October breaking news: offshore companies still in demand are not about to disappear

HomeNewsOctober breaking news: offshore companies still in demand are not about to disappear

EC president announces intense changes within the EU

In a recent speech, the EC President Jean-Claude Juncker called for a strengthening of the EU, increasing its effectiveness despite the most serious challenges. In his opinion, there is good ground for this: the economic situation has improved, there is growth observed in all the member states, while the unemployment rates are at a nine-year low.

He then outlined five priorities for the EU:

  • Trade growth. New free trade deals with Mexico, Latin American states, Australia, New Zealand. Open negotiations, providing publication of negotiating positions. Protection of strategic interests, providing for a comprehensive audit of deals on acquisition of the key EU companies by the foreign actors.
  • Industry support. The automotive industry must seek solutions for the future, instead of deceiving consumers.
  • Europe should become a global leader in the fight against climate change.
  • Protection of EU citizens against the cyberthreats. A possible creation of the European Agency for Cybersecurity.
  • Migration. «Italy saves the honour of Europe in the Mediterranean.» Better treatment of refugees in Libya, a continued programme of resettlement in Europe, improved work on the return of migrants to their countries of origin.

He carried on to present a programme more than ambitious. It offers unexpected solutions to the key internal challenges of recent years (such as the rise of Eurosceptics, the Brexit referendum, discord between the EU members). Counter to the principle of «lesser Europe», which implied a pullback from the EU’s excessive unifying role and its tendency to overregulate, towards a modest role focused on efficiency, Juncker proposed a significant strengthening and centralisation of the European Union.

Jean-Claude Juncker advocated for the universal social and financial guarantees for European workers, the uniform quality of food in different countries, the full inclusion of Bulgaria, Romania and Croatia into the Schengen zone, all countries joining the banking union, the shift from a unanimous decision-making to the principle of a qualified majority (specifically, in taxation and foreign policy fields), the creation of a European intelligence unit (to combat terrorism). The Western Balkans, he said, should be given a clear prospect of joining the EU. By 2025, the European Defence Union must be in full operation.

His proposals on the positioning of euro as a universal single EU currency may be perceived as very daring. The change would include a creation of the post of the European Commissioner for Economy and Finance (in his view it should be the VP of the European Commission and the head of the Eurogroup), a merge of the posts of the President of the European Council and the European Commission («It is simpler to guide Europe when one single captain navigates the ship»).

The statement by Jean-Claude Juncker received a positive feedback from the leaders of France, Germany, Spain, the Netherlands and several other countries. At the same time, as the well-known British Eurosceptic Nigel Faraj commented, «The EU has not derived any lessons from Brexit».

Offshores shroud global inequality

Tax havens account for 10% of the global GDP.

The assets hidden in offshore accounts amount to 10% of the World’s GDP, according to a report by the National Bureau of Economic Research (NBER). The rate varies considerably, from the Scandinavian countries where it is an matter of a small proportion of the GDP, to Russia, Persian gulf and Latin America where it reaches 60% of the GDP. Once the offshore assets are accounted for, this dramatically changes the picture of social stratification based on national tax data, experts say.

The volume of assets held in offshores has grown significantly over the past 40 years, while technology and innovation made it easier to send money abroad, researchers observe in the report entitled «Who Owns Wealth in Tax Harbours?» They estimate that about 8% of financial wealth of all households is accumulated in tax havens, that is USD 5.6 trillion, or 10% of the world’s GDP.

The authors name Switzerland as a leader in off-shore holdings: in 2006–2007, it accounted for 45% to 50% of all the offshore assets. In recent years, due to the global fight against the off-shore firms and the economic expansion the Asian tigers, this indicator was reduced down to 30%. The second most important financial off-shore hub today is Hong Kong: since the global financial crisis, the volume of offshore assets there increased six-fold.

As of 2016, a number of jurisdictions, including Switzerland, Luxembourg, the Channel Islands and Hong Kong, began to disclose information on the assets held in their banks by the citizens of different countries. Additional information fell into researchers’ hands following a number of leaks, such as the Panama Papers. The analysts admit, however, that these figures may not be considered as complete, since they take into account only the cash deposits, but not securities, bonds and shares of mutual funds. On top of this, the use of fly-by-night companies registered, for instance, in the BVO or Panama, a widespread phenomenon since mid-2000s, makes it difficult to determine the origin of the assets.

As the report highlights, the volume of offshore assets in different countries varies significantly. The least amount of cash is hidden by the citizens of Scandinavian countries: no more than 2% of the GDP. For Central Europe this indicator reaches 15%, while in the Russian Federation, the Persian Gulf countries and the Latin American states it is up to 60% of the GDP. Meanwhile, the amount of offshore assets does not depend on tax or governance systems. The lowest rates are shown by both low-tax markets such as the South Korea and Japan, and the most taxed countries in the world, such as Denmark and Norway. Top of the list is equally occupied by both autocracies and traditional democracies.

