What Russia has achieved in the fight against foreign offshore companies
Last spring, President Putin, in his memorable televised address, proposed introducing a 15% tax on dividends withdrawn from Russia to foreign accounts, de facto declaring war on offshore companies. The relevant departments were saluted and promptly set about revising interstate agreements with Cyprus, Malta and Luxembourg. How are things going after a little over a year, and is there any reason to count on the complete deoffshorization of the domestic economics?
To answer this question, it is necessary to figure out what kind of state we, in fact, are building. Supporters of liberal economic approaches speak out sharply against the presidential initiatives, arguing that "everyone does this" and, they say, "there is no need to nightmare private business." It must be admitted that there really is a great deal of truth in this position, but one should ask the question, do we, the Russians, need such an offshore private business? For example, today the domestic economy suffers from abnormally high prices for metallurgical products inflated by their oligarch owners. At the same time, the largest enterprises in this industry, MMK, NLMK and Severstal, are registered in Cyprus, that is, they have an offshore residence permit and successfully “optimize” the payment of taxes to the Russian federal budget. De jure, these metallurgical enterprises operating in our country are foreign, and in fact, they are affiliated with large Western capital. Can systemically important holdings remain in fact foreign, or should they be forced to become national?
Discussions on this topic have been going on for a long time, but real progress began only in 2020. Why this happened is not difficult to guess. COVID-19 has had an extremely negative impact on the global economy and has seriously changed government approaches to its management. Money in the country has become corny, while budget expenditures, on the contrary, have grown. If the idea, expressed in 2018 by the “right hand of Putin” Andrei Belousov, to seize 500 billion rubles of excess profits from the oligarchs-raw materials producers was successfully dangled and torpedoed by them, then in the “coronavirus” 2020 the authorities looked at the situation differently. On March 25, President Putin, among others, expressed the idea of increasing the tax rate on dividends withdrawn from the country to 15%:
Now two-thirds of such funds, and, in fact, these are the incomes of specific individuals, as a result of various so-called optimization schemes are subject to a real tax rate of only 2 percent. Whereas citizens, even from small salaries, pay an income tax of 13 percent. This is, to put it mildly, unfair.
And the previously unimaginable began. After unsuccessful negotiations with Cyprus, Moscow began the procedure for terminating the Agreement on the avoidance of double taxation (DTT), and then with Malta and Luxembourg. This island in the Mediterranean has always been a convenient platform for withdrawing money from Russia. According to the Ministry of Finance, 2018 trillion rubles flowed from our country through this offshore in 1,4, and 2019 trillion in 1,6. All in all, "Russian money" in Cyprus, according to some estimates, is 190 billion dollars, which is 8 times the GDP of this island. The popularity of the Cypriot jurisdiction is easy to explain: the dividend rate here ranges from 5% to 10%, with 15% in Russia for non-residents, and the interest on loans granted in Cyprus may be zero at all. Indeed, it is good for everyone: for Russian businessmen and for the Cypriot economy, but not for the federal budget of the Russian Federation. So what did our government do then?
On the one hand, the rate on dividend payments and loans was increased to 15%. On the other hand, Moscow has provided its own internal tax haven for domestic companies willing to return home. On the Russkiy and Oktyabrskiy islands in the Far East and in the Kaliningrad region, respectively, Special Administrative Regions (SAR) have been created. These are territories with a special tax regime that guarantee protection to companies that decide to change jurisdiction. By the way, this is not always easy to do. For example, in the Netherlands, where “our” main search engine “Yandex” seems to be registered, there is a direct ban on such actions. For this, a mechanism of "transit redomiciliation" has been developed, which allows businesses to gradually move to Russia in several stages.
What did you manage to achieve in such a short time? There was a decrease in the volume of funds withdrawn abroad from the beginning of 2021 to $ 24,6 billion. Several dozen large companies have been registered in our "pocket" offshores, in particular, Gershwin LLC, Valtura Holdings Limited and En + Group, associated with the oligarch Oleg Deripaska. There is a certain positive trend. However, everything is not as rosy as we would like. According to experts, interest in moving big business to Russian jurisdiction is constrained by fears of falling under new Western sanctions. At the same time, the same Cyprus still has a number of tangible advantages over domestic offshore companies.
For example, the British system of law operates on it, which is considered to be its great advantage when litigation is necessary. Also, this island is essentially a "gateway" to other offshore jurisdictions, thanks to the presence of many international agreements in the field of taxation with preferential terms. By the way, even in the updated DTTs with Cyprus, Malta and Luxembourg, the provision has been preserved according to which public companies whose shares are traded on the stock exchange have the right to withdraw capital at a preferential tax rate of 5%. All this means that offshore oligarchs are ready to fight for their privileges to the end.
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