Russia introduces bill to reduce offshore tax evasion

By bne IntelliNews October 23, 2014

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A long-discussed bill aimed at reducing Russian businesses’ use of offshore vehicles to evade tax  has been introduced to parliament.

The draft bill provides for taxing undistributed profit of 'controlled foreign companies'  - meaning offshore firms controlled by Russian tax payers. The plan for 'de-offshorisation' was one of Russian president Vladimir Putin's campaign promises on re-election in 2012, but the bill has been slow in coming because of objections from business lobbies.

The draft bill provides for profit from offshore vehicles to be 'attributed' to their Russian owners and thus taxed in Russia. Russian citizens and companies will be obliged to declare ownership of such companies to the tax authorities. Individuals will pay 13% income tax and companies 20% profit tax on the profits of offshore entities.

The draft bill covers firms registered in 40 low-tax jurisdictions specified by the Finance Ministry, as well as states with which Russia has a treaty on avoidance of double taxation, in the case where the partner country's profit tax rate is less than 75% of the Russian profit tax rate, currently 20%. This means the treaty will also cover companies registered in Cyprus, which is not officially an offshore zone.  

In order not to inundate the tax authorities, the draft bill proposes that initially taxpayers only need to declare offshore profits exceeding RUB50mn per year in 2015, with this threshold dropping incrementally to reach RUB10mn in 2017. During the initial period, taxpayers will not face criminal charges over for not declaring offshore profits, as long as the tax arrears are paid in full. 

The bill applies initially in 2015-2016 only to companies where the Russian taxpayer has an ownership stake of over 50%, but the threshold will fall to 25% in 2017, or even 10% where the taxpayer is one of a group of Russian citizens collectively owning over 50%. 

The draft bill is the old, tough version of the law, said Aleksandr Shokhin, president of the Russian Union of Entrepreneurs and Industrialists, a business lobby, to business daily Kommersant. Shokhin said that he hoped amendments would be made for the second reading, which he claimed he had agreed with members of the government and presidential administration. 

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