The G20 Tax Symposium Starts Today: A Perspective on BEPS From Russia
Sergey Drobyshevsky & Svetlana Shatalova
OECD and G20 Action Plan on Base Erosion and Profit Shifting (BEPS) was adopted in 2013. It consists of 15 actions including transfer pricing, taxation of controlled foreign corporations (CFC), digital commerce, hybrid instruments, international information exchange, tax treaty shopping etc. In 2013, OECD working group prepared draft documents regarding a number of the above issues and continues working on the rest, which should be finalized later this year.
Improving its tax legislation, Russia is already taking steps on a number of the Action plan items. On the other items, Russia is waiting for the final OECD documents so that it can act in line with them.
In the recent years, Russia has focused on the “deoffshorization” of its economy, combating capital outflow and unjust competition. Though the deoffshorization measures may not be as tough as initially planned due to the current economic crisis, still the most important steps have already been taken.
Transfer pricing (TP) rules based on the OECD guidelines took effect in Russia in 2012. They have proved to be viable and taxpayers have adapted to them. Some minor amendments are to be introduced in the near future, however they do not change the framework of the TP rules.
Under the BEPS Action plan, countries should implement a new format of TP documentation making taxpayers disclose the group structure and all important details of the business which will be available to the tax authorities of the involved countries (so called master file, local file and country-by-country reporting). Russian officials declare that similar forms will be implemented in Russia, too.
BEPS Action Plan also includes amendments to the TP rules regarding certain activities, e.g. transactions with intangibles etc. Russia has not yet taken any steps in this respect and will probably wait for the OECD proposals.
CFC rules effective in Russia since 2015 require that Russian shareholders disclose the ownership structure of their foreign assets and, in certain cases, pay Russian tax on the profit accumulated in such CFCs if it was not distributed as dividends. Certain amendments to the new rules are already being prepared even though they have only been in place for a few months.
There is a risk that introduction of CFC rules will force quite a number of Russian shareholders to restructure their business in order to move it offshore. Trying to avoid this, the President authorized amnesty on repatriating capital. The terms of the amnesty are being discussed by the Government.
To make CFC rules work, Russia also introduced two important concepts previously missing in the law: tax residence of companies based on the place of their day-to-day management and definition of beneficial owner of income.
All the above measures would be useless without an efficient international information exchange system. Russia and other countries are quickly moving forward in this area. Russian tax authorities say they are pleased to see serious improvements in the way countries exchange tax information. Even offshore jurisdictions began sharing information under pressure from the developed countries.
In 2014, Russia ratified the OECD Convention on Mutual Administrative Assistance in Tax Matters which helps tax authorities exchange tax information, allows them to participate in tax audits abroad and collect tax arrears from taxpayer’s assets located abroad.
Certain other issues remain unsolved in Russia, such as taxation of ‘digital economy’ (which is separately mentioned in the BEPS Action Plan) and amendment of thin capitalization rules.
Given that digital commerce is rapidly growing and common tax rules are sometimes difficult to apply in this area, there seem to be a general understanding in Russia that something should be done in this respect. This understanding was even reflected in the draft version of the Principal directions of tax policy for 2016-2018, however this document only briefly mentions the need to review VAT rules for telecommunication services.
Russian authorities also promise (yet unofficially) changes to the thin capitalization rules in some near future. They should at least close the loophole for foreign ‘sister’ companies. Alternatively, the entire thin capitalization model can be revised.
Thus, the main anti-BEPS steps in Russia included introduction of transfer pricing rules, CFC rules, the concepts of companies’ tax residence and beneficial ownership of income, as well as improvement of the international information exchange system. As OECD finalizes its proposals on the BEPS Action Plan, Russia will probably continue further amending its tax legislation accordingly.
Sergey Drobyshevsky is the Managing Director of Russia’s G20 Expert Council and Academic Director of Gaidar Institute for Economic Policy.
Svetlana Shatalova the Head of Tax Policy Centre at RANEPA.