Russian VAT inposed on e-services
Does the software developer have to pay the e-services VAT in Russia?
Last year we’ve published on this website two articles covering the tax calculation and payment specifics related to relationships with Google and Apple stores: Sales tax from apps and ads sold through Google Play and Taxes related to agreements with Apple.
Now both companies have changed their VAT payment policies in the opposite way and they have made modified their contracts. So let’s dive into the topic of “Google tax” again to renew our knowledge about it.
Based on the last legal opinion letter we let you know about the new VAT payment policies of these two huge companies related to regular developers.
Legal opinion letter topic “VAT from e-services cost”
Case: the company develops mobile apps to sell them through Apple iTunes and Google Play, the income is 70% after agency fee withdrawal. To fulfill the tax agent’s obligation the company pays VAT (30%) from the market’s agency fee. It uses the Simplified Taxation System but there is a plan to switch it to the General Taxation System because of the total annual revenue increases. According to the last versions of the Google and Apple contracts they don’t pay the VAT for Russian developers so it seems the company has to pay the VAT from the total sales cost.
It did surprise several companies, however, Apples has modified the Apple Developer Program License on June 04th, 2018 and Google has made the same even earlier - on February 26th, 2018.
Let’s break down the risks the Russian developer company could face in case of a switch its taxation system to the General one.
Apple iTunes contract provisions
According to chapter 2 of Exhibit A to the Apple Developer Program License Agreement, Apple acts as a commissioner in relationships with Russian End Users of licensed apps. The abovementioned chapter clarifies that “the commissioner” means the agent acts and enter into agreements by itself but for the benefit of another company like it is stipulated in multiple civil legislations.
If the End User is located in one of the countries from Exhibit A to the Apple contract the Apple company could act as a commission agent for a commission agreement.
According to cl.1 of art.1005 of the Russian Federation Civil Code, one party (the agent) undertakes to make legal and other actions on its own name, for the fee on the other party’s (the principal) order for the principal’s cost.
The agent gets the rights and obligations under the agreement with the third party if the agent has entered into it on its own name for the principal’s expenses even of the principal had any direct relationships with the third party.
The principal gets the rights and obligations under the agreement with the third party if the agent has entered into it on behalf of the principal and for the principal’s expenses.
So Apple gets the rights under the agreement between Apple and the Russian entity. According to the Schedule 2 to the Apple Developer Program License Agreement the developer acts as the principal and is not recognized as the agreement’s party which Apple enters into on its own name nevertheless the developer has been mentioned in the agreement or had any direct relationships with the third party.
According to the section 1 of the Exhibit A to the Apple Developer Program License Agreement Apple withdraws and pays the taxes stipulated in the Section 3.2. of the Schedule 2 to the authorized tax authority from Licensed Apps sales to Russian End Users.
However, this provision is only related to non-Russian resident developers. Apple does not calculate and does not pay the taxes on behalf of the Russian resident developers, such developers fulfill their Russian tax obligations by themselves.
In other words, the Russian developers’ apps sales are not the subject of the art. 174.2 of the Russian Federation Tax Code because the foreign company does not render any services (Apple acts as the agent on the Russian entity’s order).
So other provisions of the Russian Federation Tax Code regulate the tax obligations of the Russian developer based on the subject of matter of the agreement with the End User.
In accordance with art. 1000 of the Russian Federation Civil Code the developer as the committee has to take all the agreement’s results from the commissioner and make the commissioner free from all its commitments to the third party according to the commission order.
According to the Apple Agreement, all the agreements with End Users are made under the Exhibit A to the Apple Developer Program License Agreement and are performed in the form of Standard Apps License Rules or as a text provided by the developer to Apple during the process of the app upload to the online market. So the End User gets and uses the software under the License Agreement.
So if Apple acts as the commissioner the developer as the committee gets the payment and make Apple free from EULA commitments.
If Apple acts as the agent (it enters into agreements on behalf of the developer and for the developer’s expenses) in relationships with non-Russian resident End Users the developer gets the rights and obligations under the EULA.
