Payment of Taxes in Case of Sea Shipping by a Foreign Company
on the Territory of the Russian Federation
1.      When considering the necessity and procedure of VAT payment in the event of sea shipping, the following should be noted. Subject to para 2, Article 151 of the Tax Code of RF no VAT is payable when the goods are taken out of the customs territory of Russia in a customs export regime. However, in the case under review it is necessary to determine whether it is precisely the export of goods that takes place. In compliance with Article 2 of the Federal Law On State Regulation of Foreign Trade Activities export means taking abroad, in particular the goods, labor, services from the customs territory of Russia without an obligation to bring the same back. The fact of export is established at the moment the goods cross the customs border of Russia, and the fact of export of services – at the moment the services are rendered. Certain business operations without carrying the goods abroad out of the Russian customs territory are considered to be the export of goods, in particular when a foreign company buys goods from a Russian company and transfers the same to another Russian company for processing and subsequent delivery of the processed goods abroad. As follows from Article 3 of the Customs Code of RF, the customs territory of RF is the land territory of Russia, territorial and internal waters, and the air space over them.
In its turn, para 1, Article 2 of the Federal Law On the Internal Sea Waters, Territorial Sea, and the Adjacent Zone of RF defines the «territorial sea of RF» as the sea zone 12 miles wide, measured from corresponding initial lines and adjacent to the land territory of internal sea waters.
Therefore, if the goods carried out by sea are sold within a 12-mile zone, no export of goods takes place and, consequently, VAT must be paid. If the goods are sold outside a 12-mole zone, i.e. are carried out of the customs territory of RF, there are grounds to apply the above VAT exemption. However, in this case, as follows from Article 99 of the Customs Code of RF, the release of the goods for export must be supported by proper customs documents (customs declaration), i.e. all customs formalities relating to export must be performed.
2.      As follows from Article 161 of the Tax Code of RF, if, for instance, the service of goods transportation is acquired from a foreign company which is not registered with the Russian tax authorities as a tax payer, the acquirer of the above service registered with Russian tax authorities is obliged to determine the tax base, to compute, withhold, and pay VAT to the budget. Hence, when determining who must pay VAT to the budget, decisive is the fact of registration with Russian tax authorities of the foreign company rendering services to another company in Russia. If the foreign company is registered with Russian tax authorities, it pays VAT independently. If not – VAT must be transferred to the budget by the source of payment, though towards the funds allocated for payment to the foreign company for the services rendered.
3.      The Provision On the Peculiarities of Registration of Foreign Companies with Tax Authorities (Attachment No. 1 to the Order of the Ministry of Taxes and Levies of Russia dated 7 April 2000, No. AP-3-06/124) contains, in particular, the following regulations which should be taken into account:
a)      a foreign company must register with tax authorities at the place of business not later than within 30 days following commencement of the business, provided such foreign company transacts or intends to transact business in Russia through its branch, representative office or another permanent establishment for a period exceeding 30 calendar days a year (continuously or in the aggregate) (para 2.1.1. of the Provision); a foreign company may transact business in several places on the territories controlled by different tax authorities responsible for registration of foreign companies, and in every such place it must register with respective tax authorities (para 18.104.22.168);
b)      foreign companies having in Russia transport facilities (including those they own and/or possess and/or use and/or dispose of and have brought to Russia – para 2.4.2) must register with tax authorities;
c)      foreign companies having neither a branch nor a representative office in Russia must register with tax authorities at the place of registration of a respective bank (or its branch) with which they open accounts. Foreign companies must register with tax authorities when they open a Rouble or a foreign currency account (para 3.1). If operations with accounts opened by such foreign companies with the banks on the Russian territory result in accrual of the obligation on the part of such foreign companies to pay taxes independently, they must register with tax authorities in the same manner as prescribed for branches, representative offices or other permanent establishments, i.e. within 30 days following accrual of such obligation (para 3.3.).
4.      When considering the necessity for the foreign company engaged in sea shipping to pay profit (income) tax, the following must be taken into account.
If the goods being transported do not leave the Russian territory (the vessel does not go outside the 200-mile economic zone), it is our opinion that the tax authorities in this case will regard the activities of the foreign company concerned as those undertaken on the Russian territory and, consequently, the tax must be paid unless stipulated otherwise by a treaty on avoidance of double taxation. Let us review the situation as exemplified by the treaty on avoidance of double taxation between Russia and USA. Para 1, Article 8 of the Treaty dated 17 June 1992 between RF and USA On Avoidance of Double Taxation and Prevention of Evasion of Taxation with Respect to Income and Capital Taxes stipulates that the income of the company with permanent presence in one of the Contracting States derived from using sea vessels and aircraft in international transportation is taxable only in the above State.
However, its should be taken into consideration that in compliance with subpara f, para 1, Article 3 of the above Treaty transportation between points located on the territory of one and the same Contracting State cannot be regarded as international transportation.. If the transportation is not international, the rule contained in para 1, Article 6 is applicable which states that the profit of the company with permanent presence in one Contracting State is taxable only in this State, provided the company concerned does not or did not transact business in the other Contracting State through a permanent establishment. What «a permanent establishment» is - must be defined in accordance with Article 5 of the above Treaty and para 1 of the Protocol attached thereto, depending on the nature of business transacted by an American company in Russia.
Therefore, in case there is a respective treaty on avoidance of double taxation, and in the event a foreign company rendering sea shipping services on the territory of Russia has no representation in Russia, the company concerned must pay income tax in the country where it has a permanent presence.
In absence of such international rules the tax on income (profit) derived from business in Russia must be paid in Russia.
5.      Russia (also as a legal successor of the USSR) has treaties on avoidance of double taxation, apart from with the United States, in particular with the following countries: Norway, Austria, Germany, Cyprus, Spain, Canada, Great Britain, France, Japan, Denmark, the Netherlands, Malaysia, Finland, Belgium, India, Poland, South Korea, Vietnam, Bulgaria, Sweden, Luxembourg, Turkey, Romania, Uzbekistan, Hungary, Israel, Ireland, China, Slovakia, Ukraine, Mongolia, Albania, Belarus, Philippines, Slovenia, Croatia, Switzerland, Czechia, South Africa, Italy, Moldova, Mali, Kazakhstan, Armenia, Lebanon, Azerbaijan, Morocco, Egypt, North Korea, Macedonia, Turkmenistan, Iran, Namibia, Qatar, Kirghizia, Georgia.