One of the headaches of service providers all over the world is the payment of value added tax (VAT). The situation becomes even more complicated when a company expands their market and begins to provide services to overseas clients.
According to the basic rule, VAT shall be charged in the country where services or goods are purchased. However, where a consumer and a service provider are based in different countries the tax regulations of the different countries could prescribe for different VAT rules. In a situation where such services are not exempt from the VAT payment in the country of the service provider, the consumer runs the risk of to bearing the expenses of double VAT payment.
This such situation is particularly relevant for China-Russia contracts where the following services are exported from Russia to China:
Consultancy services;
Accounting services;
Product and advertising design services;
Software development services;
Marketing services;
Legal services;
Dispatching agency services.
In other words, for example, a Chinese company that acquires legal consultancy services from a law firm wholly based in Russia would have to pay the Russian VATincluded in the price and will be charged and must pay the Chinese VAT by itselfdirectly to the tax authorities.
Where a company is new to the service exporting market it may not be aware of such situations and due to the lack of attention to the foreign tax regulations and may provide services for foreign clients in the absence of the explicit division of the VAT burden. We need to understand that in most of the countries VAT for imported services would be paid by the consumer. Going back to our example, the Chinese company would be liable for the payment of VAT for legal consulting services provided by the Russian law firm.
The Chinese VAT would be deducted during the payment by the Chinese company if the contract does not explicitly provide for the net price. Moreover, the situation remains controversial where a contract does not mention that price shall be assumed as net for both countries’ tax regulations.
In practice, it will be challenging for the service provider to successfully claim in court that it was not aware of the tax regulations of the other country. At the same time, where the amount of the contract is not high, the penalty could be more expensive than the foreign VAT loss. Therefore, it is always better to specify clearly in the contract what shall be meant by net price and who shall bear the VAT expenses.
It shall be mentioned that the fact of how the services are described in the contract would also be relevant for the VAT payment issue as this will be deemed as the major factor for tax authorities to identify its nature. Therefore, it is always better to examine tax regulations and the way in which it regulates the services in question and the related payment of taxes required prior to entering into the contract. In case you require assistance for the double taxation issue please send us an email at info@dandreapartners.com to receive support from one of our professionals.