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Offshore zones raise concerns


Author: Natalia Nepriakhina
Source: Kommersant

The parliamentary opposition proposed to introduce in 2014 a 15 percent duty on transactions with non-residents having the offshore status to reduce the Pension Fund deficits. The list of offshore zones will be determined by the government according to the proposed list of criteria, but Cyprus will have this status by law. Experts point out that the criteria are so vague that even the USA may be recognized as the offshore zone, and deputies believe that the problem will be solved through introduction of transfer pricing control.

Arsenii Yatsenyuk and Pavlo Petrenko (both from «Batkivshchyna») filed draft laws No. 3125-3126 aimed at reduction of transactions on minimization of tax liabilities of the companies. People’s deputies propose to impose in 2014 a 15-percent duty on payments of Ukrainian companies for the benefit of non-residents registered in offshore zones. Financial institutions will have to transfer money only upon simultaneous payment of duty. The funds shall be used for financing of the Pension Fund and increase of pensions. Deputies believe that only transactions with Cyprus could bring USD 60 bln to the state budget. This is not a new idea. Back in late 2011, Vice Prime Minister Sergii Tigipko proposed to introduce a 15 per cent duty valid for five years. Then additional revenue was estimated at USD 1 bln, but the draft law has never been considered by the government. Introduction of duty will make the companies to waive the offshore transactions, which will deprive the Pension Fund of the promised billions. However, Pavlo Petrenko believes that the oligarchs will not be able to change their business schemes quickly, so the budget will receive a part of the funds.

This is not the only initiative – it is also proposed to review the profit calculation principle when dealing with offshore companies. According to the Tax Code, gross expenditures do not include the cost of advertising, consulting and marketing services acquisition from the resident of offshore territory. Now it is proposed not to include the costs of consulting, accounting, legal, brokerage and auditing services. The amount of transaction with the offshore company, which may be included in the costs of the Ukrainian company, will be reduced from 85% to 50%.

At present the Cabinet of Ministers determines the list of offshore companies and deputies want to specify in the Internal Revenue Code the criteria according to which the government shall make a list of offshore territories. There are only three of them: zero taxation, limited access to tax information, special regimes or exemptions for non-residents. Compliance with at least one of them will be the basis for getting into the list of offshore companies. However, the offshore status of Cyprus in tax matters is fixed by the law. «Currently, offshore territories are determined by the Cabinet of Ministers (there are 36 of them according to the order No. 143/2011. – «Ъ»), says Mr. Petrenko. – So they are determined with a degree of subjectivity, and we remove this factor, and if the country changes tax laws, it will automatically get into the list». In his opinion, the said criteria meet the standards of the Organization for Economic Cooperation and Development (OECD), and the European countries are guided by them.

Andrii Sydorenko, attorney at law of Ilyashev & Partners Law Firm, believes that the law shall provide for exact criteria, but it is groundless to recognize Cyprus, which the OECD excluded from blacklist, as offshore zone without any reason. In addition, many countries have both limited access to tax information and preferential treatment. «Russia has a special tax treatment for the high-tech industry, the USA also has special taxation regulations. Shall they be recognized as offshore zones?», asks Mr. Sydorenko. «Criteria for defining offshore zone are blurred in the draft law», adds Oleg Zagnitko, Partner of Beiten Burkhardt Law Firm. «It is hard to name the countries having no privileges or special treatment for foreign investors. Zero taxation almost does not exist, and some transactions are subject to a zero rate also in Ukraine. The same refers to access to tax information: there must be an intergovernmental agreement, otherwise such access is next to invasion of privacy». He believes that the proposed rules will actually mean imposition of ban on business with offshore companies, and Cyprus, the Netherlands, Luxembourg, Liechtenstein and Switzerland will be the first to «launch a campaign of protest against such restrictions». «The diplomatic channels will be involved, the said countries or the EU may freeze the technical assistance programs. If there is discrimination, the WTO mechanisms may be involved, because its members are required to provide equal treatment to non-residents during trade», explains the lawyer.

Oleksandr Dolzhenkov (Party of Regions), member of the Parliamentary Committee on Taxation and Customs Policy, is confident that it is incorrect to prescribe criteria, while separating Cyprus. He believes the initiative premature in terms of introduction of transfer pricing control. In addition, the people’s deputy does not rule out that the businessmen will find schemes to avoid the new rules. «The business mostly does not work with offshore zones directly, because restrictions are in force with regard to the offshore zones», says Mr. Dolzhenkov. Valerii Gladkyy, General Director of the Economic and Social Research Bureau, believes that the adopted transfer pricing rules and tax convention with Cyprus negate the opposition’s proposals. «Therefore, the opposition knows that their offer is a pure populism», says Mr. Gladkyy.

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