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'De-offshorisation' a key matter in Russian tax reform
The OECD states that modern international tax planning has become a threat to the world wide economy given the scale of which so many companies are using offshore instruments to avoid paying tax. Taxand Russia discusses 'offshorisation' and how the Government plans on tackling the issue.
On 12 December 2013 in his annual address to the Federal Assembly, Russia’s President Vladimir Putin stated that amendments needed to be made to Russian legislation to stipulate that the income of companies located in offshore jurisdictions will be taxed if those companies do not distribute income they receive to the Russian owners of the companies in question. On 9 January 2014, Dmitry Medvedev gave an Instruction (resolution No. DM-P13-9589 dated 31 December 2013) for the appropriate draft federal law to be prepared and submitted to the Russian Government before 19 May 2014. This draft law will implement a set of measures concerning ‘de-offshorisation’ of the economy.
Among the measures which the Government have already announced are:
- Applying profit tax to the income of foreign companies with Russian beneficial owners (the rule concerning foreign-controlled companies), if they do not pay dividends in Russia
- Imposing a ban on state support being provided to companies registered in offshore jurisdictions
- Imposing a ban on state or municipal contracts being entered into with companies incorporated in an offshore jurisdiction
Besides classic offshore jurisdictions (countries where there is no tax on profit, turnover or capital income from international operations) it is extremely common for models under which capital is withdrawn from the economy to feature low-tax jurisdictions which offer significant tax incentives for certain types of transactions and have double taxation treaties with Russia. Among these countries are not just Cyprus, but also The Netherlands, Luxembourg, Austria and many others. These countries are often used as states through which capital may be channelled to offshore jurisdictions. These transition countries should be treated on the same footing as offshore jurisdictions and placed in the group of countries in relation to which the rules on foreign controlled companies will apply.
If such rules are adopted, international double taxation treaties may need to be amended. This is a rather more complex process since it is beyond the control of Russia’s legislature.
Also published in Thomson Reuters' Taxnet Pro, 24 February 2014
In order for the Russian Government to combat 'offshorisation' and to fight effectively against capital flight, at the same time as rules are adopted regarding foreign-controlled companies it will be necessary to:
- Introduce the institution of tax residency for legal entities
- Update the concept of beneficial owner
- Improve international double taxation treaties
- Construct an effective system for exchanging information with foreign tax authorities
- Arrange for international support in levying taxes
- Improve the administration of and increase control over transfer pricing