Russian Continental Shelf: Tax Aspects June 2014
What We Will Discuss Today Tax Overview and Environment Legal Entity: Tax Registration Customs Issues People/HR Issues Transfer Pricing / De-Offshorization Page 1 June 2014 NYC IADC
Why Is Tax Relevant? Tender pricing Compliance with registration rules (30 days) Personal tax withholding Prepare early Page 2 June 2014
Tax Overview (1) Tax law is short. Much too short. Rates are low: Profits tax: 20% Withholding tax: interest - 20% dividends - 15%, 9%, 0% royalties - 20% VAT: 18% Property tax: a maximum of 2.2% of NBV of immovable property Page 3 June 2014
Tax Overview (2) Social security: 30% on the first $17,200, 10% on amounts in excess of that threshold Personal income tax: 13% for residents 30% for non-residents Resource-based taxes are the backbone of the budget (export duty and mineral extraction tax) Page 4 June 2014
Tax Overview: Tax Audits & Inspections In-house audits and on-site audits Tax audits may cover only the three calendar years which immediately precede the year in which the audit commences The tax authorities have no concept of materiality and often apply the law incorrectly Litigation is extremely common Page 5 June 2014
Tax Overview: Ruling No. 53 Ruling No. 53 issued by the Supreme Arbitration Court on 12 October 2006 Issued for the guidance of courts to curtail the practice of decisions based on designating taxpayers as bad faith taxpayers Introduced the concept of Unjustified Tax Benefit Where the true economic intent of a transaction is inconsistent with the manner in which it has been treated for tax purposes, a tax benefit may be deemed to be unjustified Page 6 June 2014
Tax Overview: Litigation Litigation is too quick Court of first instance Appeal court Cassation court Supreme Arbitration Court No law of precedence but the head of the SAC is a vocal advocate of case law The courts are clogged with cases Available on YouTube Page 7 June 2014
Tax Overview: Points to Remember Diligent record and document keeping Paper, stamps and signatures Hire an experienced accountant Page 8 June 2014
Legal Entity: Tax Registration
Legal Entity: Tax Registration Could be a requirement for tenders Registration helps avoid tax withholding Required for activity exceeding 30 days Each FLE registration separate PE A registered branch or LE should: Collect source documents and compile tax declarations Maintain personalized pension calculations Withhold personal individual tax Page 10 June 2014
Legal Entity: FLE or RLE? (1) Branch rather than as a Russian subsidiary? For a foreign-owned/foreign-managed business, a branch of an FLE is the default choice: Foreign management would be unable to comply with laws applicable to Russian companies The authorities understand that foreign companies do things differently Repatriation of cash is not dependent on the existence of distributable profit Profit can be repatriated without any withholding tax Page 11 June 2014
Legal Entity: FLE or RLE?(2) Explosives licences, some drilling permits and permits for work with radioactive sources are only issued to Russian legal entities Therefore, a Russian legal entity should be a primary contractor for drilling services Page 12 June 2014
Legal Entity: Procedure Page 13 June 2014
Customs Issues
Customs Issues State service Focus on letter of the law Avoidance of non-standard, new situations Significant risk of business interruption Customs regimes Special shelf regime Release into free circulation, temporary import Rates based on TN TS Harmonized Coding System Page 15 June 2014
Customs Description of Equipment Equipment has to be described in smallest detail Including weight and packing method Broker employees may fly to the USA to produce a proper description Communication devices need prior permits (2-6 months, up to 12 months) Devices with cryptography capacity need prior permits It is very important to start early Page 16 June 2014
Customs The Shelf Exemption Shelf: Foreign (non-russian) goods intended for use in construction - special procedure without customs duties The submission to the customs authority of a written undertaking is required The operator and/or contractors (with notice given) No detailed procedure available yet In case of changes in use, the goods have to be removed from the shelf and (or) placed under a different customs procedure Page 17 June 2014
Customs Other Points Only an RLE may import without any limitations Assignment of codes is not a trivial exercise Current practice is important, so contact with a good broker is essential Page 18 June 2014
People / HR Issues
People / HR Issues Visas Work Permits Secondment Page 20 June 2014
People Visas (1) Business visas are issued for business trips to Russia. Single-entry, double-entry for up to 3 months, or multi-entry for up to a year A special treaty exists for US citizens allowing uninterrupted visits of up to 180 days (for others: 90 days) Work visas are issued to work in Russia for up to a year HQS work visas are issued for 3 years Foreigners holding a seafarer s passport may not need a visa when merely passing in transit to join their ship or for repatriation Page 21 June 2014
People - Visas (2) 1 or 2-visit business visas for US citizens take at least 3 weeks to obtain Special long-term visa is typically not issued for first-time trip For most EU nationals, business visas can be obtained within 2-3 days It is very important that applications for visas contain no mistakes Page 22 June 2014
People - Highly-qualified Specialists (1) Annual earnings delivered in Russia of not less than 2 million roubles ($62,500) If in Russia only for a number of months, the limit is adjusted pro-rata No need to prove qualifications or educational credentials One application filed by the employer for both work permit and work visa, processed within 14 days, no quota, no posting of vacancy information with the Employment Centre, no corporate permits required No medical test results required (except for HIV) Page 23 June 2014
People - Highly-qualified Specialists (2) One work permit possible for several regions Work permit and work visa valid for 3 years Expatriate must collect his work permit in person Personal income tax rate of 13% on earnings paid in Russia regardless of duration of stay Eligible employers: Russian companies Branches of foreign companies (not representative offices) Page 24 June 2014
Transfer Pricing / De-offshorization
Transfer Pricing Environment New legislation effective from 2012 Very limited experience in applying business-driven subjective concepts for the determination of tax liabilities Federal tax authorities are in charge of law enforcement Orientation on international experience with certain Russian specifics No rulings are available Transfer pricing audits no experience yet Page 26 June 2014
Transfer Pricing - Areas of Dispute Selection of the transfer pricing method Tested party Profit level indicator Grouping of transactions Selection of benchmark data Differences between the valuation for customs and the market price determined for tax Allocation of profit to a permanent establishment Documentation of transactions between independent parties Page 27 June 2014
De-Offshorization: Plans Offshore company an entity registered in one of the black-listed jurisdictions where the final beneficiary is a Russian legal entity or individual. Includes Caymans, Bermuda, BVI Company with offshore control an RLE with more than 30% participation by offshore company Both types cannot supply goods and services to state companies and companies where RF ownership exceeds 50% Tax residency under place of actual management Consider impact in tenders Page 28 June 2014