What are the specifics of applying the first part of the Tax Code of the Russian Federation in the current realities of the digital economy and electronic services, and what are the main difficulties that business entities face when complying with the Code's requirements in the virtual space?
The first part of the Tax Code of the Russian Federation was developed long before the emergence of digital technologies and e-commerce on the scale we see today. Therefore, its application in the context of the modern digital economy presents a number of specific challenges.
Specific Challenges
The main issue is that many provisions of the Code were created for a traditional offline economy, where transactions were conducted physically, goods were transported across borders, and taxes were paid in specific locations. However, today, most transactions are conducted online, businesses operate remotely, and services are provided virtually. This poses significant challenges for tax authorities and businesses alike.
For example, the tax system must account for the specific taxation of income generated through digital platforms and international services. This presents difficulties in determining the location of the sale of goods and services, as the company may be registered in one jurisdiction, the customer may be located in another, and the service may be provided through a third party or a digital platform.
Additionally, the administration of taxes using digital tools is a pressing issue. For instance, the need to identify taxpayers becomes more complex, especially when it comes to freelancers or self-employed individuals working through electronic platforms.
Key Challenges for Businesses
For businesses operating in a virtual environment, the most common challenges include:
- Determining the tax base: Previously, income was calculated based on physical goods and services, but now it must be adjusted to account for income from digital content, software, and cloud services. Determining the taxable entity has become more challenging.
- Tax reporting: Electronic transactions require constant integration with government reporting systems, which requires significant technical resources and expertise.
- International tax obligations: When businesses operate internationally, they must comply with the requirements of multiple jurisdictions, which complicates tax accounting and increases the risk of penalties.
- VAT administration: VAT compliance has become a key issue, especially when providing services remotely, as different countries have their own taxation rules for the import of digital products.