July brings corrections into economy

HomeNewsJuly brings corrections into economy

New taxation treaties of Cyprus

The Cypriot authorities started the summer of 2017 by signing two new double taxation treaties: with Luxembourg and Barbados. Both treaties are based on the principles of the OECD frame convention.

The Cyprus — Luxembourg treaty was signed in Nicosia. Incidentally, previously Cyprus remained the only EU country that had no double taxation treaty signed with Luxembourg. Today, Luxembourg has treaties with all the EU members.

The agreement with Luxembourg provides for the following rates for taxing the repatriated income:

  • Taxation of income on dividends is 0% (if the recipient owns no less than 10% in the capital of the disbursing company) and 5% in all other cases;
  • Taxation of income on interest is 0%;
  • Taxation of income on royalties is 0% (provided that the recipient of royalty is also the beneficial owner).

At the same time, the treaty between Cyprus and Barbados, also signed earlier this summer, establishes a 0%-rate of taxation on repatriation of all types of income (dividends, interest and royalty).

Both treaties are expected to go through the process of ratification before the end of 2017 and come into force as of January 1, 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 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 to save 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.

BVI launches a Register of Beneficiaries

As of June 30, 2017 the British Virgin Islands implemented the Beneficial Ownership Secure Search System Act, which introduces a centralised system of collection and storage of information on the beneficial owners of the BVI-registered companies.

The new law compels the local registration agents to collect and store information about the beneficiaries of each one of their clients in a special RA database. Information from all such databases will then be fed into a centralised secure search engine nicknamed BOSSs (Beneficial Ownership Secure Search System).

What information is included in the BOSSs system?

1. Main details about a legal entity, specifically:

  • company name, including alternatives (if any);
  • date of incorporation (registration);
  • registration number;
  • legal address;
  • current status (active, under liquidation, liquidated).

2. Information on the beneficiary (-ies) of the legal entity:

  • full name;
  • place of residence (address);
  • date of birth;
  • nationality.

It is necessary to notify the registration agent of any changes in a 15-day period who, in turn, has to enter the changes in the database.

Who gets access to the BOSSs system? The BOSSs system is non-public. Only the BVI competent authorities may conduct the search:

  • The BVI Financial Investigation Agency;
  • The BVI Financial Services Commission;
  • The BVI International Tax Authority;
  • BVI’s General Attorney’s office.

Besides, an access to the register of beneficiaries will be open to Great Britain, since all the British overseas territories and the possessions of the crown (including the BVO) committed to cooperation with their mother country in these questions.

There is a 24-hour delay for a response to the request of data on a specific legal entity and its beneficiaries, with a 1-hour delay in urgent cases.

The main conclusion over the new BVO register of beneficiaries is that its data will not automatically become publicly available. Therefore, all the legal innovations described here are not going to influence current level of confidentiality when it comes to the company ownership in this jurisdiction. The obligation for the companies to provide full data on the beneficiaries to the registration agent was introduced in the BVO back in January, 2016.

The NBU upgrades rules for foreign investments

The National Bank of Ukraine continues to reform the inland fiscal regulation following the Concept published at the end of last year. The latest portion of changes was concerned with the procedure for legal entities to invest abroad.

Companies were given a possibility to invest an equivalent of up to USD 2 mln in one year under the same license. Up until recently the limit on such operations was set at an equivalent of USD 50,000 a month.

At the same time, the NBU set a range of requirements for obtaining the license depending on the size of the invested amount:

1. When the amount of the intended foreign investment is less than USD 50,000, the simplified requirements for the documents necessary to obtain a license apply. Apart from the standard request for a license, it would be sufficient to provide a few additional documents depending on the type of investment (an investment implementation contract, papers for the registration of an investment object, such as real estate, etc).

2. When the amount of a foreign investment is over an equivalent of USD 50,000, a more elaborate list of documents would be necessary, namely:

  • the documents explaining viability sense of the investment transaction,
  • the documents providing transparency for the sources of the implemented investment,
  • the documents confirming information on the ultimate beneficiaries of the operation.

The NBU management is certain that this type of approach should improve conditions for any foreign economic activity for the Ukrainian enterprises, while reducing abuse of the licenses for an illegal capital drain out of Ukraine.

The described rules were approved and came into force on June 12, 2017.

