NIKOLAY MILOGOLOV AND AZAMAT BERBEROV: TURBULENCE IN THE WORLD OF INTERNATIONAL TAXATION: PRESENT AND FUTURE
International tax relations go through ambivalent period in their long history. Countries continue to uphold the position to maintain international tax competitiveness while agreements concluded of double tax evasion are subjected more often to criticism for “encouraging” tax base erosion.
Sovereign positions of developing countries achieve more influence in the international taxation, thus, putting at risk the "inviolability" of lined up tax rules. However, current international tax architecture does not promptly respond to new economic challenges associated with the ever-increasing geographical mobility of value-creating factors. A study conducted by RANEPA employees in 2018 were dedicated to these issues.
BEPS Plan - tax cooperation with an obvious effort.
Probably, one of the main reasons of “bifurcational” period is that the lined up system of international tax relations does not historically contain elements of multiple cooperation required for solution of actual issues, except for informational exchange and mutual assistance.
The OECD/G20 BESPS 2013 became the first serious attempt of state cooperation in view of combatting against tax base erosion. However, experts expressed their opinion already at the stage of BEPS establishment that BEPS plan on the whole will not have a dramatic impact on the mechanism of international tax competitiveness: there will be countries on the global map considering the value of “intermediary” tax benefits higher that some ways populist idea of justice when collecting tax revenues.
For the time being, this hypothesis has an empiric confirmation. Different states still compete for global investments. Financial centers and off-shores use more delicate approaches to counter measures against evasion and a great number of motivating tools in their legislation. Selection of such an approach of the instruments of international taxation is primary related to dependence of economies of intermediary countries on global flows of capital.
At the same time, developing and developed major states use stricter measures in the international taxation mainly intended to counteract tax base erosion rather than on attraction of investments. It is obvious that such significant differences in the international taxation aggravate issues related to tax base erosion and motivate international tax competitiveness, including dishonest one.
However, BEPS plan has lost the battle so far but not the war for fair distribution of tax base. Firstly, only three years passed since the period of active onset of BEPS plan, i.e. since publication of final reports in 2015). Secondly, efficacy of EC ATAD directives suggesting implementation of regulations of counteraction to tax evasion in the national and supranational law of EC countries is not clear yet.
Thirdly, BEPS plan already counteract successfully to the state use of IP-box special preferable tax regimes inconsistent with OECD principles. Therefore, to our opinion, patience and more time required to provide a final reply to a question whether BEPS plan managed to bring international tax policies really closer.
Conformity of Russian international tax policy with global “tax mode”.
Russia is an active participant of OECD tax agenda and the legislation include all modern methods of combat against trans-border tax evasion. At the same time, efficacy of anti-evasion measures cast serious doubts, for example, based on the outcome of “deoffshorization” of the country.
By all means, one may talk on any successful cases of the payback but analysis of the FDI structure based on data of Central Bank of the Russian Federation demonstrate the situation “as hard as the stone”, i.e. after adoption of deoffshorization legislation share of low tax and holding jurisdictions in the FDI structure has not practically changed. It proves that it is more profitable for companies to reorganize their corporate structures and adjust to new conditions but refrain from refusing off-shores and holding jurisdictions.
It has to be underlined that efficacy of national anti-evasion rules has a special meaning not only due to interest of Russian tax bodies in relation to return of capital but also in the context of the issue of tax base erosion. Thus, application of OECD methods to the situation in Russia related to assessment of tax base erosion demonstrates significant negative tendencies as:
- major part of FDI in /from Russia (about 2/3) is enacted via jurisdictions having evident gap between real and financial activity (FDI vs GDP);
- major part of payments for use of intellectual property from Russia (about 1/3) is enacted towards jurisdictions having significant gap in the scale of real activities on set up and development of intellectual property and royalties received by the country;
- major part of economic sectors of Russia (about 2/3) representing affiliated transnational companies pay lower profit taxes compared to Russian companies. However, probably, the mechanism of this tax erosion is not the interest charge because wide use of excessive debt for erosion of tax base in Russia by affiliated transnational companies has not been empirically confirmed.
Actually, these facts prove risks of unjustified low taxation of outbound dividends and royalties. Most of jurisdictions receiving Russian dividends and royalties are “conduit” countries using aggressive approaches for attraction of capital in their tax legislation. At the same time, these revenues will be taxed on low rates as they leave Russia due to agreements on avoidance of double taxation. This “collision” does not apparently meet sovereign interests of Russia.
