Money gets grounded

31.01.2014 | Tetiana Smetanina

The fight against offshores will be the major fiscal trend of the year, which will bring down to nil the possibilities of legal tax minimization

The global economy still hasnt recovered from the major financial crisis. That is why governments of practically all countries are now facing the main task of introducing fiscal policies that ensure stable proceeds to national coffers and stability of government finance. It looks like 2014 will be the year of global reform of the fiscal system: companies will have to accept new world rules of doing business

All fiscal innovations will be based on two basic principles. Firstly, the companies will be obligated to pay taxes at the place where they conduct their main business, which could inflict the most powerful blow on all kinds of tax optimizers in the entire history of the existence of mechanisms of a legal reduction of the tax base. Secondly, in order to swiftly nip tax crimes controlling bodies will gain full access to information about capital flows, for which an automatic system of data exchange between fiscal bodies of all countries will be introduced.

The desire of world regulators to lock main financial flows of domestic companies at home has already resulted in a large-scale fight against offshore companies.

One of the key achievements in this sphere last year was the agreement of the UK and its foreign and dependent territories on establishment of the automatic information exchange. The Cayman Islands Monetary Authority (CIMA) created a public database of directors of hedge funds, banks and financial companies registered there, which became an unprecedented step for one of the most closed offshore territories.

If the pressure on British territories on the part of Europe and the U.S. persists, the signing of agreements and adoption of laws by these territories on automatic information exchange is quite possible. These changes will therefore affect such classic tax havens as the Bermuda Islands, British Virgin Islands, Cayman Islands, the Turks and Caicos Islands, Isle of Man, the Bailiwick of Guernsey and the Bailiwick of Jersey, predicts Ihor Reutov, Head of the Department at Hramatskiy & Partners. Introduction of the Foreign Account Tax Compliance Act (FATCA) can be considered one of the significant events of 2014. This American law obligates banks of the world to report to the U.S. Tax Agency (Internal Revenue Service) about their clients that are U.S. residents and introduces sanctions against banks that refuse cooperation. FATCA will substantially limit the possibilities of owners of U.S. corporations to conceal their profits in financially favorable foreign jurisdictions, says Oleksiy Khomyakov, an advisor at Asters law firm.

The Organization for Economic Cooperation and Development has repeatedly insisted that financial regulators should pay attention not only to dividend and percentage earnings of individuals (as it is now in the EU), but also to the operation of fly-by-night companies, trust funds and other structures that allow for concealing assets, not just earnings from them. This means that bearer shares that facilitate concealment of earnings and also nominal bearers and directors will disappear from the financial turnover system in the long term.

In the short term, the EU plans to close the ways of withdrawal of dividend payments from under taxation. A corresponding draft law was made public by the European Commission at the end of 2013 and will be soon submitted to the European parliament for consideration. We are cutting off all the possibilities for aggressive tax planning. Amendments to the Parent-Subsidiary Directive will shut down tax loopholes on existing legislation for hybrid loans, specified Algirdas Semeta, EU Commissioner for Taxation and Customs Union, Audit and Anti-Fraud.

The fight for budget stability in the long term will affect European bank depositors. The Cypriot scenario with the so-called deposit haircut will become a common practice in Europe. At the end of last year, after lengthy and tiresome talks with representatives of the financial sector the EU council decided that the governments will no longer compensate for the losses of liquidated banks and pay for their restructuring, as it is a huge burden on national budgets. This exactly corresponds to the practice that was first applied in Cyprus. The burden of the losses will be placed on shareholders and holders of deposits of over EUR 100,000. The new rules will take effect in 2016.

Ukraine also declared a fight against tax optimization via offshore and low-tax jurisdictions. Last year, the law on transfer price formation took force, which allows tax authorities to control operations with residents of tax havens more effectively.

The new agreement on avoiding double taxation with Cyrpus will be the key event of the year. These factors could trigger the flow of capital to other (though most expensive) jurisdictions, such as Hong Kong, Singapore, Ras al-Khaimah. The aforementioned jurisdictions have a number of advantages, including that strictly speaking they are not formal offshore territories and the access to information, particularly in the last of the listed jurisdictions, is very limited. In addition to that, the reputation advantages are evident, says Reutov.

Meanwhile, the Ukrainian government is ready to create an offshore at home for large corporations. In the end of last year, the MPs passed in the first reading amendments to the Law on Transfer Price Formation, which introduce the notion of consolidated group of taxpayers and establish that transactions within such a group are not subject to monitoring by tax bodies. This will allow financial industrial groups with the aggregate amount of the tax of no less than UAH 500 mn per year to continue optimize taxes via re-distribution of the tax burden among its structures.

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