From January 1 this year, foreign companies selling e-content in Russia were required to register private offices in Russia, submit information on their sales in the country, and pay an extra 18 percent tax.

This tax is levied based on the customers identified as Russian residents by their credit card number or IP addresses, and applies to the following types of content or services:

  • selling and giving access to e-books, audio and visual content, images and music;
  • computer programs and games;
  • online advertising and other types of information on service or product offerings;
  • domain name registration and hosting services.

These rules, which have come to be known as the “Google tax law,” were introduced last summer via amendments to the Russian tax code. They apply in particular to Apple, Google, and Microsoft, which generate revenues through their respective app stores in Russia, as well as to other service providers including Gett and Uber.

Aiming to balance the scales between domestic and foreign internet companies operating in Russia, the law may bring in to state coffers some ten billion rubles (approximately $160 million), according to advocates of the new laws.

Tax discrimination

However, foreign companies have no obligation to create a legal entity in Russia, and may pay the tax via their local partners instead.

This is the case for Uber, under the condition that its Russian drivers be registered as legal entities or individual entrepreneurs, and that the responsibility for the settlement of the tax be specified in their contract with Uber N.V., which is registered in the Netherlands.

The 18 percent tax applies only to the commission fee paid by the drivers to Uber — in exchange for what is regarded as an “electronic service” — not to the total fare settled by the client.

These rules were specified by the Russian tax service in an official answer to Uber’s inquiry in December last year.

Irina Gushchina, head of communications, Russia & CIS at Uber, told Russian daily Izvestia that Uber will compensate the VAT to its partners.

Stanislav Shvagerus, a Russian expert at IRU, a global road transport organization that aims to protect the rights of traditional taxi companies, believes that the Federal Tax Service (FTS) took the wrong attitude towards Uber.

“Even though Uber has registered a Russian legal entity (‘OOO Uber Technology’), the company is recognized as a non-Russian tax resident. According to FTS, Uber provides information services, which contravenes the Russian legislation. In practice, the U.S. company provides its users with the ability to book a vehicle using means of communication. Therefore, a passenger pays for transportation and not for an information service, as stated by Uber,” Shvagerus said in an exchange with Izvestia.

“Russian legislation must be applied to all the taxi service providers operating in Russia. Gett, Yandex Taxi, and Uber offer identical services regardless of whether they are a Russian or foreign company. Therefore, they have to pay equal taxes — VAT, tax on income, payroll tax,” he added.

Cancelled contracts

In Russia, according to Shvagerus, “many taxi drivers cancel their contracts with Uber by fear of the tax controls and related risks.”

Uber’s representative office in Russia declined to answer Izvestia’s inquiry on the matter.

Internet access services, as well as offline sales of physical items or software, are not covered by the law adopted in 2016.

However, the Russian government is considering applying VAT to purchases of physical goods made online in foreign internet stores. If confirmed, this new tax regime may have a significant impact on cross-border ecommerce flows, which have been developing fast in Russia over the past few years (see EWDN report).

This post first appeared on East-West Digital News, an international resource about innovation in Eastern Europe.