Types of work and services liable to VAT at zero rate

Pepeliaev Group notes that, on 27 November 2010, Federal Law No. 309-FZ “On amending chapter 21 of the second part of the Russian Tax Code” was adopted. It significantly amends and adds to the series of provisions of the Tax Code governing the application of zero rate VAT to work and services connected with the export of goods (articles 153, 164 165 and 167 of the Tax Code). The new law will come into force on 1 January 2011 [1].

The new Law includes an exhaustive list of work and services associated with goods being exported and to which zero rate VAT applies.

Currently, sub-clause 2 of clause 1 of article 164 of the Tax Code provides that work and services attract zero rate VAT when they are directly connected with the manufacture and sale of the goods listed in sub-clause 1 of clause 1 of article 164. That clause applies to goods exported under the export customs procedure and goods placed under the free customs zone customs procedure. The work and services listed in sub-clause 2 of clause 1 of article 164 of the Tax Code are examples and this list is non-exhaustive.

The new law repeals sub-clause 2 of clause 1 of article 164 of the Tax Code, instead including in clause 1 of article 164 eight sub-clauses each of which contains a specific type of work or services subject to VAT at zero rate.

Types of work and services liable to VAT at zero rate

Sub-clauses 2.1. – 2.8. of clause 1 of article 164 of the Tax Code provide that the following types of work and services are taxable at zero rate:

• services entailing the international transportation of goods by sea or river vessels or by mixed sea and river vessels, or by aircraft, railway rolling stock and/or containers, or forwarding services - sub-clause 2.1 of clause 1 of article 164;

• work and services performed or carried out by organisations engaged in the transportation by pipeline of oil and petrochemicals when transporting oil and petrochemicals within Russia to the Russian border for subsequent export, and the transfer loading and/or reloading of oil and petrochemicals being exported fr om Russia - sub-clause 2.2 of clause 1 of article 164;

• services arranging for the transportation by pipeline of natural gas being exported fr om (or imported into) Russia and also services transporting or arranging for the transportation by pipeline of natural gas being imported into Russia for processing within Russia - sub-clause 2.3 of clause 1 of article 164;

• services performed by the management company of the unified national (all-Russian) electricity network in transferring electrical energy using the unified national (all-Russian) electricity network when the supply is made fr om the Russian Federation’s electricity system to the electrical energy systems of foreign states - sub-clause 2.4 of clause 1 of article 164;

• work or services carried out or performed by Russian organisations (save for pipeline transporters) in sea or river ports and connected with the transfer loading and storage of goods being moved across the Russian border, in whose accompanying documents the point of departure and/or point of destination are stated and which are outside Russian territory - sub-clause 2.5 of clause 1 of article 164;

• work or services in the processing of goods placed under the customs procedure for inward processing- sub-clause 2.6 of clause 1 of article 164;

• services involving the provision of rail rolling stock and/or containers wh ere such services are performed by Russian organisations or individual entrepreneurs - sub-clause 2.7 of clause 1 of article 164;

• work or services performed or carried out by organisations involved in the transportation by internal waterways of goods exported under the customs procedure for transporting goods into Russia from a point of departure before the point of unloading or transfer loading or reloading onto sea vessels or mixed sea and river vessels, or other types of transport - sub-clause 2.8 of clause 1 of article 164.

Amendments to article 165 of the Tax Code in terms of the list of documents to be submitted to confirm zero rate VAT

The amendments to article 165 of the Tax Code correspond fully to those inserted into clause 1 of article 164 by sub-clauses 2.1 to 2.8. They provided for the addition of sub-clauses 3.1 to 3.8 and these contain the list of documents which need to be submitted to confirm the zero rate VAT in respect of each type of work or services listed in sub-clauses 2.1 to 2.8 of clause 164. So, for example, clause 3.1 provides that the particular nature of the documents to be provided to show that the zero rate of VAT may lawfully be applied for each type of transport by which the international transportation of goods may be carried out under sub-clause 2.1 of clause 1 of article 164 of the Tax Code.

