Dear Colleagues,
Please be advised that January 1, 2018 a new procedure went into effect for charging VAT on recycled aluminium, and ferrous and non-ferrous metal scrap, introduced by Federal Law No 335-FZ dated November 27, 2017 on Amending the First and Second Parts of the Tax Code of the Russian Federation and Some Other Legislative Documents of the Russian Federation. The new procedure for taxing the aforementioned groups of products requires that buyers of these products calculate the VAT on them and act as tax agents. The procedure was developed by the Ministry for Finance of Russia to implement the Government of Russia's Instruction No AD-P13-2297 dated April 14, 2017 and is aimed at preventing embezzlement of VAT in problem industries.
Seeing how to this day various schemes for embezzling VAT are widespread in the production and sale of recycled aluminium, it is only natural to assume that even after Federal Law No 335-FZ dated November 27, 2017 goes into effect, attempts to embezzle VAT will continue.
One way to circumvent the tax agent law when selling recycled aluminium in the domestic market would be by means of selling recycled aluminium as if it was some other product that can be sold under the general taxation regime. Suppliers may give recycled aluminium all kinds of names, despite the fact that what they are selling is scrap or used products. In this situation the customer may not recognise recycled aluminium being sold to them as something else and thus end up paying the VAT to the supplier instead of paying it as tax to the budget. In this case, the customer will be effectively failing to perform its obligations as the tax agent. And should then a tax audit establish that the transaction in question involved purchase and sale of recycled aluminium, claims will be brought against your company as the buyer that had to act as the tax agent.
Work is currently underway to add explanations to the Classifier of Products by Type of Activity (OKPD-2) to clearly define what recycled aluminium and recycled aluminium alloys are. However, until these explanations have been added to the Classifier, whatever goods are purchased under whatever name are going to inevitably draw increased attention of the tax authorities if they were used as recycled aluminium by the buyer prior to the aforementioned law going into effect. Such goods can be sold only by companies participating in various schemes where they are produced illegally without being recorded on the company's books. And this fact will inevitably be found out by tax authorities using the existing automated supervision systems. Tax authorities plan to deploy the automated supervision system VAT-3 across the country in the near future, which should allow them to track not only cash flows and payment of VAT but flows of goods and services as well. This means that tax authorities will be able to identify purchases of goods through trading firms that close down every quarter in seconds. And companies that purchase such goods are going to be held accountable for failure to act as tax agents in such transactions.
In addition, please note that Federal Law No 335-FZ dated November 27, 2017 does not obligate purchasers of recycled aluminium to calculate VAT when buying this product from legal entities and sole traders that don't pay VAT (for example, companies that use the simplified accounting system). In this case in order to avoid problems with tax authorities, buyers should make sure that the sellers of recycled aluminium and scrap that don't pay VAT make explicit mention of the fax that they are exempted from paying VAT in the contract or in the original accounting document, include the phrase VAT Free in all their invoices.
On the other hand, it should be noted that companies and sole traders that do not pay VAT must still calculate and pay VAT when buying recycled aluminium from suppliers that do pay VAT, even though they themselves are exempted from this tax. And if suppliers of recycled aluminium that do not have to pay VAt start going out of business every quarter, that is clearly a sign that you are being supplied products made as part of some VAT embezzlement scheme. In this case it's once again going to be your company that will be hit with VAT claims by tax authorities on account that the suppliers that didn't pay VAT are your first-level counterparties and the buyer, i.e. your company, may be found to have failed to take due care when selecting suppliers.
In order to avoid this situation, we recommend that when entering into contracts to buy recycled aluminium as well as ferrous and non-ferrous metal scrap you follow all the procedures for selecting counterparties outlined in the Tax Service of Russia's letters No ED-4-15/10588 dated June 5, 2017, ED-4-2/13650@ dated July 13, 2017, CA-4-7/16152@ dated August 16, 2017 and ED-4-9/22123@ dated October 31, 2017. This is especially relevant when entering into contracts with suppliers that are exempted from VAT. Also note the amendments to the Tax Code of Russia made by Federal Law No 163-FZ dated July 18, 2017. The aforementioned Federal Tax Service letter and amendments to the Tax Code are currently being actively used in the conduct of tax audits.
Purchasing recycled aluminium under the guise of other products for which the buyer does not have to act as a VAT tax agent entails a colossal risk for the buyer of being hit with back taxes and fines of up to 40% of the transaction value under Article 122 of the Tax Code of Russia, as deals like that can be classified by tax authorities as deliberate tax fraud. It is vital that the purchasing departments of companies be notified about the possible losses and risks when selecting suppliers, because purchasing departments generally tend to look for the cheapest deal and will often tend to ignore taxation security issues.
We do hope your company responds quickly to the new requirements of the Tax Code of Russia that went into effect on January 1 and will take due care when selecting counterparties.
Please also note that the new taxation procedure does not apply to primary aluminium and primary aluminium alloys that are produced in Russia by UC RUSAL Group companies.