Repatriation 2.0: Capitals will have to return to Russia

Russian government has once again initiated an active campaign of capitals repatriation. For individuals, forex control liberalization has been introduced. Finance Ministry is considering a similar liberalization for foreign companies which are subject to monetary control. A comprehensive amnesty for all sorts of tax and forex breaches is viewed as a means of reversing the Russia’s financial outflows. Experts note though, that there are several problems obstructing the process. The major one is lack of trust towards the state and its intentions. The mistrust is at times stronger than a fear to become absolutely transparent for regulators, following Russia’s accession to the global system of financial information exchange.

Come back. You’ll be forgiven! / Drawing by Yuri Aratovsky

World’s toughest forex controls

Several million of Russian nationals who spend a bigger part of a year abroad, from now on do not have to be worried about their foreign accounts. Amendments to the Federal Law FZ-173 On Currency Regulation and Currency Control became effective on January 1, 2018. From now on, those who work or study abroad or share their time between two countries but keep Russian citizenship, do not have to inform Russian tax authorities about opening or closing accounts with foreign banks, and annually report on the cashflows. The amendments to the law will affect two million people, as 1.9 million Russian nationals are registered with Russian consulates abroad, whereas many Russians do not bother about such registration.

Previously, a Russian citizen who permanently resided abroad but at times visited Russia, could not freely use his or her bank accounts and was obliged to perform most of transactions via Russian banks, Ekaterina Romanova, senior lawyer at international taxation department of CLIFF Law Firm, notes. Foreign accounts could only be used for transfers of revenues generated abroad such as dividends, coupon yield, allowances and grants, or salaries. A breach of debit/credit procedures was punishable by a fine amounting up to 75% or even 100% of a transaction.

“Such a zealous control was excessive since the Russian Federation was not aiming to tax worldwide revenues of an individual who is not a Russian tax resident. Monitoring of all non-resident accounts was therefore purposeless. Prior to January 1, 2018 Russia’s forex control was among world’s toughest”, Ekaterina Romanova claims.

Ruslan Mannapov, lawyer at Ilyashev & Partners law firm’s Moscow office, notes that first attempts to introduce such amendments were made in 2016. One of the concepts was to equate the status of a currency resident and a tax resident and to reserve the currency resident status for all Russian nationals.

“It should be pointed out that draft Federal Law was submitted to the State Duma on October 17, 2017 and signed into law on December 28, 2017. Throughout the process of its consideration, the draft law did not experience any significant amendments and its published final version was in fact identical to the initial draft”, Ruslan Mannapov says.

In his view, the amendments will not just ease life of the banks which have to monitor all transactions of their clients, and of the tax authorities, but of the individuals mainly residing outside Russia, since from now on they will be able to visit their friends and relatives without being concerned about financial consequences of such visits.

The amended law will allow Russian nationals to manage their personal accounts abroad with no restrictions of whatever nature to be set by the Russian Federation. If, for instance, a Russian citizen sells a house or a car abroad to a nonresident, the funds can be transferred to a foreign bank account if the deal is made in the Organization for Economic Cooperation and Development or Financial Action Task Force member-states.

Buying loyalty of elites

It is essential that the said liberalization has had no impact on the residents. For them, transactions via their foreign accounts remain very much restricted. Russian residents can not transfer to such accounts their incomes from entrepreneurship, sale of digital currencies or securities which are not traded at major stock exchanges in Russia. Even bank loans or inherited money can not be transferred to such accounts. If an individuals is not aware of the law or decides to ignore it, that will cost a lot of money, 75% to 100% of the amount of each transaction. Previously, residents could hope to conceal information, but that will no longer be possible since all accounts of the Russian nationals abroad will be reported to the respective authorities via the international tax information exchange system. Lapse of a claim for such breaches is two years.

“Amendments to the law on currency control should not be seen as weakening supervision of the currency transactions per se”, Elena Volkoedova, Deputy CEO and Chief Customer Officer at SDM-Bank, warns. “Currently, the main focus of the procedures of supervising transactions is on the fiscal controls which compared to the currency control is reviewing each transaction in a broader context. Hence an absence of a notice of the Federal Tax Service will not result in lifting supervision by the banks of hard currency transfers to accounts abroad”.

According to Elena Volkoedova, amendments to the law On Currency Regulation and Currency Control have made all citizens of the Russian Federation, irrespective of the place of their residence, Russia’s residents. Previously, the citizens permanently residing abroad for over a year were considered to be nonresidents. Therefore, the tax laws of the country will from now on fully apply to such individuals, including its provisions on financial information exchange with foreign countries within the International Convention on the Organization for Economic Cooperation and Development.

