Russia to crack down on tax evasion

By bne IntelliNews October 17, 2014

bne -


Russian authorities are moving ahead with a campaign to plug external and internal tax loopholes, with the government preparing a new law on 'de-offshorisation' and the central bank closing down banks complicit in grey capital outflows.

The de-offshorisation campaign is intended to repatriate Russian business from offshore zones. The finance ministry is drawing up a draft bill on foreign-controlled companies, which enjoys the support of Russian president Vladimir Putin, according to sources quoted by business daily Vedomosti.

The law envisages companies and citizens paying taxes to the Russian budget on non-distributed income received by foreign-controlled companies, i.e. offshores. Tax rates in Russia are 20% for companies (profit tax) and 13% flat tax for individuals. The law only applies to companies where passive incomes – interest, royalties, rent, dividend payments -significantly exceed active income.

According to Vedomosti, neither domestically-listed companies nor foreign listed companies will be excluded from the bill, despite Russia's business lobby, the Russian Union of Entrepreneurs and Industrialists (RUEI), having requested this. 

Companies registered in the white list of Russia's tax service will not be affected by the law, but as a rule of thumb, profit tax in the jurisdiction where a company is registered should not be less than 75% of the Russian profit tax rate (currently 20%, meaning the country of registration should not have a profit tax of less than 15%). Other variants of the law provide for milder conditions.

Russian authorities are also trying to close down the second major channel of tax revenue leakage: Russian companies' use of 'black cash' schemes, sometimes referred to as the 'internal offshore', where companies wire funds to sham firms under bogus contracts. Funds are either returned to the originating company as off-the-books cash or shifted into foreign bank accounts. Most of Russia's more than 1,000 banks, many of them tiny, are thought to be involved in administering such schemes, in cahoots with organised crime and corrupt law enforcement officials. 

A recent investigation by the Organised Crime and Corruption Reporting Project said that $20bn of such grey and black funds had been moved out of Russia via bogus contracts and mini-banks. In 2012, the outgoing head of Russia's central bank, Sergei Ignatev, said a total of $50bn was being shifted out of the country each year in this manner.

Since taking over at the helm of the central bank in June 2013, Elvira Nabiullina has launched a crackdown on banks operating such schemes, withdrawing dozens of licences. On October 16 the central bank 'celebrated' its 100th withdrawal of a credit institution licence over the last year, including 12 banks notorious for providing 'black cash' services.

The campaign seems to have avoided impacting on the inter-bank market, say experts, in contrast to Russia's last attempt at such a crackdown in 2004: when the mass withdrawal of licences of money laundering banks led to a mini-banking crisis and then the assassination of the deputy head of the central bank, Andrei Kozlov, in 2006.

How the campaign will impact on Russia's finances and capital flight remains unclear. In the second quarter of 2014 for the first time in years Russia's capital accounts recorded a $2.4bn inflow of funds under categories recording dubious operations and “errors and omissions.” But third quarter had a return to a negative balance with an outflow of grey funds totalling $7.7bn. 

“There was still a visible improvement (…) that we might link to the CBR's crusade against misbehaving banks,” wrote VTB analysts. “Simultaneously, we warn against drawing any overly upbeat conclusions as ‘grey’ capital outflow probably only changed its clothes - for example, transformed into something that the BoP methodology might classify as FDI,” they add.

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