VAT Deductions in Russia

Russian Federation Law No. 119-FZ of July 22, 2005, introduced amendments to the Tax Code in accordance with which, as of Jan. 1, 2006, many taxpayers may expect the VAT deduction procedure to take less time.

Until Jan. 1, 2006, the right to deduct VAT charged by the seller was enjoyed by the purchaser generally after the purchaser had received the invoice, the goods (work and services) had been delivered (provided) and the purchaser had actually paid for them. From the beginning of 2006, however, the seller will be obliged to recognize output VAT when the goods are shipped, even if the purchaser has yet to pay for them. Accordingly, the purchaser will be granted the right to deduct VAT generally after the purchaser has received the invoice and the goods (works, services). Therefore, from Jan. 1, 2006, the purchaser will have the right to a VAT deduction for goods, work, services and property rights prior to payment.

Amendments to the Tax Code establish special grounds for the deduction of VAT charged by:

Currently, the right to deduct VAT charged for the said work, goods and sites is enjoyed by the customer for the work in question and by the buyer of the said goods and sites only when tax depreciation starts to accrue on a completed construction site or when a capital construction-in-progress site is sold. Tax depreciation on real estate accrues from the month following the month in which documents were submitted for state registration of the site in question. Hence, as a result of the current procedure, VAT deduction for customers for construction and assembly work takes a long time.

Effective from Jan. 1, 2006, the right to deduct VAT for such work, goods and sites will be enjoyed by the construction customer and the buyer of the said goods and sites according to the general rules. In other words, in order to claim a tax deduction, it will be sufficient to have received an invoice and the goods.

The special transitional provisions in Article 3.2 of Law No. 119-FZ grant a construction client the right to a preferential procedure for the deduction of the amount of VAT charged by the contractor in 2005 but not deducted as of Jan. 1, 2006. This amount of VAT is to be deducted during 2006 in equal installments. If the customer registers a construction site in 2006, the amounts of VAT not deducted earlier are to be deducted immediately.

The time when a tax deduction may be taken for purchased equipment requiring installation has been clarified. Currently the Tax Code allows the tax authorities to classify equipment ready for installation as goods purchased for construction and assembly work, as a result of which a VAT deduction for the purchaser takes a long time. After Jan. 1, 2006, the purchaser will have the right to claim a VAT deduction immediately after the equipment is accounted for, i.e. before it is put in use as a fixed asset.

The time when VAT needs to be accrued on self-construction (construction and assembly work using one’s own resources) and paid to the budget will change from 2006. The time in question will be the last day of the month of each tax period, and not the date when a completed construction object is recorded in the balance sheet, as was the case earlier. This change will entail a change in the timing of a VAT deduction, the right to which originates when VAT calculated by the taxpayer is paid to the budget. Article 3.6 of Law No. 119-FZ establishes special transitional provisions for taxpayers engaged in self-construction at the end of 2005.

The Tax Code has been updated with norms which obligate the taxpayer to recalculate and pay to the budget any amounts of VAT previously recovered on fixed and intangible assets and on property rights upon their transfer as a contribution to charter capital or their assignment to a legal successor in the event of reorganization.

In addition, a special procedure has been established for the reinstatement of any amounts of VAT, which were previously recovered with respect to construction and assembly work and purchased real estate, if the real estate is put to use in an activity which is not subject to VAT. The tax is to be reinstated over a period of 10 years on the basis of one-tenth of the amount of deductible tax in relation to the relevant asset. This requirement does not apply to fully depreciated fixed assets.

Moreover, the Tax Code has been revised to provide new grounds for a VAT deduction as of Jan. 1, 2006. For instance, a taxpayer who has received property intangible assets or property rights that will be used for operations subject to VAT as a contribution to charter capital, will have the right to request the deduction of the amounts of VAT that were calculated and paid to the budget by the taxpayer making the contribution in question. The right to the deduction arises when the taxpayer registers the property, intangible assets or property rights that were received as a contribution, and when the actual recalculation of VAT by the transferring party is documented.