VAT and logistic services in Russia

In the modern world, international trading plays an important role in most types of business, and every day millions of cross-border trade transactions take place totaling billions of US dollars in value. Transportation and logistics are often important cost factors in these transactions. In Russia, international logistics plays a particularly important role as the country is still very dependent on imported goods.

The VAT treatment of transportation services

In most countries around the world, international transport and international logistics services are zero-rated for VAT purposes. This is also the case in Russia; however, in Russia, there is a catch.

According to the Russian VAT place-of-supply rules, transportation services or transportation-related services are subject to VAT in Russia if they are supplied by a Russian company and the departure point and/or the destination point of the transportation is located in Russia. For these purposes, the term “international transportation” should be defined as transportation where the departure point or the destination point is outside the Russian territory.

As we have said, international transportation and certain related logistics services are subject to 0% VAT in Russia. The advantages of applying the zero VAT rate are clear:

The supplier does not charge VAT with respect to the services, but it can still enjoy input VAT recovery.
The buyer does not need to finance VAT and wait for a refund of input VAT.
A non-Russian buyer does not incur non-recoverable Russian VAT.

The VAT treatment of logistic services

In Russia, the VAT treatment of the cross-border transport of goods generally hasn’t been discussed (but is generally accepted to be zero-rated). The complication lies in the treatment of logistics services connected to the cross-border transport. The Russian Tax Code provides a list of certain logistic services that are eligible for the zero rate if they are provided in the context of arranging international carriage and if they are provided under a “freight-forwarding agreement.”

A freight-forwarding agreement is a specific type of agreement established by the Russian civil legislation. In particular, under a freight-forwarding agreement a forwarding agent agrees to perform or arrange for the performance of certain services connected with the transportation of the goods for a fee. In Russia, federal law regulates freight-forwarding services.

There are, however, no specific requirements established in the law with respect to logistic services (such as licensing, a special registration or the necessity to own transportation means). As a result, any company can provide freight-forwarding services. In practice, therefore, there may be uncertainty as to whether the 0% rate or the 18% VAT rate should be applied to certain types of logistic services.

For example, doubts may arise for logistic services that are not provided under a freight-forwarding agreement or for services where a forwarding agent does not organize the cross-border transportation itself. In these cases, service providers often prefer to apply the 18% VAT rate instead of the 0% VAT rate. As a result, VAT risks are transferred to the buyer of the services, as the tax authorities could argue that such services should be zero-rated and could challenge the recovery of such VAT by the buyer.

Trends in the how the court treats services related to international transportation

Recent court practice with respect to the VAT treatment of logistic services related to international transportation shows the following trends:

The court applies a “substance over form” approach to freight-forwarding services. This means that the court supports the application of the 0% VAT rate even if the agreement under which the services are provided is not formally called a freight-forwarding agreement. The requirement is that the agreement in substance should match the key features of a freight-forwarding agreement. As a result, application of the 18% VAT to the service is rejected.

The court supports the position that a freight forwarder should apply the 0% VAT rate even if the freight forwarder neither transported the goods itself nor arranged such transportation. In particular, this approach could be applied to loading, unloading, warehousing, the execution of documents, customs clearance and many more services. This conclusion is based on the fact that the services rendered by the freight forwarder are performed for the purposes of transporting the goods from Russia, and they should therefore be subject to the 0% VAT rate.

These court decisions are very important because they raise the following issues:

A broader range of services rendered during international transportation are subject to the 0% VAT rate. Various types of logistics support services supplied during the export or import of goods should therefore be zero-rated.

This zero-rating allows non-Russian buyers to reduce the VAT costs related to the transportation of goods. Russian buyers may also benefit in terms of improved cash flow, as they do not need to finance 18% VAT on these supplies.

There is increased risk that the tax authorities may successfully challenge the deduction of input VAT charged on international logistics support services, making it more likely that clients will refuse to pay VAT charged by logistics service providers.

Conclusions

It is important to carefully review any Russian VAT being charged by logistics service providers in relation to cross-border logistics support. We believe there is no black-or-white solution to dealing with some of these issues, so a balanced approach should be taken.

That includes requesting the application of the VAT zero rate for international logistic services where possible and including protective clauses in the agreement in case the tax authorities challenge the related input VAT deduction.

VAT and logistic services in Russia