Aliya Vayissova, Senior Manager of the Tax Department, RoK Professional Accountant, I Category Tax consultant, answered some tax questions often asked by taxpayers who are involved in foreign economic activities.
Question 1: Recognition of sales revenues
A Kazakhstan company is planning to export goods to Kharkov city (Ukraine) on DAP terms according to Incoterms[1] 2010. In this regard, it has the following questions:
- On which date revenue should be recognized?
- Which documents are required for revenue recognition?
Answer to Question 1: According to paragraph 2 Article 226 of Tax code[2], unless otherwise is established by Articles 227-240, paragraphs 5 and 6 of Tax code, revenue recognition including the date of its recognition shall be made in accordance with IFRS[3] and requirements of RoK[4] legislation on accounting and financial reporting.
Accounting for revenue arising from the sale of goods is governed by IFRS 15 ‘Revenue’. This standard prescribes a uniform model which should be applied to contracts with customers and uniform recognition criteria.
Thus, to decide when and to what extent revenue from transactions should be recognized, IFRS 15 prescribes a five-step analysis:
- identifying the contract(s) with a customer;
- identifying the performance obligations in the contract;
- determining the transaction price;
- allocating the transaction price to the performance obligations in the contract;
- recognising revenue when (or as) the entity satisfies a performance obligation.
According to paragraph 31 IFRS 15, an entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or as) the customer obtains control of that asset.
Factors that may indicate that control of an asset was transferred at a certain point in time include:
- the company has the right to receive payment for the transferred asset;
- the buyer has ownership of the asset;
- the entity has transferred the physical possession of the goods;
- the customer has accepted the asset;
- the customer has the significant risks and rewards of ownership of the
Thus, the transfer of goods to the buyer under the contract, that is, the transfer of control over the asset from one party to the other is treated as the moment when sales revenue is recognized.
As we know, it is planned to sell the goods on DAP terms in accordance with Incoterms, which explains the distribution of risks, costs and functions that arise when the goods are transferred from one side to another. Also, the time and place are determined when the goods and ownership of the goods passes from one party to the other.
Thus, the date of recognition of revenue from the sale of goods is the date when the buyer acquires control of the goods, and the Company has a high probability of receiving money under this contract.
Answer to Question 2: The supporting documents are:
- contract;
- goods declaration;
- invoice;
- bill/copy consignment documents.
To recognize revenue, one needs a bill signed by the buyer, confirming that the goods have been transferred.
Question 2: Separating VAT in invoices issued for services rendered by a Kazakhstan company in the RF[5]
A Kazakhstan company performs work related to installation of ladders on industrial containers in the territory of the RF, and issues invoices for its services without VAT[6]. In this regard, the company would like to learn whether it is lawful to issue invoices without VAT to the RF-based service recipient.
Answer: Since the Kazakhstan company provides installation services on the territory of the RF and these services are related to immovable property located in the RF, the territory of the RF is recognized as the place of sale of works and services. Accordingly, the company does not have obligations to charge VAT, that is, invoices to the Russian buyer of services should be issued without VAT.
According to sub-paragraph 1) of paragraph 1 of Article 369 of the Tax code, taxable turnover shall be a turnover from sales of goods, work, services committed by a VAT payer except for exempt turnovers specified in Article 370 of the Tax Code.
In accordance with sub-paragraph 2) of Article 370 of the Tax code, a non-taxable turnover shall be, among other things, a turnover from sales of goods, work, services for which the place of sale is not RoK.
The location where goods, work, services are sold in the EAEU[7] member states is defined in accordance with Article 441 of Tax code.
In accordance with sub-paragraph 1) of paragraph 2 of Article 441 of the Tax Code, the territory of the EAEU member state shall be recognized as the place of sale of works, services, if the work and services are directly related to immovable property located on the territory of that state.
For the purposes of this sub-paragraph, immovable property shall be recognized as land plots, subsoil plots, isolated water bodies and everything that is firmly connected to the land, that is, objects whose displacement is impossible without disproportionate damage to their purpose, including forests, perennial plantations, buildings, structures, pipelines, power transmission lines, enterprises as property complexes and space objects.
Thus, since the place of sale of works, services of the Kazakhstan company is not the territory of the RoK, the turnover from providing installation services by this company is not subject to VAT.
The tax legislation of the RF contains similar provisions for VAT purposes. Thus, according to sub-paragraph 1) of paragraph 1 of Article 146 of RF Tax Code[8], among other things, the sale of goods (work, services) in the territory of the RF shall be recognized as a taxable item.
In accordance with sub-paragraph 1) of paragraph 1 of Article 148 of the RF Tax Code, for the purposes of the present Chapter the territory of the RF shall be recognized as the place of sale of works (services) performed if works (services) are connected directly to real estate (except for aircraft, sea ships and internal navigation ships and also spacecraft) located on the territory of the RF. Such works (services), in particular, shall include civil engineering, assembly, construction and erection, repair, restoration works, the planting of trees and shrubs, rent services;
That is, pursuant to both the Tax Code and regulations of RF Tax code, the place of sale of such work, services is recognised to be RF rather than RoK. However, there is a significant difference in the approaches to determining the tax base. In particular, if in the RoK the amount of taxable turnover of the recipient of works and services is determined on the basis of the cost of purchased works, services, except VAT, then in the RF the tax base is determined taking into account the VAT that is withheld when paying income to a foreign person.
Thus, in accordance with Article 161 of RF Tax Code “Peculiarities of Determination of Tax Base by Tax Agents”:
- In cases when goods (works, services) for which the place of sale is the territory of the RF are sold by foreign persons being taxpayers who have not tax registration with the tax authorities, the tax base shall be defined as the sum of income from selling these goods (works, services) taking into account the tax. The tax base shall be defined separately in case of performance of each operation of sale of goods (works, services) on the territory of the RF taking into account the present Chapter.
- The tax base specified in paragraph 1 of this article is determined by tax agents. In so doing, the tax agents shall be recognized to be organisations and individual entrepreneurs registered with the tax authorities, who purchase goods (work, services) on the territory of the RF from the foreign persons specified in paragraph 1 of this Article. The tax agents are to assess, withhold from the taxpayer, and pay to the budget the relevant amount of tax regardless of whether they execute obligations of the taxpayer associated with the assessment and payment of tax and also other obligations established by the present Chapter.
When a foreign person who is not registered as a taxpayer with the RF tax authorities sells work, services in the RF territory, the tax base is determined as the amount of income from the sale of these works and services, including VAT.
At the same time, the tax agent (the buyer of works, services, RF taxpayer) is obliged to assess, withhold from the Kazakhstan company and pay the appropriate VAT amount to the budget.
Based on the foregoing, we recommend that when preparing a contract with a Russian company for providing services in the RF territory, the Kazakhstan company’s service fee should comprise the Russian VAT (18%) which most likely will be withheld in the RF at the time when income is paid.
Thus, we recommend that when issuing invoices, the Kazakhstan company should increase the service fee by 18%, which should comply with the terms of the contract. However, VAT should not be shown as a separate line in the invoice, because the Kazakhstan company has no VAT obligations on that transaction.
[1] International trade term.
[2] Code of the RoK “On Taxes and Other Obligatory Payments to the Budget” No.120-VI dated 25 December 2017 effective from 1 January 2018.
[3] International Financial Reporting Standards.
[4]Republic of Kazakhstan.
[5] Russian Federation.
[6] Value Added Tax.
[7] Eurasian Economic Union.
[8] Tax Code of the Russian Federation.
