VAT Treatments in Russia: recommendations to VAT setup of posting groups in ERP systems

The VAT in Russia in general is treated in a similar fashion as in other countries, however there are few very important specific features that might complicate the setup of posting groups in the ERP system, if not considering them in advance. In this article, we will discuss the major difficulties of system setup when dealing with Russian VAT.

General VAT rates and principles

As in many other countries, there is outcoming VAT (VAT that is paid to suppliers and further is a subject of reimbursement from the tax authorities) and incoming VATs (those VATs that customers are paying you and that is a subject of further payment to the tax office).  Difference between incoming and outgoing VAT during the reporting period is basically the amount that is paid to the tax office (or claimed back from the tax office).

There are the following VAT rates used in Russia at current date:

• 18% - most commonly used rate, applied to services and major parts of items
• 10% - rate that is mainly used for specific items, such as grocery products or children clothes or shoes
• 0% - mainly used when exporting items abroad, regardless the fact that the item itself may be a subject of VAT inside Russia
• No VAT (which is different from 0%); it relates to specific cases when the object of sale is not considered as a subject of VAT; e.g., licenses are not a subject of VAT in Russia

Accordingly, the setup of corresponding VAT Item Groups is done in the ERP system.

Then, the companies themselves might also have different relation to VAT. Most companies apply regular system of taxation, that obliges them to work with VAT and apply the rates, mentioned above. But, there are also other companies applying so-called “simplified system” of taxation. Under this regime, companies do not work with VAT as such. This means that when they issue invoice to the customer, VAT is not included above the price (and consequently not paid to the government further). But, it also means that those companies are not able to reimburse VAT from purchase invoice that they receive from their suppliers: outcoming VAT cannot be reckoned and claimed from tax authorities, and is treated as additional cost when applying simplified system of taxation.

This means that there should be separate setup of Vendor Posting Groups: for regular regime of taxation and simplified regime of taxation, as the same purchase of 18% VAT item will correspondingly either lead to VAT in transaction or will not. Thus, a matrix of intersections of these VAT Item posting groups and VAT Business posting groups needs to be made.

Working with export

Also, the same item might be either sold or purchased inside Russia, or exported/imported. As you learned from the previous, 0% rate is applied for those items that are being exported from Russia during the sales process. This means, that the calculation of VAT in ERP system would be dependent not on item group, but on business group (that is, it is the property of customer, not item).

There is one difficulty here when working with export 0% VAT rate. The company needs to calculate separately outgoing VAT, related to the export, apart from all other outgoing VAT, as it will not be deductible. E.g., if company had purchased this item from local supplier and paid VAT to it, this VAT cannot be reimbursed in case this item is further sold to a foreign country. If purchase VAT has been reimbursed already in the previous periods, it should be restored back and paid in the period when the export took place.

More difficult case comes when production takes place: there might be a bundle of items, produced from the same materials, and only part of them is exported, where as the other part is sold locally inside the country. Thus it is impossible to identify exactly what materials were used for a certain exported items, and what exactly outgoing VAT needs to be restored. In this case a proportional method is used: a proportion of export sale amount in total sales for the period is calculated, and all incoming VAT is divided to non-reimbursable and reimbursable based on this proportion. The same proportion actually should be applied to all related expenses, even non-direct costs (e.g., administrative expenses, rent, etc), as they also finally participate in creation of those items that were exported.

Working with import

When company imports items to Russia, thus making a purchase abroad, it does not pay any VAT directly to the foreign suppliers (as he will never pay it further to Russian tax office). In this case, VAT is paid directly to Customs and such VAT can be fully reimbursed further from the tax office. The VAT is calculated from the total cost of the purchase, that includes not only direct invoice costs, but also shipping and handling costs, customs brokerage and customs fees – customs VAT is calculated from all those costs in total. Normally customs VAT is paid to customs office in advance.

There is also a special case which is called “tax agent scheme”. It is applied when a company is buying a service abroad, and the service is provided on the territory of Russia (e.g., some foreign supplier is making a marketing campaign for you in Russia). In this case, company is also not paying VAT to supplier (as he will again never pay this to Russian tax office). But, since the purchased service is a subject of VAT, this VAT need to be paid to the tax office anyway. In this case the company who makes such purchase from foreign supplier is acting as a “tax agent” on behalf of this supplier: it pays VAT directly to the tax office at the same time when the payment of the invoice to supplier takes place. This VAT is also a subject of reimbursement in the end of reporting period, similar to reimbursement of normal regular outgoing VAT from purchases. But, in order to have correct transactions and supporting documents, produced by the system, as well as correctly filled VAT declarations, company needs to book such transaction in a special manner inside ERP system, thus it is also a matter of separate setup.

