Размышления женщины о геополитике. Татьяна Александровна Югай

      Russia’s anti-offshore package

      Recently, Russia has joined international efforts in fighting offshore tax evasion. Though the country’s economy has been hemorrhaging due to offshore tax evasion since 1990s, Russia could not start combating tax havens unilaterally.

      According to Russia’s Bank for Foreign Trade (Vnesheconombank), offshore companies had become one of the main channels of capital flight from Russia abroad since the beginning of liberal economic reforms. Russian businesses have begun actively using offshore jurisdictions since the 1990^th. Most of Russian firms established offshore companies in European countries and especially in the Isle of Man (UK), Cyprus, Gibraltar, Ireland, Switzerland and Liechtenstein. Offshore structures of Russian business are, first of all, centers for concentration profits which are generated in Russia but they evade from paying taxes there and serve as reliable «vaults» for fortunes of Russian «oligarchs» received both by legal and criminal means71.

      The IMF highlights the main channels of illegal capital flight from Russia which «have included (i) under-reporting of export earnings, including through transfer pricing schemes; (ii) overstatement of import payments, including through fake import contracts for goods and services; (iii) fake advance import payments; and (iv) a variety of capital account transactions, often effected through the correspondent accounts of nonresident banks with Russian banks»72.

      The Global Financial Integrity report (GFI) traces illicit financial flows (IFF) from developing countries in 2002—2013. Unfortunately, Russia was among top countries hit by illegal flows. Three emerging markets – China with cumulative illicit financial flows of $1.4 trillion during 2002—2013, Russia with more $1 trillion and Mexico with $528 billion – were worst hit by IFF73. The GFI report (January, 2014) stated that «approximately 61% of Russia’s $403 billion in outward foreign direct investment (FDI) is held in tax havens and the amount of FDI coming into Russia is also dominated by tax havens. Approximately 53% of FDI invested in Russian companies comes from entities located in tax havens»74. At that, the GFI did not take into account the Netherlands, a low tax jurisdiction that is often used by tax evaders in various sophisticated schemes involving so-called prestigious jurisdictions along with classical offshores.

      The GFI study outlines a strong connection between illicit financial flows and use of offshore jurisdictions. The report states that offshore financial centers and banks in developed country are major points of absorption of illicit financial flows from emerging market and developing countries75.

      On December 12, 2013, in his annual address to the Federal Assembly, President Putin proposed to introduce amendments to the Russian legislation stipulating that the income of companies located in offshore jurisdictions will be taxed provided that those companies have not distributed income they receive to the Russian owners of the companies in question.

      Russia has recently introduced significant changes to the Tax Code adopting the so called «deoffshorization law». Federal Law №32-ФЗ «On Introducing Amendments to Parts 1 and 2 of the Tax Code of the Russian Federation (Regarding Taxation of Controlled Foreign Companies’ Profits and Foreign Organizations’ Income) «» is intended to restrict the use of offshore corporate and trust structures controlled by Russian taxpayers76.

      A rule concerning foreign controlled companies is included in tax legislation of many developed economies such as the USA, UK, Germany, Sweden, Japan, and Australia. According to international legal practice, a company registered in a foreign state, which belongs to shareholders, or a group of shareholders who are residents of another state may, under certain conditions, pay taxes in the country where its shareholders are resident. The tax treatment of CFCs introduced by the Russian law corresponds to the world practice.

      The objectives of the above-mentioned Law are the following:

      – to create the mechanism preventing use of low-tax jurisdictions for the purpose of enjoying unfair preferences and obtaining unjustified tax benefits;

      – to improve tax laws in terms of taxation and control of foreign organizations.

      The law is applied to both organizations and individuals participating in foreign companies or controlling them in any other way. According to the Law, from 1 January 2015, a Russian tax resident should pay income tax on undistributed profits of any foreign entity controlled by him, in proportion to such controlling stake or participation, at the rate of 13% (if an individual) or 20% (if a corporate entity).

      The Law introduces a number of new concepts such as «controlled foreign company», «controlling entity», «beneficial ownership», «place of effective management».

      According to the Law, a controlled foreign company (CFC) is a non-Russian entity which is not a tax resident in Russia; and is controlled by legal entities and/or individuals that are treated as Russian tax residents. The definition of a CFC covers pass-through entities (such as funds, trusts, partnerships and collective investment vehicles) which generate income for the benefit of their participants/settlors or beneficiaries, as well as corporate entities. The «beneficial ownership of income» test can be applied to a foreign company (including a CFC) to determine whether the company serves merely as a conduit function.

      The Law defines control over a corporate entity as exercising influence (or having the ability to exercise influence) over distribution of profits of that entity through direct or indirect participation in the capital of that entity (e.g. as a shareholder); and having rights under a shareholders’ agreement regulating the management of that entity, or other criteria.

      A controlling entity of a foreign organization is an individual or a legal entity:

      – whose participation interest in an organization is more than 25% (before 1 January 2016 – more than 50%), or

      – whose participation interest in an organization (for individuals along with their spouses and minor children) is more than 10%, if a direct and (or) indirect participation interest of all entities recognized as tax residents of Russia in this organization (for individuals along with their spouses and minor children) is more than 50%, or exercising