To reveal all: why Russia agreed to exchange financial information

Russia Thursday, may 12, signed the international agreement on the automatic exchange of financial information: it will allow FNS starting in 2018 to obtain data on the financial accounts of taxpayers from more than 80 jurisdictions, including offshore. Authorities claim that the adherence to this regime will help to reduce the shadow economy and combating illegal transfer of profits from Russia, will be fewer opportunities for tax fraud.

How will the exchange of information?

Tax Treaty countries will automatically exchange information annually, according to the established standard. A uniform standard of exchange of information (Common Reporting Standard, CRS) assumes that financial institutions provide information about the financial accounts of the resident to the tax authority of his country, and the tax authorities on a bilateral basis for sharing this information.

In fact, Russia will begin to share such financial information only in 2018. Foreign banks, insurance companies, brokers, depositaries, management companies, which will operate the agreement with Russia, by September 2018 for the first time will provide on information on the financial accounts of Russian individuals—tax residents, as well as companies and organisations without a legal entity, the beneficiaries of which are the Russians, says EY partner Irina Bykhovskaya. The same thing should be done and Russian banks and other financial institutions. Via on they will be obliged to transfer information about the tax residency of customers to foreign tax authorities.

What information should be exchanged?

Information about “financial accounts” like Bank accounts and deposits, investments in securities, collective investment instruments, etc. be Collected and will be sent the names and addresses of account holders, VAT number, account number, the actual financial information (the balance, the amount of the interest, payments on financial instruments, insurance contracts, etc.).

Than the agreement threatens the Russian business?

This agreement may result in additional taxes to Russian tax residents — owners of controlled foreign corporations (CFC) within the framework of the law on deofshorizatsii, warn tax advisers of the respondents. The CFC rules enacted in late 2014, ordered the owners of shares in foreign companies from 10% to notify the Russian tax authorities in 2015. And in 2016 ordered the owners of a share of 50% or more to pay a tax on undistributed profits of a CFC, provided that the profit made for the year 2015, 50 million rubles and above (rate is valid for a transitional period until 1 January 2016, then the proportion will decline to 25%, the threshold for net profit to 30 million, then up to RUB 10 million).

KIK for owners providing information on account holders under the automatic exchange will mean the inability to hide behind the “facade” of a foreign company, the adviser said the tax practice of law Bureau “Egorov, Puginsky, Afanasiev and partners” Igor Shikov.

Representative FTS argues that direct effect on the holders of shares in the CFC signing of the agreement will not have. But the service expects that automatic exchange of information will effectively in automatic mode to check the information about the CFC, presented by the Russian taxpayers.

“Having such a database, the tax authorities will be able to compare that information with information about the possession of foreign companies and CFC, which will provide the Russian resident, and to identify discrepancies. This may result in additional charge of taxes on CFC’s profit, as well as sanctions for failure to report and pay tax” — does not preclude Alexander Tokarev from KPMG. Information about the account balance and most importantly — the proceeds to the account, will efficiently help the Russian tax authorities in checking the completeness of the information reflected in the Declaration on a tax on CFC’s profit, adds Bykhovskaya from EY.

What will change for ordinary citizens?

Nothing, if the person does not have foreign financial accounts. FNS will be obliged to transfer to foreign tax authorities information about open in the Russian financial organizations accounts tax residents of the relevant foreign countries. Information on the financial accounts of Russian tax residents in the automatic mode will not be transmitted, said a representative of the FTS. Exceptions are possible only in cases if such information is formally requested by a foreign tax authority as part of the ongoing tax audits or investigations of tax crimes, he says. But such information could be transmitted and used, in accordance with international treaties on avoidance of double taxation and the Convention on administrative assistance in tax matters, in effect for Russia from July 2015 adds a representative of the FTS.

If the Russians have a Bank account abroad, he is obliged to notify about it already now, in accordance with applicable law. In this case, the agreement about the exchange of information on financial accounts will help to monitor the implementation of these requirements, says Bykhovskaya.

“Revealed” does Panama?

Offshore financial institutions are discussed in light of the scandal with the leak of “Panama records”, will also soon begin to provide information about their customers. That Panama, along with Bahrain, Nauru, Vanuatu and Lebanon, has pledged to accede to a multilateral agreement, may 11, announced the OECD.