Important factors are the geographical proximity to tax havens and the specific national development trajectories, experts affirm. Accounting for offshore statistics fundamentally changes the picture of global inequality, traditionally based on tax data, the researchers emphasize. Some 80% of the offshore assets are owned by 0.1% of the richest households, while 50% are held by the top 0.01%. In the UK, Spain and France, 30 to 40% of the savings of this richest segment are stored away in offshores.

In Russia, where the growth of O&G revenues in the 2000s was accompanied by a sharp increase in offshore assets, they account for about 60% of the wealth. In China, by contrast, the rate does not exceed 2.3% of the GDP, although Hong Kong’s sharp rise as a financial centre since 2007 may serve as an indicator of the Chinese offshore assets. In general, despite a step back in practice of banking secrecy, statistics remain extremely opaque, making it difficult to assess the global wealth.

Cyprus earns over €4 bln selling EU passports

Cyprus received more than EUR 4 billion in proceeds from EU passports sales.

The Cyprus authorities have received more than EUR 4 billion since 2013 for the issue of local passports in exchange for investment.

According to the Western press, wealthy citizens from Russia and Ukraine are among those who obtained the right to live and work in Europe. Some European media say that hundreds of citizens have received the EU passports through shady disputed schemes. «The Russian oligarchs with billions as well as the members of the Ukrainian elite, accused of corruption,» also received passports in exchange for cash investments.

In 2016, more than 400 passports were issued under this scheme. At the same time, a number of European media keep silence over the fact that other EU countries (such as Hungary, Malta, and the Czech Republic), along with some bigger players, issue European passports under similar legal provisions.

Russian business wants offshores and cybercurrency

Putin’s annual meeting with business: what did the businessmen ask for?

Mitigating the tax policy of the Russian Federation, especially with regard to the offshore legislation, will help Russia overcome a new round of US sanctions. This is what the top Russian entrepreneurs tried to convince the President Vladimir Putin during a recent annual meeting. Other proposals to minimize damage from external pressures included the legalisation of the cybercash, which, incidentally, was immediately blocked by the RCB.

«Despite certain limitations, including those from the outside, the economy of Russia is stabilising, and as you know, it has quite obviously already emerged from the recession and is gaining momentum,» President Putin affirmed at the meeting with the Russian business reps last month. Among those invited to Kremlin are some 50 businessmen: the heads of public corporations, banks, business associations, as well as the representatives of government’s financial department.

«The meeting as a whole was devoted to the survival of the big business should the US introduce new sanctions against Russia, and to what needs to be done to minimize the damage,» one of the participants commented.

The response to the unfriendly sanctions policy of the Western bloc might be a softening of the tax policy in Russia, as well as more lenient legislation on the controlled foreign companies (CFC), the Russian businessmen propose.

To recap, as of January 1, 2015 the law compels the Russian company owners to notify the tax authorities when a foreign entity is registered and its offshore share exceeds 10% of total capital. Another case overseen is a cross-border transfer of assets, including the ones under the management of a blind trust. This is not only the case of the companies located in offshore zones, but also those in any other jurisdictions. Control over such company is assumed by an individual or a legal entity with a share of at least 25%. The Russian owners of such companies must provide a financial report once the revenues hit a certain threshold. In 2017, this threshold was reduced to 10 mln Roubles (EUR 150,000), whereas in 2016 it was set at 30 mln Roubles.

«Anti-offshore norms were adopted as early as 2014 and entered into force in 2015. This is the point at which the fight against offshores started. These norms created a new foundation for the use of offshore companies by the Russian businesses,» lawyers comment. While previously any foreign activity remained under the European jurisdiction, today «any operations deemed de facto ’Russian’ are taxed in Russia,» the lawyers affirm. «Naturally, this had an impact on the Russian businesses». The only way to bypass the implementation of the anti-offshore legislation is to avoid the tax residency in Russia. This means spending less than 183 days in the country within the 12-month tax year.

In March 2017, the State Duma adopted amendments to the Tax Code that exempt individuals, who became subjects to sanctions, from the obligation of tax residency irrespective of the actual period of their annual presence in Russia. For this to work, they must notify the tax authorities of tax residency under a foreign constituency. According to the comments by United Russia majority party that introduced the amendment, this norm is meant to harmonise the differences in tax residency in Russia and in other countries, and not to write off taxes of the businessmen who found themselves under the anti-offshore measures.

Those present at the meeting with the Russian President, generally supported the latest legislative initiatives on the CFCs. Last month the Russian Ministry of Finance proposed to clarify the rules for the tax on profits of controlled foreign companies. The bill on the amendments to the Tax Code is in pipeline at the State Duma. The main changes, inter alia, include the rules of forward-dating of a CFC losses for a 3-year period prior to 2015. Besides, there is a plan to soften taxes on the CFC financial operations (including assets held in securities). The Ministry of Finance also proposes to revise a few more procedures for calculating the financial performance of these companies and the deadlines for submitting documents to comply to the terms of the tax exemption of the CFC profits within the framework of a multi-level ownership schemes used in the Russian Federation.

