September 12, 2024

VAT and services rendered by residents in foreign transactions

INTRODUCTION

Value Added Tax (VAT) plays a key role in the taxation of retail services abroad. Understanding the rules and requirements relating to VAT taxation in an international context is an important aspect of successful business and compliance.

This memorandum is intended to provide an understanding of the basic rules and requirements related to the VAT taxation of retail services abroad and to be used as a guide for those involved in international transactions and tax planning in the VAT context.

General information about VAT

1.1 VAT taxpayers

According to Article 237 of the Tax Code of the Republic of Uzbekistan (hereinafter referred to as the TC), VAT taxpayers are legal entities and individual entrepreneurs with a certain level of income from the sale of goods or services. Also foreign legal entities and individuals carrying out business activities in Uzbekistan, as well as persons moving goods across the customs border of the country. Taxpayers are required to enter a special registration account with the tax authorities. The Cabinet of Ministers establishes the procedure for issuing, suspending, terminating, and appealing a certificate of registration as a VAT payer.

1.2 Object of taxation

Article 238 of the Tax Code establishes the object of VAT taxation. According to this, the object of taxation is the turnover on the sale of goods or services in the territory of Uzbekistan, as well as the import of goods into this territory. For foreign legal entities operating through permanent establishments, the turnover is determined based on the activities of these establishments.

Such operations as the sale of personal property by an individual entrepreneur, transfer of property during the reorganization of a legal entity or trust management of property, as well as operations related to the circulation of currency except for numismatic purposes are not considered taxable.

In turn, turnover on the sale of goods, by virtue of Article 239 of the Tax Code, we can consider various types of transfer of goods on a reimbursable basis, such as sale, gratuitous transfer, financial rent (leasing) and transfer of goods on the terms of installment payment. The turnover on the sale of services is consideredany activity other than the sale of goods, including the provision of services on a reimbursable basis and gratuitous provision of services.

The gratuitous transfer of goods or rendering of services is recognized as economically justified when certain conditions are met, such as a connection with the receipt of income, necessity for the maintenance or development of business activity, or compliance with legal requirements.

In addition, the article describes specific cases that are also recognized as turnover on the sale of goods or services, such as the transfer of goods as a contribution to the authorized capital of a legal entity, the transfer of goods during the reorganization of a legal entity, and others.

The article also states that the sale or gratuitous transfer of vouchers granting the right to receive goods or services is also recognized as turnover on the sale of such goods or services.

1.3 The VAT tax base

As stated in Article 247 of the TC, the tax base is determined by the taxpayer depending on the peculiarities of the realization of produced or purchased goods or services, according to the TC. When importing goods into the territory of Uzbekistan, the tax base is determined in accordance with the tax legislation and customs regulations.

To determine the tax base, revenue from the sale of goods or services received in cash or in kind, including payment in securities, is taken into account. If the proceeds or expenses are expressed in foreign currency, they are converted into the national currency at the exchange rate of the Central Bank of Uzbekistan on the date of the transaction.

The article also regulates situations where a contract between the parties provides for payment in national currency equivalent to a certain amount in foreign currency, and where the date of payment does not coincide with the date of the transaction, the difference in exchange rates should not be taken into account in determining the tax base. This difference shall be accounted for by the seller as income or expenses in accordance with the Tax Code.

Place of realization

From the above, it is clear that the object of VAT is the turnover on the realization of goods or services on the territory of Uzbekistan, as well as their import. Accordingly, in order to appear the obligation to pay VAT it is necessary to raise the object of taxation. For this purpose, it is necessary to determine in what cases the realization of goods and services is considered to be realized on the territory of the Republic of Uzbekistan.

As stated in Article 240 of the Tax Code, if the goods are in the territory of the Republic of Uzbekistan and as a result of the transaction do not leave its territory, as well as if the goods at the time of shipment or transportation were in the territory of the Republic of Uzbekistan, the place of sale is considered the territory of the Republic of Uzbekistan

As for services, Article 241 of the TC establishes that the place of sale of services is the territory of the Republic of Uzbekistan, provided that the purchasers of such services carry out activities or are located in the territory of the Republic of Uzbekistan. The place of sale of services is Uzbekistan if the purchaser of the service is actually present in this territory because of state registration of a legal entity (its branches or representative offices) or an individual. In the absence of state registration, the actual presence of the purchaser of services on the territory of the Republic of Uzbekistan is established on the basis of the place specified in the constituent documents of a legal entity, or its place of management, the location of its permanent establishment (if the services are purchased through this permanent establishment), the place of residence of an individual.

In addition, the place of realization is considered to be Uzbekistan, if:

Services related to real estate on the territory of Uzbekistan (e.g. construction works, repairs, landscaping, rent of real estate);
Services related to movable property rendered in Uzbekistan (e.g. installation, processing, repair of movable property);
A wide range of services in various spheres such as catering, tourism, hotel services, culture, sports, and education provided on the territory of Uzbekistan;
Transportation and shipping services, if the point of departure and/or destination are located in the territory of Uzbekistan;
Services related to the transportation of goods under the customs transit procedure in the territory of Uzbekistan;
Aircraft servicing at airports and in the airspace of Uzbekistan;
Organization of natural gas transportation by pipeline on the territory of Uzbekistan;
Services on short-term rent of vehicles on the territory of Uzbekistan;
Placement of advertisements on the territory of Uzbekistan in mass media;
Services in electronic form purchased by persons located or operating on the territory of Uzbekistan.

The Republic of Uzbekistan is not recognized as the place of sale of services if it does not meet the criteria established in the law. In addition, if the services are of auxiliary nature, their place of realization is considered to be the place of the main services.

