www.pwc.com/ru/tax New Law to change how zero VAT rate is applied to transportation services Tax Flash Report Russia, Issue # 20 (234 34), November 2010 PwC New Law to change how zero VAT rate is applied to transportation services On 24 November 2010, Russia’s Federation Council approved Law No 391528-5 391528 “On the introduction of changes to Chapter 21, Part 2 of the Tax Code of the Russian Federation” (the “Law”). “ The Law makes significant changes in how taxpayers apply and substantiate zero VAT rate on transportation services and other services related to transporting goods (Articles 164 and 165 of the Russian Tax Code). When do the new rules take effect? Applying zero VAT rate to transportation and related services The Law was officially published in Rossiyskaya Gazeta on 29 November 2010, after which the new rules will take effect from 1 January 2011. How to apply zero VAT rate to import / export transportation services is currently a pressing issue for both transportation companies and importers / exporters. The amendments contained in the Law significantly change how the application of zero VAT rate to goods transport services is regulated. The Law cancels the old wording of Article 164.1.2 of the Russian Tax Code (RTC) and introduces two new sub-paragraphs sub (21-28) to RTC Article 164.1, which establish how zero VAT rate should be applied to goods transportation services and a range of other services. Under the new wording, there is a closed list of services that are subject to zero VAT rate. Most of the services named in the list can be grouped as follows: follows  International goods transportation services (sub-paragraph paragraph 21), which covers shipments made by all means of transportation provided that either the point of dispatch or the destination of the goods is located outside of Russia.  Freight-forwarding forwarding services (subparagraph 21). In essence, the new wording gives a definition of freightfreight forwarding services for the purposes of applying zero VAT rate since the relevant sub-paragraph paragraph includes a list of the types of activities that come under freightfreight forwarding services. For example, this list includes receiving and delivering freight, loading-unloading and warehousing services, and freight insurance services. According to the new provisions the zero VAT rate can be applied to freightforwarding services only if the services are being provided under a freight-forwarding contract. The introduction of a “definition” of freight-forwarding services prompts a number of different questions. For example, can the provision of only one or several of the types of activities named in the list (e.g. customs clearance of freight, servicing and repairing containers) be considered as freight-forwarding services? Or, what is the minimum list of activities necessary for them to be considered as freight-forwarding services?  Transport and certain related services for oil, oil products, natural gas and electrical power transmission (sub-paragraphs 22-24). For these types of services, the Law provides special rules for applying zero VAT rate.  Services provided at river and sea ports, as well as the trans-shipment and storage of goods brought across the Russian border at such ports (sub-paragraph 25). To this category of services has been added, in particular, services for the storage of goods. PwC November 2010 2 Substantiating documents and how to calculate the 180day period Transportation of goods within the Customs Union What action should you take now? The Law also makes changes in RTC Article 165, specifically sub-paragraphs sub 31 8 -3 have been added which establish the list of required documents for substantiating the taxpayer’s right to apply zero VAT rate for each type of service outlined in sub-paragraphs sub 21-28 of RTC Article 164. No significant changes have been made to the list of zero rate confirmation documents, with the exception, for example, of the cancellation of mandatory submission to the tax authorities of customs declarations substantiating zero VAT rate for electrical power transmission services. The Law also establishes how the 180-day period should be calculated for each type of service outlined in sub-paragraphs 21-28 of RTC Article 164. The current practice within the Customs Union (CU) is that goods transportation services are VATable at 18%. The Law establishes that zero VAT rate should apply to shipping services, freightfreight forwarding services and certain other services for providing railroad rolling stock and/or containers while exporting goods from Russia to a CU member state or importing goods from a CU member state into Russia. Before the start of 2011, we recommend that all companies currently either providing or using import / export transportation services should carefully analyze the practical implications of the new zero VAT rate application rules. In particular, one key question that you may examine is to what degree the services your company renders or uses correspond to the list of services and types of contracts indicated in the new wording of RTC Article 164 contained in the Law. This question is particularly relevant from the point of view of both the application of zero VAT rate by service providers and the recovery of 18% VAT by buyers of such services. Zero VAT rate on import / export transportation services currently applies to various different types of contracts, not only to freight-forwarding contracts and shipping contracts. Thus, the new rules may require that you make changes in your contractual arrangements (for example, concluding freight-forwarding contacts when planning international shipments). We will continue to monitor new developments and inform you with timely updates about any significant changes in the practical application of these rules. We would also be happy to provide you with more in-depth insight on any aspect of this issue. PwC November 2010 3 Contacts in Russia David John Partner, Russia Tax & Legal Leader david.c.john@ru.pwc.com Natalia Kuznetsova Partner International Tax Structuring natalia.kuznetsova@ru.pwc.com uznetsova@ru.pwc.com Ekaterina Lazorina Partner, Financial Services ekaterina.lazorina@ru.pwc.com Evgenia Veter Director, Transfer Pricing evgenia.veter@ru.pwc.com Peter Solyonov Partner, Energy, Utilities and Mining peter.solyonov@ru.pwc.com Galina Naumenko Partner, Mergers and Acquisitions Tax Services galina.naumenko@ru.pwc.com Irina Martakova Partner, Consumer Industrial Products irina.martakova@ru.pwc.com Vladimir Konstantinov Partner, Indirect Tax Services and Customs vladimir.konstantinov@ru.pwc.com Natalia Milchakova Partner, Technology InfoCom Entertainment natalia.milchakova@ru.pwc.com Kirill Nikitin Partner, Tax Management and Accounting Services kirill.nikitin@ru.pwc.com Karina Khudenko Partner, International Assignments and HR Services karina.khudenko@ru.pwc.com Yana Zoloeva Partner, Legal Practice Leader yana.zoloeva@ru.pwc.com The Tax Flash Report is issued in Russian and English to keep PricewaterhouseCoopers clients abreast of changes in Russian legislation which may be of special interest. The information presented does not constitute professional advice provided by our specialists solely on individual basis. © 2010 PricewaterhouseCoopers Russia B.V. All rights reserved. In this document "PwC" refers to PricewaterhouseCoopers Russia B.V., which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. PwC