It should also be taken into consideration that the formation of the Customs Union means that goods may be transported both within and outside of its borders. Sub-clause 3.1, for example, provides for different documents to confirm that zero rate VAT should be applied when goods are transported: from within Russia to a destination outside the Customs Union; into Russia from a foreign state which is not a member of the Customs Union; and across the Russian border but within the Customs Union [3].

In respect of services arranging for the transportation by pipeline of natural gas (sub-clause 2.3 of clause 1 of article 164), it is now possible under the law, instead of providing the full customs declaration, to supply – wh ere the customs declaration is not produced – documents (or copies thereof) which confirm the fact that the services arranging transportation of (or, when importing into Russia, services transporting) the natural gas by pipeline have been performed.

Rules are included in clause 9 of article 165 of the Tax Code which govern the issue of the starting date for the 180 calendar day time lim it for submitting the documents listed in clauses 3.1 to 3.7 and clause 4 of article 165 of the Tax Code.

Specific comments on the application of zero rate VAT in respect of work and services transporting or arranging for the transportation of oil, petrochemicals and natural gas

In relation to work or services transporting oil, petrochemicals and natural gas by pipeline under sub-clauses 2.2 and 2.3 of article 164 of the Tax Code, persons engaged by the an organisation that directly concluded the transportation agreement are no longer subject to zero rate VAT. This includes, for example, the subsidiaries of transportation companies or entities providing transportation services.

Moreover, it is worth noting the new rule contained in sub-clause 2.2 of article 164, which applies to transportation work or services in relation to oil and petrochemicals. Under this provision, zero rate VAT is applied irrespective of the date on which the goods are placed under the relevant customs procedure [4]. However, sub-clause 2.3 of article 164 contains no similar provision in respect of arranging the transportation of natural gas by pipeline.

General conclusions

We consider that the amendments made by the new law will introduce certainty into the procedure for applying zero rate VAT, a procedure which currently gives rise to a significant number of court disputes. The trickiest current problem, the fact that the list of the relevant goods and services is not exhaustive, is dealt with by the law. However, this will not prevent potential disputes with taxpayers over how the work they perform or services they provide are classified. In other words, there will be disputes over whether they fall within the scope of the new list.

Moreover, the law has left untouched the rule contained in sub-clause 3 of clause 1 of article 164 of the Tax Code. This governs the application of zero rate VAT to work or services directly connected with the shipment or transportation of goods placed under the international transit customs regime. This rule is drafted in the same way as that which applies before sub-clause 2 of clause 1 of article 164 comes into force as contained in the new law and it also gives rise to a large number of disputes owing to the lack of a precise list of the relevant work and services. However, the new law leaves this problem unresolved.

Pepeliaev Group’s lawyers are ready to advise on any issues arising in connection with the application of the new rules on zero rate VAT. We will propose solutions that take into account the particular situation and the actual circumstances.

[1] The provisions of clause 1 of article 164, clauses 3.1 - 3.8, 4 and 9 of article 165 and clause 9 of article 167 of the Tax Code as amended by the Federal Law in question apply to work or services performed or carried out after such Federal Law enters into force.

[2] Moreover, for the services set out in sub-clauses 2.2 - 2.3 of clause 1 of article 164 of the Tax Code, under the provisions created by the new law, there is direct provision for the original or a copy of the full customs declaration to be supplied to confirm that zero rate VAT should lawfully be applied with the markings of the Russian customs authority which gave the goods their export customs clearance.

[3] For example, when goods are transferred within the Customs Union, there is no customs control at Russia’s border with the other Customs Union Member States, so there is no requirement for the transportation documents, accompanying customs documents and/or other documents to bear a mark affixed by the customs authorities.

[4] The relevant rules of the RF Tax Code have been brought into line with the Customs Code of the Customs Union from the perspective of terminology. For example, the term “customs treatment” has been replaced with the term “customs procedure”.

in Moscow – Andrey Nikonov, Senior Partner, at: (495) 967-0007 or by e-mail; Evgenia Eremina, Associate, at: (495) 967-0007 or by e.eremina@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail