Tax Messenger

VAT for STS users: life will never be quite the same

04.06.2024

On 28 May 2024 the Ministry of Finance of Russia published Bill No. 01-06-12/03-49115 (“the Bill”) containing extensive amendments to the Tax Code of the Russian Federation (“the Tax Code”) regarding the calculation and payment of VAT by taxpayers that apply the simplified taxation system (“the STS”) and the implementation of an amnesty for “business splitting”.

On 3 June 2024 the Bill was submitted to the Budget and Taxes Committee of the State Duma. It is expected to be considered during June 2024.

Changes regarding the calculation and payment of VAT by taxpayers that apply the STS

The Bill proposes the following amendments:

Organizations and individual entrepreneurs (“IEs”) that apply the STS and whose aggregate income for the preceding calendar year exceeded 60 million rubles are deemed to be VAT payers from the 1^st of the month in which that level was exceeded.
Organizations and IEs that transferred to the STS in a calendar year and/or organizations and IEs whose aggregate income for the preceding year did not exceed 60 million rubles have the right to claim an exemption from VAT under paragraph 3 of clause 1 of Article 145 of the Tax Code provided that they submit a notification to the tax authorities.
By default, organizations and IEs using the STS that have become VAT payers will be obliged to calculate and pay VAT at the standard rates (0% / 10% / 20%). The standard VAT rates must also be applied by taxpayers that formerly applied the STS and have transferred to the general taxation system as a result of their income exceeding the threshold of 450 million rubles.
For organizations and IEs applying the STS that are VAT payers, the Bill envisages the right to apply special VAT rates:
- 5% if income of organizations and IEs applying the STS for the calendar year does not exceed, in the aggregate, 250 million rubles
- 7% if income of organizations and IEs applying the STS for the calendar year is from 250 million rubles to 450 million rubles
In order to apply these special VAT rates (5% / 7%), an organization or IE must submit a notice specifying the tax rate to the tax authority not later than the 20^th of the month following the tax period commencing from which the organization or IE intends to apply those rates.

It remains unclear whether it is necessary for a repeat notice of the application of the 7% special VAT rate to be submitted where the right to apply the 5% rate has been lost as a result of the income threshold of 250 million rubles being exceeded. Where VAT is calculated and paid at the special rates of 5% / 7%, input VAT paid by such taxpayers as part of expenses incurred is not deductible. The non-deductible amounts of tax should not be included in the cost of goods (work, services) acquired but should be included in expenses (if income reduced by expenses has been chosen as the tax object for STS purposes).

Conversely, where such taxpayers apply the standard VAT rates (0% / 10% / 20%), amounts of input VAT may be deducted in the normal manner.
VAT on goods (work, services) which was previously deducted by taxpayers applying the STS must be restored if those goods (work, services) are used in activities that are VATable at the special rates envisaged for such taxpayers (i.e., 5% / 7%).

Business splitting amnesty

A no less important element of the tax reform relating to the use of the STS is the announcement of the amnesty for business splitting. The bill introduces the first legislative definition of “business splitting”, which is taken to mean the division of unified business activities among notionally separate entities (organizations, IEs) that are controlled by the same persons, the sole or primary purpose of which is to enable taxes to be artificially lowered through the application of special tax regimes by those persons. Also defined is the phrase “voluntary discontinuation of business splitting”.

Under the amnesty, tax authority decisions on business splitting which were issued based on tax audits in the period 2022-2024 would be suspended from the effective date of the Bill. The fate of the suspended decisions would depend on whether the taxpayer discontinues business splitting in subsequent periods (2025-2026) and how and when that discontinuation occurs (voluntarily, after the tax authority has ordered a field audit for 2025-2026, as a result of the termination of activities, etc.).

These factors determine those cases in which obligations to pay tax assessments, fines and penalties for tax offences related to business splitting are cancelled and those cases in which they are not.

What do the above changes mean for businesses?

The proposed changes to the VAT rules for organizations and IEs that apply the STS would lead to an increased fiscal and administrative burden, including the need to:

Calculate and pay VAT to the Russian budget. In this regard, taxpayers would be able to choose between standard VAT rates with the right to deduct input VAT and special rates without the right to claim a deduction
Issue VAT invoices and prepare and file VAT returns and purchase and sales ledgers
Evaluate activities for indications of business splitting and the advisability of participation in the amnesty

We should point out that entities that apply the general taxation system and purchase goods (work, services) from suppliers that apply the STS and are liable for VAT may also be required to introduce / review procedures to check counterparties for tax risks associated with dealing with them, and to analyze the correctness and quality of documents prepared by them (for example, VAT invoices).

In view of the proposed changes to VAT legislation and the business splitting amnesty, we advise companies to take the following steps:

Evaluate the tax efficiency of applying the special VAT rates (5%/7%) envisaged for organizations and IEs that apply the STS compared with the standard VAT rates based on estimated amounts of input VAT and the types of buyers of goods (work, services).
Carry out a tax and legal review of existing contracts to assess the need to review them and/or add tax and/or commercial clauses.
Configure the organization’s accounting system and records to handle VAT.
Analyze the organization’s activities to detect indications of “business splitting”.
If indications of business splitting are identified, evaluate the potential tax risks and the advisability of taking advantage of the amnesty.

How can B1 help?

The B1 team is ready to provide professional services in discussing issues related to the introduction of new VAT obligations for taxpayers that apply the STS and the rules governing the implementation of the business splitting amnesty. We would be happy to provide comprehensive support in the following areas:

Modelling tax burden scenarios to assess the efficiency of applying special or standard VAT rates.
Reviewing existing contracts to assess the need to amend them and/or add tax and/or commercial clauses.
Assistance in liaising with counterparties on VAT issues arising from the acquisition of VAT payer status (both for buyer and for the supplier under a contract).
Given that the Bill does not contain any transitional rules, analyzing issues that may arise in the transitional period, such as the VAT restoration procedure for organizations transferring from the general to the simplified taxation system.
Developing / updating procedures for conducting tax due diligence of counterparties. Automation of the tax due diligence process with the aid of the “B1 Tax – Ray” automated due diligence system.
Analyzing your organization for potential indications of business splitting and the advisability of participation in the amnesty.
Liaising with the tax authorities to support the taxpayer’s position on VAT and/or business splitting issues.