Based on this it can be concluded that if the place of realization of goods and services is not considered to be the territory of Uzbekistan, there is no object of taxation in the context of VAT. Consequently, when goods are exported from the territory of Uzbekistan for realization, VAT is not payable either.

Trade turnover is taxed at a zero rate

3.1 Taxation of export and equivalent operations

In accordance with Article 260 of the Tax Code, taxation is made at a zero rate on the sale of:

Goods exported outside Uzbekistan under the export customs procedure;
Goods previously placed under the procedure of processing on the customs territory of Uzbekistan, as well as goods and processed products obtained as a result of this processing;
Supplies exported outside Uzbekistan, such as fuel and lubricants necessary for the operation of aircraft;
Services directly related to the transportation of goods under the customs transit regime through the territory of Uzbekistan;
Services related to international transportation.

Documents confirming the right to apply the zero tax rate should be submitted together with tax returns.

3.1 Confirmation of export operations.

Article 261 of the Tax Code establishes a list of documents that confirm the right to apply a zero tax rate. Such documents are:

Contract or its certified copy;
A cargo customs declaration with a stamp of the customs authority releasing the goods for export;
Shipping documents with a stamp of the customs authority at the checkpoint.

When goods are sold through a commission agent, a commission agreement or assignment between the commission agent and the commission agent is also required. Other documents approved by the Cabinet of Ministers of the Republic of Uzbekistan may be required for different types of activities.

3.2 Taxation of services related to international transportation

Article 263 also establishes taxation of various services related to international transportation. This applies to services related to international transportation of goods, services related to customs transit, and transportation of foreign goods through the territory of Uzbekistan, as well as services related to transportation of passengers, mail, and luggage if the departure or destination is outside the country. In addition, services provided at airports and in the airspace of Uzbekistan for servicing aircraft fall under the zero rate of taxation.

3.3 Specific cases of application of the zero rate

Article 264 of the Tax Code of Uzbekistan defines the cases of application of zero rate of taxation, in which the turnover on the sale of goods or services may be taxed by refund or refund of the tax paid. These cases include:

Acquisition by foreign diplomatic missions.

Foreign diplomatic and similar organizations may receive a tax refund when purchasing goods or services for the official and personal use of their personnel and family members.

Acquisition under a Production Sharing Agreement.

Taxpayers participating in activities under a Production Sharing Agreement may also benefit from a tax refund on the purchase of goods or services if the agreement provides for the application of a zero rate of taxation.

In order to apply the zero rate in accordance with the first paragraph of the article, it is required that the legislation of the relevant foreign state establishes a similar procedure for diplomatic missions of Uzbekistan and their personnel, or if such a provision is stipulated by an international treaty of Uzbekistan.

Also, the zero rate is applied to precious metals sold by producers of these metals to the authorized body on acquisition of precious metals.

Procedure for calculation and payment of taxes

In accordance with Article 265 of the TC, the amount of tax is calculated at the end of each tax period on the basis of the tax base of operations on the sale of goods (services), the dates of turnovers of which relate to the relevant tax period, taking into account all changes that increase or decrease the tax base in the relevant tax period.

As it was determined the realization of goods and services outside the Republic of Uzbekistan is subject to zero rate of VAT. Accordingly, the amount of tax paid is subject to refund in accordance with Article 266 of the TC.

4.1 VAT credit

According to Article 266 of the TC, a taxpayer has the right to reduce the amount of tax payable to the budget by offsetting the tax paid on goods or services actually received. For this purpose, certain conditions must be met:

The goods or services on which the tax was paid must be used within the taxpayer’s activities related to the production or sale of goods or rendering of services, turnovers on which are subject to taxation, including turnovers at a zero tax rate;
The taxpayer must have an invoice or other document issued by the supplier of the goods or service, where the amount of tax is separately indicated, and the supplier must be registered as a taxpayer;
In the case of the importation of goods, the tax must be paid to the budget;
Cases stipulated in other articles of the Tax Code must also be taken into account.

Additionally, when it comes to the export of goods taxed at a zero tax rate, a bank statement confirming payment by the foreign buyer is required. This means that the taxpayer must document the receipt of payment for exported goods.

Part three of Article 266 of the TC supplements the conditions for crediting tax paid when exporting goods taxed at a zero rate. It specifies that the amount of tax payable on such goods shall be taken as a credit regardless of the receipt of foreign currency proceeds to the taxpayer’s accounts in banks of Uzbekistan, provided that the taxpayer is categorized as a disciplined taxpayer that ensures timely receipt of foreign currency proceeds for the previous year and has no overdue receivables under export contracts.

Also, if the export of goods taxed at a zero rate is carried out through a commission agent, the tax is accepted for credit as a percentage of the amount of foreign currency proceeds received by the commission agent or the taxpayer.

It is worth mentioning that when refunding the amounts of tax paid to persons engaged in export and equivalent operations – in the part of the amount resulting from the application of the zero rates, the reproductive procedure of tax refund is applied, in this case, this process takes 7 days, in accordance with Article 274 of the Tax Code.

CONCLUSION

In conclusion, the following conclusions can be drawn:

Retail trade or provision of services by a resident of the Republic of Uzbekistan abroad is not subject to VAT, as for this purpose goods and services must be realized in Uzbekistan. Such activities are subject to a zero rate of VAT.
The following transactions are subject to the zero rate: export and equivalent operations; services related to international transportation; acquisitions by foreign diplomatic missions; and acquisitions under a Production Sharing Agreement.
VAT paid on goods and services actually received, the turnover of which is subject to zero rate taxation, is subject to offset. Export of goods is also subject to offset, if there is a bank statement confirming payment by a foreign buyer.
When goods and services are sold by a resident of Uzbekistan, VAT is payable in the country in which the goods and services were sold

VAT and services rendered by residents in foreign transactions

Related posts