Interviewed tax consultants point out that owners of foreign assets a year ago began to think about whether to save them to a foreign company or structure. And for many “Panamanian dossier” was an additional impetus, as it became obvious how fragile can be the “secret offshore”, said Igor schikow.

“In my practice, we have yet to see significant interest in the change of jurisdiction of the foreign company in light of the automatic exchange of information, given the number of jurisdictions that have either already joined the Treaty, or intend to do so in the future. However, we see interest in the change of residence of natural persons — owners of foreign companies with the aim of going beyond the actions of the Russian CFC rules,” — said Tokarev.

“We now see a growing customer requests for compliance with the requirements of the new tax and currency legislation, disclosure of foreign accounts, companies and structures as well as to bring them into compliance with the new rules, the voluntary Declaration of assets — specifies senior associate at international tax law firm “Goltsblat BLP” Artem Toropov. — Demand begins to use tax-free liquidation of the offshore structures with the Declaration of elimination in Russia, the transfer of the tax residency of the holding companies in Russia, the rejection of the nominal ownership of assets”. He adds that while the demand cannot be called mass.

Who else joined the agreement?

To the agreement have already joined 80 countries and territories, including European countries, the part of offshore companies (including British virgin Islands, Cayman Islands, Isle of man, Jersey and Guernsey). On the website of the OECD States (at.pdf), 101 jurisdiction has confirmed that it will also share financial information. Many countries in the EU, BVI, Cayman expect to begin to exchange information in an automatic mode in the next year, says Alexander Tokarev. Panama in 2018.

To the agreement for Russia to act, it will be necessary to amend legislation and implement standards of exchange. In particular, the standard CRS. Also it will be necessary to establish a system of protection of the transmitted data, as such information is confidential. For the full implementation of the automatic exchange of financial information will be amended in the current legislation and the necessary regulations, FTS Russia has already prepared the bill and sent it for consideration to the Finance Ministry, said the representative of the FTS.

The usual procedure involves the adoption of the Federal law. Next, you need to notify the Secretariat of the coordinating body on the readiness of specific countries participating to the implementation of the agreement. Most countries are already working on the technical side of the treatments: data in standard format to be collected and prepared for automatic exchange, said Shikov.

What will happen to the “black list” of offshore tax havens on?

In the future, the signing of the agreement may lead to change in the list of countries included in “black list” of the on — not exchange information for tax purposes with Russia or provide information of poor quality, said the representative of the FTS.

The list was approved by order of FTS in March 2016 and has started to operate from 1 April 2016. It includes, in particular, BVI, Bermuda, Panama and several other countries — a total of 111 countries and 22 territories that the Russian authorities equated to offshore. “We hope that all States and territories who subscribe to the automatic exchange of information on Russia and fully implement its obligations, does not fall in the above list or are excluded from it in the future”, — said the representative of the FTS.

The exception list will depend on how effective, in the opinion of the tax authorities, will be the exchange of information with jurisdictions from the “black” lists. Formally, the accession of any country to the agreement does not mean automatic exclusion from the “black list”, — says Alexander Tokarev from KPMG. “If the practice of information exchange is positive, it is possible that such States and territories may be excluded from the “blacklist” — for example, Bermuda, BVI, Guernsey, Jersey, Cayman Islands, indicates Irina Bykhovskaya.

Tax overview PwC from October 2015, it was said that if a company is a tax resident of the country from the blacklist, on, it in some cases will not be able to use the possibility of exemption of profits from taxation in Russia. In particular, in cases where a CFC has a high effective tax rate in their jurisdiction (at least 75% of the average weighted Russian rate), is a Bank or an insurance company carrying out activities in accordance with its personal law on the basis of a license or other permission is specifically, and if the CFC is the Issuer of marketable bonds or organization authorized to receive interest income, or organization, which have been assigned the respective rights and obligations.

FNS worked on the black list of offshore companies in a few months. In October in one of the variants of the list were Austria, UK and Switzerland, as well as, for example, Brazil, which along with Russia is part of BRICS. Then, in early 2016 in progress on a list of “transparent” Austria, UK and Switzerland have been excluded. Partner Paragon Advice Group Alexander Zakharov said that the exception from the blacklist on these countries is a major relief for business, as these countries were popular among Russian owners of KIK for starting a business.