The increase of VAT to 20% starting from 2019: how to prepare yourself for changes
Legal Digest \ 20.11.2018
The VAT rate will climb from 18% to 20% starting from 1 January 2019. Companies should prepare themselves for the changes right now in order to mitigate the potential adverse effects. We have developed a roadmap companies should follow before the end of 2018 in order to understand whether this change will affect you and what should be done in this case.

Which contracts require revision

  • A contract indicates the value ‘including the VAT’

In this case, a vendor company may pay the VAT out of its own pockets, by reducing its revenues. To avoid this, an addendum to a contract should be drafted. The addendum should specify the value of the goods (work, services) without the VAT that was assessed according to then current version of the contract and determine that the VAT amount is assessed in addition at the rate for which article 164(3) of the Russian Tax Code (the “Tax Code”) provides.

  • A contract indicates the value excluding VAT and stipulates that VAT is assessed in addition at the rate of 18%
In this case, a vendor assumes no losses in terms of the VAT payment if the company charges the value of goods (work, services) on the purchaser by adding VAT at the relevant rate of 20%. To avoid disputes with purchasers, however, it is advisable to further conclude an addendum to the agreement and state in it the VAT rate of 20% or a reference to article 164 of the Tax Code.

  • A contract has no mention of VAT
There is a risk of disputes with purchasers for such contracts, when purchasers are charged for the value of goods (work, services) under a contract and such value is increased by the amount of VAT. To avoid any conflicts, the addendum should stipulate that VAT is not included in the value but is assessed on top.

Which contracts do not require revision

  • If a company’s goods (work, services) are not subject to VAT, or the company applies the rate of 10% or 0%.
  • If the contract provides for a vendor’s right to unilaterally increase the value if the VAT increases.

What to do with supplies that go beyond 2018

If a company has supplies under contracts that go from 2018 to 2019, the rate of 20% should be applied, irrespective of when the contract was concluded. The table below shows the plan of actions to be undertaken for different business situations.

 Situation VAT rate until 31 December 2018 VAT rate from 1 January 2019 Consequences
Purchase in 2018.
Payment in 2019.
The purchaser makes a deduction of input VAT at the rate of 18%.

The payment order indicates the rate of 18% regarding the shipments until 31 December 2018. No financial losses.
Receipt of advance payment in 2018.
Shipment in 2019.
The vendor calculates VAT at 18/118.
The purchaser deducts input VAT on advance payments at the rate of 18/118.
The vendor calculates VAT at the rate of 20%.The vendor makes deductions at the rate of 18/118 on advance payments it worked for.
The purchaser makes deductions of input VAT at the rate of 20%. The purchaser reinstates VAT at the rate of 18/118.
The vendor may sustain financial losses, see note below.
Shipment in 2018.
Change of shipment value in 2019.
The vendor calculates VAT at the rate of 18%. The vendor issues an adjusted VAT invoice at the rate of 18%. No financial losses.
Shipment in 2018.
Adjustment of the VAT invoice in 2019.
The vendor calculates VAT at the rate of 18%. An adjusted VAT invoice is drawn up at the rate of 18%. No financial losses.

Based on the fact of a shipment, an obligation arises for the vendor to pay, in addition, the VAT that arises from the difference due to the change in the rates. The vendor may pay this out of its own funds or require the purchaser to do so. If the vendor pays the difference independently, such expense cannot be deducted for profit tax purposes.

If the purchaser makes an advance payment in 2018 and pays the difference of 2% in 2019 before the shipment date, this amount will be the additional payment of the VAT owing to the tax rate having been changed. In this case, the vendor should issue an adjusted VAT invoice to the purchaser. This will be for the difference between the amount of tax under the advance 2018 VAT invoice indicating the rate of 18/118 and the amount of VAT assessed based on the additional payment of tax.

If the purchaser pays the difference in 2018, the amount will be treated as an additional advance payment for the goods. Therefore, the VAT of 18/118 should be assessed on the advance payment and an adjusted VAT return should be issued owing to the value of shipped goods being changed. To avoid losses and adjustments, the parties may also agree on, or close, advance payments against shipments in 2018, or transfer the advance and the shipment to 2019.

What to do as a tax agent?

The change in the VAT rate from 2019 does not bring the risk of financial losses for the tax agents. Let us remind that tax agents are the organizations and individual entrepreneurs who are registered in the tax authorities and acquire goods (works, services) from foreign entities on the territory of the Russian Federation. Tax agents are obliged to calculate, withhold from the foreign entity and pay the appropriate amount of VAT to the budget.

Tax payment is made by tax agents simultaneously with the payment (transfer) of funds to such foreign organizations.

If payment for future deliveries of goods (works, services) shipped in 2019 is transferred to a foreign supplier (not registered in tax authorities of the RF) in 2018, then the VAT is calculated on the date of transfer of the specified payment using the tax rate 18 / 118 percent. When these goods (works, services) are shipped and advance payment is closed, the VAT is not calculated.

If payment for goods (works, services) shipped in 2018 is made by the tax agent in 2019, then the VAT is calculated by the tax agent using the tax rate of 18/118 percent (since the 20% rate applies only to shipments from 2019 and does not affect the shipments of 2018).

Acsour is ready to provide you with the relevant services: terms' audit of contracts and/or preparation of additional agreements. For all questions, you can always contact your managers or ask a question.