The government confirmed the suspension of tax treaties with “unfriendly” countries
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The government approved the legislative suspension from August 8, 2023 (that is, retroactively) of most provisions of double taxation agreements with 38 “unfriendly” countries. Understanding the ambiguity of this step for Russian business, the White House intends to somewhat smooth out its consequences and promises to return part of the benefits included in the agreement, the cancellation of which led to the emergence of an additional tax burden for Russian companies.
To implement Vladimir Putin’s August decree on the partial suspension of double taxation agreements (DTAs), the government at a meeting on Thursday approved a bill enshrining this decision at the legislative level. We would like to remind you that, as a response to the sanctions, as well as to the decision of the European Union to include Russia in the black list of jurisdictions that do not cooperate on tax matters, from August 8, by decree, most provisions of the DTT with 38 unfriendly countries, including the USA, Great Britain and EU countries, were suspended (see. “Kommersant” dated August 9).
The need for a government document is due to the fact that, according to the law “On International Agreements”, the validity of international treaties can be suspended by the president in cases requiring the adoption of “urgent measures” – but with informing the parliament and introducing a corresponding bill to the State Duma. The draft approved at Thursday’s meeting duplicates the provisions of the decree. In particular, reduced or zero withholding tax rates are frozen – the Russian rate of 15% will be applied to dividends (instead of the 5% or 10 specified in the agreements), and for royalties and interest – 20% (instead of the zero rate). Let us clarify that the suspension does not affect the ability of individuals to offset income tax paid in another country.
The authorities promise to somewhat smooth out the negative consequences of the suspension of DTT norms for business – they consist, in particular, in the fact that under many commercial agreements the tax burden for withholding tax is now shifted to the Russian counterparty. Thus, the State Duma has already passed the first reading of a bill on the return (also retroactively, from August 8) to companies making payments abroad of a number of DTT benefits. We are talking about the right not to calculate income tax at source (or to do so at a reduced rate) when paying interest to foreign banks and export credit agencies. The benefit will also apply to the purchase of sea vessels, royalties for the rights to sports broadcasts, leasing payments for aircraft and licensing payments under contracts for software that has no analogues in the Russian Federation. As Deputy Head of the Ministry of Finance Alexei Sazanov said at a meeting with business the day before, the authorities are ready to discuss expanding this list – in particular, at the expense of income from international transportation and freight. To apply benefits, it will be necessary to confirm the absence of interdependence between the Russian organization and the foreign recipient of income.
In addition to relaxations, large businesses are also being prepared to tighten related legislation – regarding transactions between related parties. To reduce the number of cases of non-return of foreign currency proceeds from foreign trade transactions to the Russian Federation when non-market prices are used, it is planned to change the approach to transfer pricing (TP) administration. According to Alexey Sazanov, it is proposed to expand the circle of interdependent persons, increase fines to 40% of the tax base adjustment (currently 40% of arrears) and change approaches to determining market prices.
The Ministry of Finance has not yet disclosed the details of the innovations. According to Kommersant’s interlocutor, who is familiar with their discussion, it is planned to recognize controlled foreign companies and their controlling persons as interdependent (now for the purposes of the transfer pricing they are not considered such). At the same time, transactions with foreign export credit organizations and banks will not be controlled (in the absence of interdependence with the Russian debtor). In addition, according to Kommersant, discussions are underway to increase the contract verification period from three to five years and to use median prices in determining market prices rather than the maximum and minimum prices of transactions on the stock exchange.
According to B1 partner Marina Belyakova, the return of part of the DTT benefits is “a compromise solution that covers the most obvious pain points – situations where bargaining with counterparties is impossible, and the new tax places an additional burden on Russian companies.” In her opinion, international rental and transportation can also be included in this list, since organizing logistics is important now. In terms of transfer pricing, she says, businesses are “not happy with the proposals” – but the authorities’ task is clear to strengthen control over the outflow of the tax base through export-import transactions, especially with deteriorated information exchange. Partner of the Marillion group of companies Alexey Shvyndenkov notes that such “aggressive” amendments may be caused by the emerging trend of international holdings to withdraw profits from the Russian Federation through transfer pricing instruments. According to him, the cost of a mistake in pricing issues will increase significantly.
What do businesses think about tax amendments?
The RSPP says that “the business community is grateful for the balanced approach: partial rather than complete suspension of the double taxation agreement, as well as for the Ministry of Finance’s readiness to mitigate the negative consequences for the economy.” The RUIE, of course, also agrees with the need to continue the dialogue with the department to maintain benefits for freight and international transport.
Another initiative, about changing approaches to transfer pricing (TP) for businesses, as noted by the RSPP, “raises great concern.” Its approval will lead to the fact that additional tax charges and fines may be several times higher than the deviation of the actual price from the boundary of the transaction price range. “This level of penalties is unprecedented for Russian taxation and is more consistent with foreign exchange regulation, while transfer pricing is not an exact science and assumes a large share of the Federal Tax Service’s discretion when deciding on price adjustments,” the association says. They fear that any exporter may face huge additional charges even if there is no intention to transfer the tax base abroad. Also, levying a withholding tax on the amount of additional transfer pricing charges will lead to double taxation of the same price adjustment (income tax and dividend tax) and to the possibility of additional tax on dividends in situations where dividends could not be paid even hypothetically: in transactions with subsidiaries or sister organizations, as well as independent counterparties.
The RSPP also asks the authorities to extend the moratorium on fines for failure to submit documents in relation to controlled foreign companies (CFCs) in the context of European service providers refusing to provide services to Russian citizens. The union notes that “the sanction pressure not only continues, but is also intensifying” – as a result, many foreign assets are actually frozen, which does not allow the preparation of CFC reporting.
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