Russia withholding VAT

Thu 2nd Aug 2012

Non-resident businesses hoping to capitalise on business opportunities in Russia need to be fully aware of the withholding VAT issue.

Where a non-Russian business, with no defined presence in Russia, and working there for a short period, provides local taxable services to a Russian resident company, the latter is legally responsible for the withholding of Russian VAT. The withheld VAT is then paid over to the Russian tax authorities, but subject to the rights of deduction, it can be recovered subsequently on the periodic VAT return filing, supported by the invoice and payment documentation.

Russian VAT case

A case, recently made public, highlighted the need for care in ensuring that contracts, invoices and payment processes are fully understood at the outset by both parties. In the case concerned, due process was not followed. As a result, the Russian company was found liable for not only penalties and interest, but also for the VAT amount itself, which it had failed to withhold. The original contract details had apparently not provided for the VAT issue.

Clearly, in future, Russian companies will be increasingly vigilant in application of their responsibility, and unwary non-Russian businesses could find they may be short-changed by the amount of Russian VAT involved, with possible difficulties in retrospective recovery. The situation highlights the need for the withholding VAT issue to be fully transparent at the initial commercial agreement.