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. Last Updated: 07/27/2016

Russia to Catch Up On Internet Tax Law

In the middle of a Moscow winter, Sergei Shiyan dreams of Dubai.

Shiyan yearns not for the yearlong summer, beaches and palm trees. Instead, he is impressed by Dubai Internet City in the United Arab Emirates, an electronic- and media-free zone where there are no taxes levied on corporate profits and income.

Russia is a long way from being the next Dubai Internet City, but this doesn't mean that e-commerce is being taxed unfairly, said Shiyan, a representative of Sweden-based CMA Small Systems, a systems integrator for the finance industry. Tax laws pertaining to the Internet have only emerged in the past five years, and the whys and the hows of taxing e-commerce are still being sorted out in the most Internet-savvy countries.

"Am I suffering from this ambiguity?" he said. "Absolutely not. I'm making money off of it."

While CMA Small Systems is taking advantage of the short-term benefits that a lag in legislation can provide, their Russian office isn't exactly reaping the same benefits as are 180 high-tech firms already registered in Dubai Internet City (www.dubaiinternetcity.com).

Much will depend on the approach the government still has to formulate. The current ad hoc approach taken by tax inspectors is now considered to be relatively neutral.

"There will be no e-business here if taxation isn't convenient," Shiyan said. "Government officials have to be careful that their taxation plans don't aid in the brain drain."

In tax circles, the phenomenon of e-commerce has been compared to a crisis of physics, where what is taxed can't always be seen and the concept of "place" loses all traditional meaning.

Even the lines between "goods" and "services" have become blurred. Downloaded software has long tugged that line, and the European Commission has proposed defining it as a "service."

This applies to electronic books, music, movies and distance learning.

This has serious ramifications for the publishing industry in Britain, said Paul Tobin, senior manager for PricewaterhouseCoopers. Physical books have a value-added tax of zero, while the electronic versions are hit with a 17.5 percent VAT.

"Traditional book publishers are not against it because it makes their books that much cheaper," Tobin said.

'There will be no e-business here if taxation isn't convenient.' CMA's Shiyan

The U.S. Treasury Department issued a comment on the issue in 1996, which stated that foreign businesses will be taxed if they are doing business that is "effectively connected" with economic activity in the United States.

This is a very broad explanation of what is taxable, said Steve Henderson, a partner with Deloitte & Touche CIS. In Canada and the United States, which share a common system, the courts will end up deciding the nuances of how Internet activities will be taxed.

The Organization for Economic Cooperation and Development has laid out some concepts on taxation of e-commerce. Russia, however, is not an OECD member. Thus, norms put forward by this international organization don't have to apply here.

For one, according to the OECD, the existence of a server on a country's territory isn't enough to warrant being subjected to that country's tax laws. It all depends on what the server's functions are.

Even within the OECD, this clause evokes controversy, said Yulia Maximovskaya, a senior manager with Arthur Andersen. But most experts agree that if the site is used just to collect customer information, then it shouldn't be taxed. If the web site coordinates orders and payment, then there is a more solid basis for taxation.

To make things even more complicated, many companies have started to keep servers with different duties in different countries in what is called a "tax-effective operation structure," said Gennady Kamishnikov, senior manager with PricewaterhouseCoopers. Companies are choosing to base their operations in Hungary, for example, where the corporate profit tax is only 3 percent.

Russia isn't far behind other countries is developing effective legislation, said Shiyan of CMA Small Systems.

"There are a lot of smart people working on this right now," he said. "I'm confident they'll get it right."