“Steps of declaring individuals residing in Russia for over six months currency agents, are the continuation of measures aimed at boosting loyalty of elites towards authorities. People with dual citizenship who are tax agents of the other state are permitted not to pay taxes in Russia”, Ivan Antropov, First Deputy Director of the Institute of Contemporary Economy, claims. “The first ones to support lifting (to some degree) of forex controls requiring obligatory repatriation of currency proceeds to Russia, were the Ministry of Economic Development and Ministry of Finance. Nowadays, the Central Bank seems to favor the changes as well. Ministry of Economic Development motivated its position by the view that an obligatory repatriation of revenues hampers international trade. Still, in fact, forex controls liberalization in Russia’s environment pursues somewhat different goals. Such a liberalization is in the interests of national exporters”.

Freedom and its reverse

Ministry of Finance is of an opinion that exporters can be relieved of the obligation to bring currency revenues to the country in case they inform Russia’s tax authorities thereof. Ministry of Finance thus intends to kill two birds with one stone, namely to boost non-resource exports (since exporters have to structure barter deals because of the anti-Russian sanctions or inability of their partners to pay in cash), and to give up inefficient attempts to stop capitals outflow from the country.

At the 2018 Gaidar Forum, Alexey Moiseev, Deputy Finance Minister, noted:

“The time has come to lift the requirement of currency revenue repatriation, to stop supervising advance payments for future imports, and to also abolish any restrictions on transactions via accounts of the Russian nationals, whether currency residents or currency nonresidents”.

The draft law is ready, but, according to Alexey Moiseev, the process of its consideration is contradictory, since liberalization is supported by tax and customs authorities while the Central Bank remains cautious as it wants to avoid additional pressure on the national currency’s exchange rate. In its view, companies will keep their currency revenues abroad thus cutting currency supply. It also does not want to lose an instrument of implementing FATF’s requirements on fighting money laundering.

Russia’s Finance Ministry is an active proponent of the taxation and currency laws liberalization as far as legal entities are concerned. It would be hard to make them repatriate. As Elena Maximova, EY Senior Consultant, noted, Russian authorities have got an important deoffshorization instrument. These are CFC (controlled foreign corporations) taxation rules. CFCs also include trusts and funds established without incorporation of legal entities. In this case, controlling entities or individuals are those who own over 25% in a foreign company (or 10% in case the aggregate share of the Russian residents in a company exceeds 50%) or exercise influence over profit distribution. CFCs must advise tax authorities of their existence and pay taxes in Russia. Exempt from taxation are banks and insurance companies, as well as the situations when profits are below set thresholds (RUR 30 mio ($520K) in 2016 and RUR 10 mio thereafter). To avoid taxation in Russia, many controlling individuals change their tax jurisdiction, bring in nominees or try to obtain the status of an NGO.

Admit and pay no tax

To make the capitals repatriation campaign more attractive, Ministry of Finance suggests declaring yet one more capital amnesty. Between March and December 2018, owners of bank accounts and assets abroad are invited to declare them to tax authorities. Unlike in the previous case, this time capital amnesty will apply to the already closed accounts as well. Besides, fiscal returnees will be relieved of an obligation to disclose the origin of the capitals to which no profit tax or personal income tax will apply. Russian authorities are certain that once the capitals are legalized, people will start bringing them back home. For that, a fiscal instrument is offered, namely sovereign bonds worth $3 bln in the aggregate. There is no straightforward demand for capitals repatriation though, but a handy mechanism for countering sanctions regime which can certainly be useful for some Russian nationals residing abroad.

The first capitals amnesty took place in 2015 and 2016. According to Finance Minister Anton Siluanov, 7,200 business people from Russia made use of the amnesty. This time, the number of those willing to Russianize their capitals may be greater due to fears of wealthy individuals and entrepreneurs that interstate exchange of tax information will be followed by fiscal sanctions.

Nevertheless, these fears are counterbalanced by a strong mistrust towards Russia inherent to those who try to get all their valuables out of the country. As a result, the demand for services of lawyers capable to arrange smooth migration to other jurisdictions is currently growing. In 2017, Tranio real estate agent and Adam Smith Conferences jointly polled tax advisors and lawyers who advise wealthy Russians. The poll revealed that after the country joined the international convention, the share of the people who declared their foreign assets grew from 10% to 40%. One third of respondents noted that their clients closed all their accounts abroad and brought capitals to Russia. 13% of respondents said their clients intended to leave Russia once and for all. But most of the people still prefer hiding and they started actively looking for a new tax jurisdiction.

The problem is not the financial factor. Owners of capitals and assets are still concerned that whatever their declare may some day be used against them. According to Tranio, the tax jurisdictions most popular with the Russian nationals are Cyprus, United Kingdom, Monaco, Malta and Switzerland. UAE’s and Singapore’s resident visas are also in demand. An increased interest of the Russian citizens is observed in the US and Israel.

Therefore, the gate being now opened for capitals repatriation, may well become a channel for financial outflows.

By Anna Oreshkina

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