Google Tax will be Introduced to Russia

It has been finalized that Russia, like numerous other countries, will impose VAT on foreign electronic service providers. The new VAT legislation was approved on 29 June 2016 by the Council of Federation.

The legislation will influence the majority of services provided within the IT field. In particular, 14 kinds of services will be imposed to VAT. Some of these services include: databases, programs, hosting providers, data storage, advertising platform, automated search services, audio-visual products and graphics as well as digital goods (books or music), auctions performed online, applications, games and platforms which provide sales of goods and services.

The new legislation will not only influence foreign IT service providers like Google Play and Apple Store. The tax will also influence domestic businesses that engage in the sale of games, databases and software that can be downloaded. Two deputies, Vladimir Parahin and Andrei Lugovoi, initially recommended the actual legislation in December 2015. However, the draft was not well received since it was argued that the Russian market would be seriously affected. Local developers of cell-phone applications and games sell goods via foreign mediators such as Google Play and App Store. At the moment, App Store and Google Play are not subject to VAT on Russian Internet users purchases.

In January 2017, renowned online providers, like Microsoft, Google, Apple and eBay, will be obligated by law to register with the tax authorities in Russian. They will be subject to 18% VAT. The increase in the tax rate means that the price of goods and services will also increase. Domestic IT companies used to complain that locals preferred buying via App Store and Google Play because the price of the item they wished to purchase did not include any VAT. This era has ended.

It is estimated that the introduction of the VAT on foreign electronic services providers will boost the Russian 2017 budget by 52 billion rubles. On the downside, the introduction of the VAT may lead Russian application and game manufacturers to other jurisdictions.

Currently, the majority of companies in Russian that engage in the sale of cell-phone games have agreements with foreign app stores. Therefore, even when a Russian buys the mobile phone game, the company is subject to VAT twice. They are subject to the first VAT since they are registered taxpayers and sellers. They are subject to the second VAT due to the fact that under the Tax Code Art. 174.2, the foreign online seller will be forced to hold back VAT from the purchaser from any sales made through online stores and present these to the Russian tax authorities.

In order to gain a bigger insight on how this new VAT will influence the Russian market we will need to be patient and observe how foreign companies will react to the new changes