At the meeting with Putin, the businessmen also proposed to further reform the inheritance law.

Among other propositions was the legalisation of the cyber currency: several businessmen upheld the idea. However, the head of the Central Bank, Elvira Nabiullina, also present at the meeting, opted against. She argued that this development would lead to a loss of state control over cash flows from abroad.

Some propositions have become traditional over time, such as the growth of foreign investment, and the need to increase the share of the SMEs. In his turn, the president of the Russian Union of Industrialists and Entrepreneurs (the ’RSPP’) Alexander Shokhin proposed to re-establish the working group for monitoring of the law enforcement activities, since, despite a number of initiatives introduced to fight criminality with the help of civil and criminal codes, the law enforcement still keeps a low standard.

Judging by the positive feedback of the participants following the meeting, the authorities were sensitive to the requests by the Russian business, and promised to take their propositions into account.

China plans a powerful blow against the US dollar

Far-reaching consequences

China has it in the immediate plans to start crude oil futures trading denominated in Yuan, while the Chinese currency is de facto already tied to gold prices and not to the US dollar. A number of experts called this step the first of its kind in the global context.

This decision «will have a serious impact on oil prices, which might rise to USD 70 per barrel as the first contracts kick in, as well as on the price of gold, that is expected to rise to USD 1,850 for an ounce instead of USD 1,350 today,» the experts observe.

O&G analysts argue that this step will open doors for countries outside the OPEC, as well as for the countries, subjects to the US authorities’ aggressive foreign policy: Venezuela, Iran, Qatar and others. «One possible consequence of China paying gold-secured Yuans for oil, is the weakening of the US dollar against other major currencies. This, nonetheless, might have a positive effect on the US export and a decrease of the imported goods, which in turn will reduce the trade deficit in the United States,» the expert maintains.

Disadvantages and benefits for the US

«This development is a major change in the the global economic set of rules, and it will affect the US dollar, reducing its investment attractiveness, which in turn will cause the interest rates to grow. This may have a certain negative effect on both public and private lending in the US, which will also affect several sectors of the economy, such as services,» the expert adds.

The public and private sectors in the US will see the consumption shrink and the investment increase, a positive development for the US economy in the long run, although the consequences might be quite dramatic in short and medium term.

A gold market expert predicts the price of crude oil to grow up to USD 70 per barrel upon the implementation of contracts, which will also lead to an increase of gold prices, hitting USD 1,850 for an ounce, i. e. USD 500 per ounce above the current value of gold (at USD 1,350/ounce). This unjustified price, according to the expert, brings damage to the global markets and leads the countries investing in gold to economic losses.

The new standard

Given that China is the world’s largest oil importer, the futures in Yuan may become a new benchmark for traders, only this time based in Asia. At present, two standards exist for the crude oil contracts on the world market: WTI and Brent, both nominated in US dollars. The introduction of the Yuan-nominated futures will allow exporters such as Russia and Iran to avoid using the US dollars and, if necessary, avoid sanctions. Additionally, one would be able to convert Yuans into gold at the exchanges of Hong Kong and Shanghai, which will be perceived as an additional incentive for shifting the trade to Asia, the experts observe. Many experts, including the ones based in the US, admit that the rules might change now at the global energy market.

In China, the necessary infrastructure for launching its futures is already in place. In recent years, there has been an active participation of Chinese independent oil refineries, which has made the domestic market in China diverse, which means that an environment has been created in which a contract for crude oil will be in demand. China has long wanted to reduce the dominance of the US dollar in commodity markets, the experts say.

On top of this, Beijing can not help paying attention to the threats regularly voiced by Washington. The US recently threatened to impose new sanctions on China, should it refuse taking more effective measures against North Korea. According to a comment (possibly speculative albeit picked up all over the world) by the US Minister of Finance Stephen Mnuchin, the threats might go as far as closing access for Beijing to the global dollar system.

Gold in trade now

China already launched its gold futures, the trade is implemented at the Shanghai Gold Exchange since April 2016. Now the exchange plans to start trading in Budapest, presumably by the end of 2017. The presence of two contracts (for oil and gold) nominated in Yuan will allow traders paying gold for oil or converting Yuans in gold. In any case, this presents an excellent opportunity to avoid settlements in US dollars. In case a trader has no desire to pay in Yuans, he would use gold.

Russia’s tax authority takes BVI off the black list

Since 2018, at the request of the Russian tax service, local authorities are ready to provide «information on the real owners of companies registered in this jurisdiction.»

The Federal Tax Service (FTS) of Russia excluded the British Virgin Islands from the list of countries whose authorities do not share information on the owners of offshore companies. This means that, as of this year, the local authorities are prepared to supply information on the real owners of companies registered in this jurisdiction at a request by the FTS of Russia on a regular basis," the report says.

Back in 2014, the Russian Ministry of Finance published a list of 40 offshore companies, which included exceptionally only the low-tax jurisdictions. This list includes countries and territories with no double taxation treaties with Russia, or those with an unsatisfactory level of tax information exchange.