In December, in his annual address to the Federal Assembly, Vladimir Putin announced measures to ‘deoffshorize’ the Russian economy. It is beyond doubt that significant public resources will be allocated to ensure that the Russian President’s wishes become reality.
Radical changes in tax legislation in this area could be in effect as early as 2015. It is hard to forecast now exactly what form these may take, but it is already possible to make out general trends that will have to be considered and discussed.
Firstly, Russia, like other countries, is making rapid strides towards greater transparency in the taxation of international transactions and holding structures. In the very near future, it is proposed to ratify the 1998 Convention of the Council of Europe and the OECD on mutual assistance in tax matters. There are already 64 signatories to the Convention, and it extends to the UK’s overseas territories. It provides not only for ‘standard’ information to be supplied on request, but for information automatically to be exchanged, for one-off (“parallel”) and joint tax audits to be held involving tax authorities from two or several countries, and for assistance to be given in recovering taxes.
Secondly, amendments to the Tax Code are under discussion, and a definition may be brought in of a legal entity’s tax residency. Currently, residency and the regime for taxing legal entities are generally based on a single factor – the place of establishment (state registration) of the legal entity. Russia’s double taxation treaties with other countries (including the Netherlands, Luxembourg and Cyprus) also contain other indicators of a legal entity’s residency but in practice these are applied extremely rarely. However, it is specifically a legal entity’s residency that determines whether or not its "worldwide income" (i.e. income earned outside Russia) is taxable, and the formal non-residency of offshore companies does not now allow their income to be taxed abroad.
Thirdly, a definition of a controlled foreign company (CFC) will be introduced into the Tax Code along with a regime for taxing CFCs. The notion of a CFC presupposes that the undistributed profit of a foreign subsidiary will be taxed as income of the Russian parent company. It appears that this notion should not be applied in Russia in the opposite situation, i.e. when holding structures have a head office abroad. Though it cannot be ruled out that the tax authorities will aim to tax the undistributed profit of such parent companies by showing that they are controlled in Russia not just in fact but also in legal terms (by the ultimate beneficial owner through trust companies or in another way).
Probably these risks will have a greater effect on holding structures in which foreign companies have an obvious formal involvement. It may be proved that the role of a particular company in the holding structure is purely formal through a lack of assets or staff (or these being clearly disproportionate to the stated purpose of the company’s activity), as well as through the lack of any operations except for receiving and transferring money, important decisions actually being taken by another person, there being no profit or some kind of market margin accrued in connection with the activities undertaken and so on.
At the same time, such a significant change in the law seems to affect almost all international corporations acting through Russian-based companies. To put it mildly, the level of legal literacy, professionalism and competence in international tax matters in this country leaves much to be desired, and this certainly means that basic concepts and rules of law are interpreted in an arbitrary manner.
The bottom line is that our country is only at the start of the path. Taxpayers, tax inspectors and courts all need more time to develop the expertise they need, to study experience in other countries, and to devise unified approaches to matters that in Europe and the USA have been discussed and tested out over decades of practice.
The article was first published in IFLR Magazine.