Further improvement of Russian international tax policy
Obviously, elaboration of new trends in the Russian sphere of international tax system should correspond to common standards recognized in the tax community as well as sovereign goals of tax base protection and attraction of investments.
Firstly, Russian agreements on the avoidance of double taxation significantly restrict the right to tax income at the source due to the extremely low rates of tax withheld in Russia. Such a lined up position does not correspond to the instruments of international taxation typical for other
developing countries and leads to losses in the form of tax revenues.
In our opinion, in the medium term, it is advisable to shift the taxation rights in the concluded agreements towards the country of the source of income. To do this, tax rates withheld on passive income shall be increased. Such a shift of the paradigm would lead to a significant reduction of fiscal risks and administrative and methodological problems when status of an actual right to income has been confirmed when paying income to non-residents.
Secondly, rules determining tax residence of individuals valid in the Russian Federation are based on objective criteria of physical presence in Russia, which simplify administration of this rule and clarity in relation to its implementation.
However, these rules reduce motivation to re-register foreign assets to individuals in the context of taxation mechanism of the foreign companies under control, allowing, first of all, to reduce potential level of tax load (13% vs 20%) and secondly, abandon Russian residence by deliberate physical absence in the Russian Federation. Therefore, additional criteria required for recognition of an individual a resident of the Russian Federation have to be taken into consideration: thus, for instance, availability of a permanent housing in Russia along with his/her stay in the country for over 91 days a year.
Thirdly, current tax legislation of the Russian Federation does not foresee opportunities and clear mechanism of tax payment with regard to taxes of foreign companies earned as a result of sale of shares of the Russian companies when the amount of transaction normally constitutes a significant sum even nationwide. Having said that, Russian Federation does not practically have any effective instruments for income taxation when such a transaction is conducted by foreign company registered in the low tax or off-shore jurisdiction.
We suggest to suggest a provision for the Tax Code of the Russian Federation saying that Russian Federation has the right to tax profit of foreign companies in the form of capital gains if they sell assets of companies, Russian tax residents, unless otherwise stipulated by provisions of agreements. We suggest adopt direct declaration of such incomes of foreign companies to become the mechanism of tax payment. It will also be reasonable to make the relevant amendments to the concluded agreements.
Nikolay Milogolov, Candidate of economic sciences, Head of Tax Policy Research Department, Senior Researcher of the Financial Research Institute of the Ministry of Finance of the Russian Federation (FRI)
BEPS Plan - tax cooperation with an obvious effort.
Probably, one of the main reasons of “bifurcational” period is that the lined up system of international tax relations does not historically contain elements of multiple cooperation required for solution of actual issues, except for informational exchange and mutual assistance.
The OECD/G20 BESPS 2013 became the first serious attempt of state cooperation in view of combatting against tax base erosion. However, experts expressed their opinion already at the stage of BEPS establishment that BEPS plan on the whole will not have a dramatic impact on the mechanism of international tax competitiveness: there will be countries on the global map considering the value of “intermediary” tax benefits higher that some ways populist idea of justice when collecting tax revenues.
For the time being, this hypothesis has an empiric confirmation. Different states still compete for global investments. Financial centers and off-shores use more delicate approaches to counter measures against evasion and a great number of motivating tools in their legislation. Selection of such an approach of the instruments of international taxation is primary related to dependence of economies of intermediary countries on global flows of capital.
At the same time, developing and developed major states use stricter measures in the international taxation mainly intended to counteract tax base erosion rather than on attraction of investments. It is obvious that such significant differences in the international taxation aggravate issues related to tax base erosion and motivate international tax competitiveness, including dishonest one.
However, BEPS plan has lost the battle so far but not the war for fair distribution of tax base. Firstly, only three years passed since the period of active onset of BEPS plan, i.e. since publication of final reports in 2015). Secondly, efficacy of EC ATAD directives suggesting implementation of regulations of counteraction to tax evasion in the national and supranational law of EC countries is not clear yet.
Thirdly, BEPS plan already counteract successfully to the state use of IP-box special preferable tax regimes inconsistent with OECD principles. Therefore, to our opinion, patience and more time required to provide a final reply to a question whether BEPS plan managed to bring international tax policies really closer.
Conformity of Russian international tax policy with global “tax mode”.