So the developer uses the General Taxation Scheme waives the VAT payment from the income he or she gets from assignment of computer programs and databases intellectual property rights under the license agreements according to subcl.26 of cl.2 of art.149 of the Russian Federation Tax Code (sales in case customer resides in Russia) or according to subcl.2 of cl.1.1. of art.148 of the Russian Federation Tax Code (sales in case customer is a non-Russian resident).
Google Play contract provisions
Google Play Terms of Service and Google Terms of Service (hereinafter referred to as “the Terms of Service”, jointly - “the Terms”) cover Google Play, apps (including Android instant apps), games, music, movies, books, magazines and other digital content usage (hereinafter referred to as “the Content”).
According to the section 3 of Google Play Terms of Service the Content sales agreements (in case the Content does not belong to Google) are made between End Users and the Content Supplier (hereinafter referred to as “the Supplier”), even if Google Commerce Limited acts as the Supplier’s agent.
According to cl. 3.4. of the Google Play Developer Distribution Agreement (hereinafter referred to as “the Google Agreement”) the developer acts as the principal, Google acts as the developer’s agent and the official seller of Products to the customers from the European Economic Area (EEA). At the same moment, the developer acts as the official seller of the Products to all other customers.
So in case of the Content sales to EEA customers, Google acts as the commissioner, in all the rest cases Google acts as the agent under the agency agreement.
Thereby in case Russian or other non-EEA customers purchase the Content all the rights and obligations under such deal assign to the Supplier. In relationships with EEA customers, Google Commerce Limited gets the rights and obligations under the agreement and transfer them to the supplier acting as the commissioner under the Google Agreement.
If Products are sold in EEA and in the countries from this list (including Russia) according to cl. 3.5. of the Google Agreement Google determines if such Products are taxable or not. If so Google, Payment processing Partner or Authorized Provider collect and pay the Products sales taxes to the authorized tax authorities. Google saves the right to change the list of such countries and regions with prior notification of the developer. If Products are sold in other countries and regions the developer undertakes to pay all the taxes by him- or herself to the authorized tax authorities. All the taxes are withdrawn from the Product sales cost, the developer gets the rest of the money (sales cost minus the Operation fee and applicable taxes).
Given that there is an e-services VAT for the foreign entity in accordance with art.174.2 of the Russian Federation Tax Code Google additionally clarifies the payment procedures of the Russian VAT for Russian residents and non-Russian residents - Russian developers have to calculate and pay by themselves the VAT from apps and content sales through Google Play in case the purchase has been made by Russian customers. In other cases, Google undertakes to calculate and pay the Russian VAT (18%) from all the paid content purchased by Russian customers through Google Play.
We consider the above-mentioned position legitimate because in the first case the seller is a Russian resident, in another case, it is the foreign entity.
However, the sales object is the computer program and database intellectual property rights assignment under the license agreement because of the cl. 5.3. of the Google Agreement which stipulates the developer grants the user with the non-exclusive worldwide unlimited license to the Product execution, display, and usage.
The developer has the right to enter into the separate EULA related to the Product to regulate the user’s rules related to the Product in a different way. However, the Google Agreement has the priority in case of any controversies.
Thereby if the software has been sold to the Russian customer the provisions of subcl.26 of cl.2 of art.149 of the Russian Federation Tax Code apply (sales in case customer resides in Russia) and the VAT is waived. In all other cases the provisions of subcl.4 of cl.1.1. of art. 148 of the Russian Federation Tax Code apply (sales in case customer resides abroad of Russia) and nobody has to calculate the Russian VAT because the sales place of goods (services) is outside the Russian Federation.
E-services VAT summary
Russian VAT is not calculated and paid in case of Russian developers’ software sales through Google Play and Apple iTunes because the following. The Russian resident developers are not matched with the definition of the foreign entity renders the e-service. The foreign companies do not include the Russian VAT into the Product cost and do not additionally charge it because such companies act as the intermediary in seller-customer relationships. The developers do not have to pay the VAT from the intellectual property rights assignment cost under the license agreements.
You only need to make the right EULA!
The article "Russian VAT for in-app purchases" is coming. See you soon!
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02.09.2008 г.
ИНН 5407053894
