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Tax-free Shopping Set for Russian Debut Prior to World Cup Kick-off

Pilot tax-free shopping programme for overseas visitors to be trialled in Moscow, St Petersburg and Sochi in 2018.

Photo: Moscow’s Petrovsky Passage: Pre-approved as tax-free shopping destination for the 2018 trial programme. (Shutterstock.com/Pavel L Photo and Video)
Moscow's Petrovsky Passage: Pre-approved as a tax-free shopping destination.
Photo: Moscow’s Petrovsky Passage: Pre-approved as a tax-free shopping destination. (Shutterstock.com/Pavel L Photo and Video)
Moscow's Petrovsky Passage: Pre-approved as a tax-free shopping destination.

Russia is to introduce tax-free shopping for overseas visitors for the first time next year. Although a final date for the implementation of this new policy has yet to be announced, it is thought likely that 1 January will mark its introduction, ensuring the system is fully bedded in prior to 14 June, the date the FIFA World Cup kicks off in Moscow, an event sure to see visitor numbers spike.

Russia is a relative newcomer to the tax-free shopping phenomenon. The practice was largely non-existent during the Soviet years, with duty-free outlets only opening in the country's airports in 1989, barely a year before the bloc dissolved. Since then, though, the country's residents have enthusiastically embraced the concept, with many of the newly rich of the 1990s and early 2000s fully exploiting the possibilities of the EU tax-free shopping system.

Even less affluent Russians were not immune to its allure, with many of those living close to the Finnish border frequently decamping to the neighbouring country's premium retail districts. So endemic did the practice become that many Finnish retailers tagged their goods in roubles, while also accepting the Russian currency in payment and offering on-the-spot tax rebates on eligible purchases.

Next year, though, will mark the first time a similar tourist-oriented tax-free shopping regime has operated within Russia. Initially, the scheme will be trialled in Moscow, St Petersburg and Sochi, a coastal city and the site of a number of World Cup fixtures next summer. Two international shopping-tax-refund businesses – Switzerland-headquartered Global Blue and Ireland's Premier Tax Free – have already been designated as the official processing agents by the Russian Federal Tax Authority.

With annual revenue and overall tax contributions said to be the deciding criteria, two major retail operators have been given the go-ahead to offer tax-free shopping facilities – the Bosco di Cilliegi Group and the Mercury Group. Moscow-headquartered Bosco di Cilliegi currently operates the GUM and Petrovsky Passage department stores, two of the Russian capital's most exclusive outlets, as well as the MorVokzal Shopping Mall, set within Sochi's key cruise terminal. Again based in the capital, the Mercury Group runs more than 100 upmarket outlets across Russia, including TSUM and DLT, two of the leading department stores in Moscow and St Petersburg, respectively.

In order to qualify for a refund on the 18% VAT currently payable in Russia, overseas visitors will be obliged to spend at least 10,000 roubles on qualifying items. With alcohol, tobacco products and perfumes excluded from the scheme, the bulk of the rebates are expected to relate to a range of high-end purchases, most notably furs, jewellery, designer fashion items, premium footwear, upmarket electronic products and luxury gifts.

It is anticipated that the scheme will have a significant uptake among the country's ever-growing number of overseas visitors. Over the winter 2016-17 period, TSUM and GUM both recorded a 40% growth in footfall, with the majority of this attributed to the tourism sector.

Although, technically, Ukraine is the largest source of Russia-bound tourists, this figure is said to be grossly over-stated on account of the high number of Ukrainians making personal or business visits to the country claiming tourist status in order to side-step immigration formalities. This leaves Chinese tourists as Russia's most significant group of visitors and sees them likely to be the prime beneficiaries of the new tax-back regime.

As an indication of the possible rebate sums involved, in the first nine months of 2017, Russia welcomed some 555,000 mainland visitors with individual visas, as well as a further 600,000 travelling on group visas. According to the Russian Travel Association, each mainland tourist then spent an average of US$530 a day during their stay.

In addition to mainland tourists, 2018 is expected to see a surge in visitors from many of the world's footballing nations, as the sport's most high-profile tournament is played out in 11 cities across Russia. While this will provide a huge boost for the country's economy overall, the tax-free eligible sectors are expected to be particular beneficiaries. With demand certain to soar, Hong Kong companies are well advised to look for supply opportunities in these high-end market segments.

In terms of the 2018 Russian Federal Budget, some 200 million roubles (approximately US$4 million) has been allocated to fund the pilot scheme. While the initial threshold requirements and operating procedures are expected to remain in place after 2019, when the scheme is implemented nationwide, the budget will inevitably undergo a substantial upwards revision.

Leonid Orlov, Moscow Consultant

Content provided by Picture: HKTDC Research
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