Russia is an active participant of OECD tax agenda and the legislation include all modern methods of combat against trans-border tax evasion. At the same time, efficacy of anti-evasion measures cast serious doubts, for example, based on the outcome of “deoffshorization” of the country.
By all means, one may talk on any successful cases of the payback but analysis of the FDI structure based on data of Central Bank of the Russian Federation demonstrate the situation “as hard as the stone”, i.e. after adoption of deoffshorization legislation share of low tax and holding jurisdictions in the FDI structure has not practically changed. It proves that it is more profitable for companies to reorganize their corporate structures and adjust to new conditions but refrain from refusing off-shores and holding jurisdictions.
It has to be underlined that efficacy of national anti-evasion rules has a special meaning not only due to interest of Russian tax bodies in relation to return of capital but also in the context of the issue of tax base erosion. Thus, application of OECD methods to the situation in Russia related to assessment of tax base erosion demonstrates significant negative tendencies as:
- major part of FDI in /from Russia (about 2/3) is enacted via jurisdictions having evident gap between real and financial activity (FDI vs GDP);
- major part of payments for use of intellectual property from Russia (about 1/3) is enacted towards jurisdictions having significant gap in the scale of real activities on set up and development of intellectual property and royalties received by the country;
- major part of economic sectors of Russia (about 2/3) representing affiliated transnational companies pay lower profit taxes compared to Russian companies. However, probably, the mechanism of this tax erosion is not the interest charge because wide use of excessive debt for erosion of tax base in Russia by affiliated transnational companies has not been empirically confirmed.
Actually, these facts prove risks of unjustified low taxation of outbound dividends and royalties. Most of jurisdictions receiving Russian dividends and royalties are “conduit” countries using aggressive approaches for attraction of capital in their tax legislation. At the same time, these revenues will be taxed on low rates as they leave Russia due to agreements on avoidance of double taxation. This “collision” does not apparently meet sovereign interests of Russia.
Further improvement of Russian international tax policy
Obviously, elaboration of new trends in the Russian sphere of international tax system should correspond to common standards recognized in the tax community as well as sovereign goals of tax base protection and attraction of investments.
Firstly, Russian agreements on the avoidance of double taxation significantly restrict the right to tax income at the source due to the extremely low rates of tax withheld in Russia. Such a lined up position does not correspond to the instruments of international taxation typical for other
developing countries and leads to losses in the form of tax revenues.
In our opinion, in the medium term, it is advisable to shift the taxation rights in the concluded agreements towards the country of the source of income. To do this, tax rates withheld on passive income shall be increased. Such a shift of the paradigm would lead to a significant reduction of fiscal risks and administrative and methodological problems when status of an actual right to income has been confirmed when paying income to non-residents.
Secondly, rules determining tax residence of individuals valid in the Russian Federation are based on objective criteria of physical presence in Russia, which simplify administration of this rule and clarity in relation to its implementation.
However, these rules reduce motivation to re-register foreign assets to individuals in the context of taxation mechanism of the foreign companies under control, allowing, first of all, to reduce potential level of tax load (13% vs 20%) and secondly, abandon Russian residence by deliberate physical absence in the Russian Federation. Therefore, additional criteria required for recognition of an individual a resident of the Russian Federation have to be taken into consideration: thus, for instance, availability of a permanent housing in Russia along with his/her stay in the country for over 91 days a year.
Thirdly, current tax legislation of the Russian Federation does not foresee opportunities and clear mechanism of tax payment with regard to taxes of foreign companies earned as a result of sale of shares of the Russian companies when the amount of transaction normally constitutes a significant sum even nationwide. Having said that, Russian Federation does not practically have any effective instruments for income taxation when such a transaction is conducted by foreign company registered in the low tax or off-shore jurisdiction.
We suggest to suggest a provision for the Tax Code of the Russian Federation saying that Russian Federation has the right to tax profit of foreign companies in the form of capital gains if they sell assets of companies, Russian tax residents, unless otherwise stipulated by provisions of agreements. We suggest adopt direct declaration of such incomes of foreign companies to become the mechanism of tax payment. It will also be reasonable to make the relevant amendments to the concluded agreements.
Nikolay Milogolov, Candidate of economic sciences, Head of Tax Policy Research Department, Senior Researcher of the Financial Research Institute of the Ministry of Finance of the Russian Federation (FRI)