Gazprom to fight for the market

Gazprom gears up for a fight with the American competitors. The US authorities set out a highly ambitious plan for trade in energy carriers. The White House declared an intention to earn billions on trade in the liquefied natural gas (LNG), and this will inevitably lead to collision between the US companies and the Russian Gazprom. This might be the underlying reason for the new anti-Russia sanctions reviewed in Congress in draft form.

The USA plan to move onto the global LNG market, as declared the White House administration. «As a pure importer (of energy resources) since 1953, the USA might become a net exporter as soon as 2020», the White House message reads. «The gas revolution in the United States will result in this country becoming a global player on the LNG market», while the US LNG export might «increase the revenue of the federal budget by USD 118 billion» between 2016 and 2040«, the document affirms.

Previously, the United States were the largest LNG importer. However as a result of the so-called ’shale gas revolution’ (revival of the old oil and gas wells with the help of new technologies) the USA have sharply increased domestic extraction of natural gas. «The country already gave up on the gas imports, there is only a small market with Canada. Today the US are LNG exporters», the leading expert of the Russian National Energy Security Fund (NESF) Igor Yushkov observes.

So far export volumes are scanty. According to BP, the US exported 4,4 billion cubic metres of gas in 2016. In three years United States intend to increase the LNG export to nearly 80 bln cubic metres per year. The question is who will they sell to all this natural gas?

«It is a fact now: the Americans get out on the world gas market. At the same time they use political instruments to clear the passage for themselves in this market. And it is quite disgraceful», Yushkov reckons.

In 2016 the main shipments of gas went to the South America due to a short transport time and high base prices. However, it is unlikely that this market would grow, so US took interest in the Asian and the European markets.

However, the expansion to Europe is so far tampered by the rather low prices on gas in this region. «The Americans want to ship their gas to Europe, but would only be able to do so if the prices on the European market grow. The supplier with the lowest offer is Gazprom, therefore, according to the American logic, it should be removed from this market. Therefore the new sanctions against Russia discussed by the Congress stipulate that the USA forbid everyone to assist in building pipelines, such as, in particular, the „Nord Stream—2“. Along with the traditional reason of decreasing the dependency of the EU on Gazprom, this time some cynical commercial grounds are quoted. The United States oppose „Nord Stream—2“ as they want to supply gas to Europe, since this would expand the LNG production in the US and increase number of jobs», Yushkov says.

Should Gazprom be cast out of the European market, the EU countries will not only suffer from the increased cost of gas, this key energy carrier playing a major role in production of electricity. «With the price of gas going up all the goods made in Europe become more pricey. The European companies would become less competitive next to the American producers who use the electricity derived from the cheap slate gas. Then it should be easier for the US companies to enter the European market», the expert argues.

Another market for export of the American LNG is Asia, where the main competitors are Qatar and Australia. However, fighting against the Australian LNG is simpler. «Australians extract gas either from the deep-water shelf (and then liquefy it), or by extorting methane from coal layers. Cost of production of gas there is the highest in the world», Yushkov explains.

It might be more difficult to oust Qatar, and, once again, the political pressure may be necessary. «Perhaps, it is not by pure chance that following the visit of the US President Donald Trump to Saudi Arabia, the Saudis filed a claim against Qatar. Problems in Qatar mean a drop in supply of LNG to the Asian markets. This will result in growth of prices and allow more space for supply of the US LNG there», Yushkov argues.

Russia is also present at the Asian LNG market. «This is the reason for the US sanctions imposed against the South-Kirinsky field which was to become a resource base for the third stage of the Sakhalin—2 project. They blocked it», the expert reminds.

However, for the next few years Gazprom has nothing fear: a drop in the share of the European market is unlikely, NESF senior analyst Roman Tkachuk affirms. «The output of the American LNG terminals is still small, by 2020 it is planned to reach a capacity of 7.9 bln cubic meters which is less than half of what Gazprom deliveries to Europe. It wouldn’t be enough to meet the European demand», Tkachuk says.

The United States, however, have good chances to take over a significant share of the Asian market due to a higher LNG supply flexibility. «The situation might evolve once Gazprom implements the Force of Siberia project. The Pacific rim states would have cheaper piped gas to buy. So far, the project is staggering as Gazprom seeks to ensure its sales, while the Asian markets are traditionally reluctant to accept this sort of terms», the expert adds.