VAT Recovery on Cross-Border Consulting Services

Under Belarusian VAT law (Tax Code, Article 33), the place of supply of services is determined by the location of the buyer for certain services, including consulting and marketing. Since Alpha is in Belarus, the place of supply is Belarus. Therefore, the services are subject to VAT in Belarus. The Lithuanian supplier is not registered in Belarus, so Alpha must act as a tax agent and withhold VAT from the payment (Article 33 and Article 92 of the Tax Code). The VAT rate is 20% (standard rate). The tax base is the contract price including VAT? Actually, under Belarusian law, when a foreign supplier does not include VAT, the tax agent must compute VAT on the contract price and remit it, but the amount is not added to the price; it is withheld from the payment. However, in practice, if the contract does not specify VAT, the tax agent must pay VAT at the expense of the buyer? The Tax Code states that the tax agent must compute VAT on the cost of services and pay it to the budget, and the amount is not subject to deduction unless the service is used for VATable activities. Alpha paid VAT on 20 April 2025, which is late because the VAT return for Q1 (due 20 April) should have included the import VAT. Actually, for imported services, the tax agent must file a VAT return and pay by the 20th of the month following the quarter. So Alpha's payment on 20 April was timely if the quarter ended 31 March. But Alpha did not file a return. Also, Alpha claimed input VAT deduction, which is allowed if the service is used for VATable activities and if the VAT was actually paid. However, the deduction should be claimed in the quarter when the VAT was paid and the service was received. The tax authority's argument about withholding is correct: Alpha should have withheld VAT from the payment to the Lithuanian firm, but instead paid it from its own funds. This is a violation. The treaty argument is irrelevant because the treaty does not exempt VAT; it only addresses income tax. Therefore, the assessment of additional VAT is likely incorrect if Alpha paid the correct amount, but the penalties for failure to withhold and failure to file may apply. However, the penalty for late payment may not apply if payment was timely. The 10% penalty for failure to withhold may be reduced if Alpha voluntarily corrected. The deductibility: Alpha can deduct the VAT if it paid it and the service is used for VATable activities, but since Alpha paid the VAT as a tax agent, it can claim deduction only if it has a VAT invoice? For imported services, the tax agent's VAT return serves as the document for deduction. So Alpha should be allowed to deduct. The tax authority's assessment of additional VAT is wrong if Alpha paid the correct VAT. But the penalty for failure to file a return is valid. The penalty for failure to withhold is also valid because Alpha did not withhold from the payment; it paid from its own funds, which is not the same. However, Alpha can argue that it acted as a tax agent by paying the VAT, but the law requires withholding from the payment to the foreign supplier. Since Alpha paid the full contract price without withholding, it violated the withholding requirement. Therefore, Alpha is liable for the 10% penalty. The 20% penalty for late payment may not apply if payment was on time. The case should be resolved by Alpha filing a corrected return, paying any additional VAT (none), and requesting waiver of penalties due to voluntary correction. The tax authority may also assess a penalty for failure to submit a VAT return. Overall, Alpha should have withheld VAT from the payment to the Lithuanian firm, filed a VAT return, and paid the VAT. It did pay but did not withhold or file. The penalties are partially justified.

The Belarus-Lithuania double tax treaty (based on the OECD Model) applies to taxes on income and capital, not to indirect taxes such as VAT. Article 2 of the treaty typically lists the taxes covered, which include taxes on income and capital, but not VAT. Therefore, the treaty does not exempt the Lithuanian consulting firm from Belarusian VAT. The treaty's business profits article (Article 7) provides that business profits of a Lithuanian enterprise are taxable only in Lithuania unless the enterprise has a permanent establishment in Belarus. However, this applies only to profit tax, not VAT. VAT is a transaction-based tax and is not covered by the treaty. Thus, Alpha's argument that the treaty exempts the service from VAT is incorrect. The treaty may, however, affect the withholding tax on payments to the Lithuanian firm if the payment were royalties or interest, but here it is a service fee, which is not subject to withholding tax under domestic law (only VAT). Therefore, the treaty does not apply to the VAT assessment. The tax authority correctly rejected the treaty argument.