De-Offshorization of the Economy Will Be Impossible without an Effective International Information Exchange System

The battle against tax base dispersion has become the focus of attention not only in Russia, but also G20 and the OECD.

Tax avoidance schemes are used in the main by big international holding companies with businesses based in different countries. These companies have opportunities for deriving profit fr om the existing differences in national tax legislations. Besides, Russia’s tax legislation lacks stipulations concerning some relevant notions and institutions that can prevent tax avoidance, for example the definitions of beneficiary ownership and residency of legal entities, or the rule on controlled foreign corporations (CFC).

Measures against tax avoidance must include those aimed at improving national tax legislations and elaborating international agreements, as well as the procedures for cooperation between tax agencies of different countries.  

Russia’s tax legislation lacks both the notion of ‘beneficiary ownership’ per se and its synonymous definitions applied in treaties against double taxation (for example, ‘actual owner of income (or interest, or dividends)’). This legal gap makes it possible for taxpayers to redistribute their incomes received fr om Russia-based sources in favor of their shareholders represented by the so-called shell corporations set up in jurisdictions that have signed beneficial tax agreements with Russia – even in those cases when a shell corporation is not a beneficiary owner of the relevant income.

At present those foreign organizations that receive no incomes fr om sources based in Russia, but are controlled by Russian beneficiaries, are not subject to taxation in Russia. By taking advantage of existing international agreements, such organizations may sometimes be allowed not to pay tax in full also at the source of their income. To avoid situations like this, residency must be determined by the place of a company’s incorporation and the place of its actual administration which, in its turn, is to be determined by applying a number of specific criteria (for example, the place where the board of directors holds its meetings; the place wh ere the managerial office is situated; the place wh ere accounting records are filed and archives are stored, etc.).

The inclusion, in the RF Tax Code, of rules concerning the taxation of incomes derived by companies owned by Russian citizens and (or) Russia-based legal entities makes it possible also to include, on an annual basis, the profit received by such foreign companies in their Russian owners’ tax bases.

Transfer pricing represents one of the most common methods of transferring profit to low-tax jurisdictions. In Russia, the rules for transfer pricing control were introduced in 2012, and so they have not yet been sufficiently tested by being applied in actual practice. However, even those governments that have a long experience of applying such rules do not always succeed in efficiently preventing profit outflow into tax havens.

International groups may use existing transfer pricing rules in order to file their profit declarations in another jurisdiction, away from the place wh ere their profit is actually being generated. Most often this can be achieved by means of ‘artificial’ distribution, between the companies within a given group, of their intangible and other assets, risks and capital, as well as by concluding ‘artificial’ deals between dependent entities (that is, deals of a type that do not normally take place between independent companies, or occur only rarely).

The existing under-capitalization rules need to be further elaborated. At present, they do not apply to debt owed by Russian organizations to their foreign ‘sister’ companies – a loophole that taxpayers take advantage of in order to avoid paying tax by means of distributing profit in the form of increased amount of interest in a companies with a favorable tax regime (thus also reducing the tax base of a Russia-based borrower company).

It will be impossible to successfully implement measures designed to prevent tax evasion schemes without an efficiently functioning system of international information exchange between tax agencies operating in different countries, as well as procedures ensuring prompt and transparent settlement of tax disputes arising between them.

S.S. Shatalova – Senior Researcher, RANEPA