Prepayments

Another peculiarity of Russian specific VAT calculations are prepayments. If company receives a prepayment from its customer, it should book incoming VAT and further pay it to tax office (or match against outgoing VAT). The customer here has a right to reimburse this VAT from advance payment, that he paid to your company. Then, when the actual sale is made, company registers normal sales invoice and recognizes VAT from sales, which is also a subject of further payment to the tax office. At this moment, company has a right to deduct back (restore) the VAT from advance payment, in order not to pay twice VAT amount from the same sale transaction.

The same is valid for suppliers – if your company is paying advance to supplier, and the transaction includes VAT, the supplier should calculate VAT from that advance payment, and your company in theory has a right to claim this VAT from the tax office.

VAT and currency exchange rates

In some cases, you will face a need to book transactions, nominated in foreign currency, different from Russian rouble. In this case, currency exchange rates appear when you make the matching of payments and invoices.

When the payment is done after the sale, that is, a company issues invoice to the customer first, and customer pays it some days later, there are no major complications: VAT from sale is calculated at the rate of the Central Bank of Russia at the date of the sale (in most cases, the date of the invoice).

In case of prepayment, the situation is more difficult. If prepayment is received, company needs to book further sale, using the rate at the date of the prepayment. In case partial prepayment has been done, the sales transaction needs to be posted using a mixed proportional rate: partly at the date of the prepayment, partly – at the date of the sale. The same mixed rate should be applied for calculating the VAT from this transaction. Thus, it is very important to print and provide to the customer the sales invoice documents only when ERP system “knows” that there has been a prepayment: otherwise the documents might not reflect the correct amounts!

Sales documents

The term “invoice” is treated differently in Russia. In other countries, the term “invoice” means official legal sales document, based on that issued document one company books revenue, and the other – books cost.

In Russia such role of official legal document plays a way-bill (shipping note, signed by both parties, stating that the ownership rights for the items have been transferred), or act of acceptance of services (signed by both parties, stipulating that the services were duly provided).

The term “invoice” in Russia is usually treated as a payment advice (prepayment advice), containing bank details, amounts and other relevant information. It is not a legal document, and issuing of this document does not usually imply any legal obligations to the parties).

Another important document is a VAT invoice, or Factura invoice. It is issued in addition to a way-bill or act of acceptance of services, as a separate print form, and it shows just how much VAT there is in the transaction. It is a document, that describes the VAT amounts and other needed details to treat and prove VAT reimbursement correctly. If the VAT invoice is missing or improperly created, customer would not be able to reimburse the VAT from transaction (nobody wants unhappy customer!).

In turn, if company wants to reimburse outgoing VAT that has been paid to the supplier, it should collect from supplier the correct VAT invoice.

VAT Reports

There is an obligation to submit to tax office quarterly VAT declaration. Starting from Y2015, it should include three parts:

• The book of Sales. It is basically a table that contains all incoming VAT transactions (all transactions of sales to customers, as well as all kinds of calculations and restoration of VAT that increase the tax debt of the company against tax office).
• The book of Purchases. In the same fashion, it is a table that contains all related purchase VAT transactions, as well as all calculations of deductions of VAT that reduce the VAT debt of the company against tax office.
• VAT declaration itself. It is, basically, the difference between the total amount of book of sales and book of purchases (depending on which one is bigger in this period, to be either paid or claimed from the tax office). The declaration is broken down into several parts, each part describes total amount of certain type of VAT, used in calculations.

All three should be exported into certain XML format and submitted to tax office, using special authorized software.

Summary

The treatment of VAT in Russia in general is similar to other (European) countries, however there are few specific distinctive features that needs to be taken into account. With some of those features you will not cope using W1 non-localized versions of Microsoft Dynamics products. Microsoft provides localized version that covers all abovementioned topics, and it is strongly recommended to use localized version of Dynamics products in order to have correct transactions and further tax reports, submitted to Russian tax offices.