Tax risks for the industry: Nearest perspectives. Andrei Ignatov Partner

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1 Tax risks for the industry: Nearest perspectives Andrei Ignatov Partner

2 State tax policy on international taxation Politicalcontext Statements by government officials and the head of state (e.g., Budgetary Address of the President of the RussianFederation) Discussion of amendments to the Civil Code of the Russian Federation on the revelation of beneficiary owners when foreign stakeholders participate in Russian legal entities Key lines of the tax policy of the Russian Federation ( Counteracting Tax Avoidancevia Low-tax Jurisdictions ) Letter of the Ministry of Finance of the Russian Federation concerning the actual owner of income within the framework of the placement of Eurobonds (December 2011) Russia signs the Stockholm Convention on Mutual Administrative Assistance in Tax Matters (February 2012) Ratification of the new Protocol to the tax treaty with Cyprus, start of the procedure for agreeing on the amendments to the tax treaties with Switzerland and Luxembourg Appearance in the mass media of adraft law on the introduction of the norms concerning the additional taxation of payments in offshore zones into the Tax Codeof the Russian Federation

3 Key lines of the tax policy of the Russian Federation CounteractingTax Avoidancevia Low-tax Jurisdictions Disclosure of all foreign related companies, as well as the amounts of income tax paidby them, in the tax declaration Promotionof an exchange of informationon tax issues with foreign states Definition of the concept of tax resident in relation to legal entities Definition of the concept of actual recipient of income for using the instruments of internationaltreaties on counteractingtax avoidance Institution of taxation of retained earningsof controlled foreign companies

4 Reference: concept of CFC in foreign countries CFC =controlled foreign corporation Used in the majority of the developed countries Ordinary requirements: Control(25-51%) Low tax rate (usually less than 50% of the rate in the holding company s country) Passiveoperations(interest,royalty,capitalgains) Non-paymentof dividendsfor alongperiodof time There are important exceptions to production, trade and other activeoperations Whenthe rules are applied, There is no exemption from the dividends received and capital gain(participationexemption) A statement is issued by a holding company on its equity participationin subsidiaries(сfc) The profit of such companies is included in the tax base in the holdingcompany s country

5 Draft law on offshore zones of 2012 Payment to an offshore jurisdiction? Yes Has the required information been revealed? No Expenses may be deducted, and payment is not deemed an income Yes Is the taxpayer the final beneficiary or its related party? Нет Deduction of expenses is denied, payment is deemed an income and taxed at the rate of 20% Yes Deduction of expenses is permitted, payment is deemed an income and taxed at the rate of 9% No The amount of tax paid by a foreign company (TF) is less than 50% of the amount of tax which should have been paid in Russia (TR)? Yes Deduction of expenses is permitted, payment is not deemed an income, the difference of TR x 50% TF should be paid into the budget No Deduction of expenses is permitted, payment is not deemed an income

6 Situation concerning the application of draft law norms Variant 1. Independent offshore zone The Russian taxpayer is not regarded as the final beneficiary An organization presented the following information to the tax authorities: Informationon the finalbeneficiaryof aforeignorganization Confirmation of the business purpose of aforeign organization by an authorizedbody Confirmation by an authorized body of aforeign state of the amount of tax paid by aforeign organization on the operations inquestion Tax implications: The expenses relating to that payment are to be deducted for profits tax purposes If the amount of tax paid abroad is less than 50% of the amount of tax which would have been paid in Russia, the difference should be paid by the taxpayer to the budget of the Russian Federation

7 Situation concerning the application of draft law norms Variant 2. Disclosure of the final beneficiary The Russian taxpayer is regarded as the final beneficiary / related party of the final beneficiary Tax implications: Payment is deemed the taxpayer s income and tax is paid at the rate of 9% The expenses relating to that payment could be deducted for tax purposes

8 Situation concerning the application of draft law norms Variant 3. Non-disclosure of the final beneficiary The taxpayer either did not present information or is providing inaccurate information, while the tax authority has reliable information allowing it to classify the taxpayer as the final beneficiary Tax implications: The amount of payment is regarded as taxable income The actual payment is taxed at the penalty rate of 20% The expenses relating to that payment are not to be deducted for profits tax purposes

9 What are we to expect? In its current form, the draft law cannot work: The definition of abeneficiary proposed by the Federal Tax Service allows various interpretations to be made Actually, the tax authorities would not be able to receive information from offshore zones, since the Russian Federation so far did not sign even one information exchange agreement with the offshore zones Dishonest taxpayers can easily bypass new rules(there is no need to make payments through offshore jurisdictions which are in the list of the Ministry of Finance) while honest taxpayers will suffer in ordinary business situations, e.g., M&A transactionswhen shares are purchasedfrom the vendor an offshore company Payments in the oiland gas industryto the PSA operatorsand insimilarsituations Payments to legalcompanies locatedinthe offshorezones The requirement for documented confirmation is extremely vague Rules which are well thought-out and revised, and which combine the classical norms of CFC, anti-offshore rules and the norms of the actual owner of income, will most probably be adopted

10 Сontact details Andrei Ignatov Partner Tel.: Partner, Tax & Law, Business Tax Advisory, Ernst & Young Moscow Over 15 years of experience in providing a wide range of services to international and Russian companies, including advising on Russian taxation, taxation of international operations and methods of operations structuring; wide experience in the analysis of tax issues as part of audits of financial statements prepared in accordance with Russian accounting standards and GAAP as well as in comprehensive audits of Russian companies; specializing in advisory services for Russian enterprises seeking to obtain foreign investments; extensive experience in consulting related to the business restructuring with respect to changes in Russian and international tax legislation; providing tax advisory services to clients in industrial and other sectors; advising on tax risk management, tax accounting review and development Moscow State Institute of Electronics and Mathematics (Technical University), diploma in Applied Mathematics; member of the British Association of Chartered Certified Accountants (ACCA)