscription to e-newspapers, magazines, books, providing access and / or downloading photos, graphics, videos, providing access to databases, audiovisual works, games; remote learning in the Internet, supply of software and updates to it; providing advertising services in the Internet, etc. The following activities are not recognized as electronic services: delivery of goods/services ordered (booked) through the Internet, mobile applications and other electronic resources and the actual delivery is made without using the Internet; provision of consultations by e-mail; provision of remote learning services in the Internet, where the Internet is used exclusively as a means of communication between the teacher and the student, etc.

How SCHNEIDER GROUP can help

SCHNEIDER GROUP tax experts can help with the above questions: determine whether certain services can be considered electronic, support the registration of companies with the tax authorities of the respective EAEU member states and assist with the preparation of VAT returns.

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