TAX PLANNING EXPERIENCE CAN’T BE BOUGHT – BUT IT CAN BE SHARED

Akin Gump Strauss Hauer & Feld LLP – one of the largest foreign law firms in Russia – recently held a seminar in conjunction with the International Tax and Investment Center. Their “Changes to the Application of International Tax Treaties” seminar took place in Moscow to address the implications for international tax structures and dual taxation.

After more than two decades of working in Russia, specialists from Akin Gump have accumulated extensive experience in providing legal support for foreign investments in the Russian economy. The tax seminar held in Spring, 2011 was a timely special event for both practicing jurists and business representatives as Russia's accession to the WTO is now only a matter of time. One of the main conditions for the nation’s WTO membership is synchronizing Russia’s tax legislation with international tax legislation. The seminar opened with an overview of the obvious progress Russia has made in simplifying and clarifying its tax legislation. It’s no coincidence that in this case, the existence of a number of “black listed” offshore countries in Russia is considered to be a serious shortcoming. Specialists believe this to be a direct cause of the fact that numerous companies, particularly small and medium-sized businesses, have been forced into Russia’s grey market economy. This mass shift of officially regulated companies to grey market businesses has resulted in the widespread use of double – and sometimes even triple – accounting and reporting systems. The seriousness of the problem is further exacerbated by the fact that the government authorities concerned and branches of executive as well as legislative structures in Russia regularly accord themselves the right to create new “lists”, particularly in rural areas of the nation’s outlying regions. The negative attitude European experts have on doing business in Russia stems from the very limited list of gross business costs that companies are permitted to claim and the extent to which this restrictive list is difficult to apply. The major issue here is the Russian tax authority’s various interpretations of Russian legislation as to evaluating the business expenses which allow companies to actually reduce their tax base. Experts suggested that should paying income tax in advance become a more widespread practice, it would result in enhancing the credibility and “trustworthiness” of companies. Switzerland provides unique and particularly valuable experience in the area of legislative regulation to combat abuses in tax planning, thereby preventing or pre-empting virtually any fiscal irregularities. In their discussions on strategies for minimizing tax risks using international structures, seminar participants considered various alternatives for creating these structures. Considering current Russian tax practices, experts pointed out several serious threats to various types of businesses. The first concerns the prospect of Russia implementing the renowned “actual recipient of income” concept. Another unpleasant surprise could affect many foreign businesses currently operating in Russia. Should a company follow the standard international business practice of establishing a form of local corporate representation, the move may result in the loss of tax benefits under treaties covering the avoidance of double taxation in Russia. In these cases, the problem is that any de facto representation of a company automatically makes it a legal entity in Russia. Hence, direct subordination to a foreign company is not sufficient grounds for the Russian tax authorities to grant privileges to any form of corporate representation located in Russia. However it is actually a corporation's representation – not its parent company abroad – that pays taxes in Russia.