In Russia, information exchange with offshores to start on 2018

In Russia, information exchange with offshores to start on 2018

The ’anti-offshore’ policy implemented by the Russian authorities since 2014 against the large businesses caused a negative effect. Experts believe that many Russian billionaires keep their businesses in Russia while paying taxes in other countries with looser fiscal systems. This practice may change in 2018 when the intergovernmental convention on the global exchange of financial information comes into force.

It is not yet time to focus on the issues of the income concealed by the large businesses in the foreign ’tax havens’, reckons the Finance and Economy manager of the Institute for modern development, Nikita Maslennikov: «Three years have passed since the adoption of the so-called ’anti-offshore’ legislation. This document pushed the businessmen to restructure their assets under the foreign jurisdictions. Although one cannot claim that certain businessmen began to reconstruct internal processes in order to intentionally avoid the fiscal payments», the expert observes.

Indeed, according to the CBR, net capital outflow from Russia almost doubled in the first trimester of 2017 reaching USD 15.4 bln, compared to the same period last year. As the deputy head of the Ministry of Finance declared, this year, the capital outflow is estimated at 1–1,5% of GDP. Under the current budget, this translates onto USD 18 bln to 27 bln. Capital influx to Russia will not be restored before 2023, according to the estimates of the Russian Ministry of Economic Development.

There is, however, no reason for the businessmen to loosen up: there are new difficulties in the pipeline. Just over a year ago the Russian authorities approved of the country’s accession to International agreement on the automatic exchange of information. It was signed by many an offshore territory: Bermuda, Cayman Islands and the British Virgin Islands, Costa Rica, the Isle of Man, Guernsey, Gibraltar and Jersey. The exchange will start in 2018. It presumes the disclosure of data on the investment income, interest, dividends and account balances, income derived from the sale of shares, interest on deposit, the income on bonds and payments under the insurance contracts.

On top of this, the cooperating tax authorities get access to information on individuals, the actual owners of the companies. «Should the new tool function as expected, tax evasion and hiding earnings in offshores loses sense. The Russian tax authorities will have an additional reason to tighten control», the expert observes.

However, according to lawyers, the work in this area is only accomplished by half. Among other issues, the intergovernmental memorandum does not contain any amendments compelling banks to provide information on the accounts of non-residents to the tax authorities. Russia is yet to name the countries which it would exchange the data with, while the exchange is to be stipulated by mutual consent and «given a common interest». The signatories of the treaty express a general intention to comply (including Panama authorities that declared their desire to participate). The document, however, is yet to be signed in hard copy.

Barely half a year onwards, Maslennikov believes, after obtaining the relevant information from the signatory states, the Russian tax authorities will be able to charge large Russian businesses with the penalties comparable to the fiscal claims to Yukos.

The issue should not be oversimplified. Clearly, hardly every Russian citizen would be a subject to this agreement. The memorandum is based on the tax residency, not on nationality. Any businessman or any Russian citizen who spends over 183 days of the tax year outside the home country is no longer a tax resident in this country. Therefore, he or she would not be subject to the exchange of information. «Besides, an important detail to retain is that the agreement does not assume transversal or universal data exchange. According to the official listing, Russia has no similar agreements signed with any other states or territories at the moment», the expert affirms.

At the same time, Maslennikov believes that today it is no harder to hide capital in Russia than it is in any other country, including the offshore territories. The annual turnover of the domestic shadow economy is estimated at USD 300 bln. «The Russian economy is far from being transparent. The share capital of companies is only superficially incontestable. However, the actual owners of these assets are ultimately hidden», the expert notes.

«According to the official figures, only a few businessmen recurred to the proposed tax amnesty. Although, the Panama papers provide evidence that thousands of Russians registered their offshore companies. The numbers of those who decided to resort to tax amnesty and those who actually own the offshore companies are incomparable. Businessmen express their discomfort in the Russian business environment.

An offshore may be used in two ways. The first is to manage one’s assets and property, no matter, what the property is, and how it came under the current ownership. The second way is to hide the final beneficiary.

The western practices and legislative initiatives in the USA and the EU are focused on fighting against the first type of offshores, those that allow saving on taxes. The Russian legislation is focused on revealing the end beneficiaries. This initiative was not a success. The Russian entrepreneurs hold no guarantees that they would remain in possession of their businesses should they use the tax amnesty and open the list of beneficiaries. They took steps to avoid the tax burden in Russia». Russian businessmen refuse to pay taxes in Russia, and the business elite prefers to drop tax residency in the Russian Federation.

The Russian business elite tries to offset the losses following the introduction in Russia of the anti-offshore legislation adopted by the authorities in 2014, compelling all Russian residents to declare their offshore assets. «As a result, a whole portion of large-scale assets got accumulated in the hands of Russian businessmen with a semi-exiled status. They make money in Russia but are not tax residents there as they spend less than 183 days per year in the RF. One might condemn these practices, accusing the businessmen of a lack of patriotism. All the same, the facts demonstrate that the Russian budget lost a part of its tax revenues», the expert says.

«I kept my tax resident status in Russia. Meanwhile, many Russian billionaires have changed their tax residence because of the anti-offshore legislation, but have kept a part of their investments in Russia», the co-owner of Norilsk Nickel Vladimir Potanin told the press.


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