Can the economy be withdrawn from offshore companies?

By Vestnik Kavkaza

Last year, 42% of the Russian foreign trade turnover ($321.2 billion) passed through offshore zones. The data was voiced by the head of the Council of Federation’s committee on budget and financial markets, Sergey Ryabukhin, at a parliamentary session yesterday. The Top-5 of offshore companies countries are Switzerland, Hong Kong, Ireland, Cyprus, the British Virginian Islands.

It was discovered that most of major and small Russian enterprises used offshore zones. More than 170,000 Russian companies are registered in Cyprus alone. The country has a real market of offshore companies: to buy a company, you need $550-1800.

According to experts, the main reasons for Russian business’s leaving to offshore zones are the irregularity of laws and the court system, vulnerability of property, unfavorable investment climate, underdevelopment of the fund market, and striving for minimal tax duties by the companies.

The senior expert of the Investigation Committee of Russia, Georgy Smirnov, spoke about offshorization: “The first direction is disinvestment when money or financial instruments are taken back. The second direction is withdrawing of a management center when corporate stock is given to trust management to offshore companies; it is made to hide an actual owner of business. It is a widely used scheme as well, the so-called securitization of assets. A big part of Russian economy is offshored in this direction.

In the last decade we have seen schemes when capital is transferred not directly to offshore companies, but to secure companies to avoid a tax control or any other control by the Central Bank. After that, money is transferred to offshore companies and can be withdrawn as borrowed assets.”

The Central Bank detected the volume of resources which were withdrawn arguably, it is about 60% of the whole volume of finances taken to abroad. “According to economists, GDP loses 1.5-2% because of that. So, if we stop offshorization of our economy by 60-70%, we will increase our GDP by necessary 1.5-2%. Thus, the struggle against offshore companies is very important,” Smirnov said. He also noted that “it is not a Russian innovation, it is a world trend. After the financial crisis of 2007, almost all countries got budget deficit which can be compensated by means of the reserve offshore capital; and the U.S.A. example is illustrative.”

According to the deputy head of the Federal Tax Service, Alexei Overchuk, globalization caused changing of a business model which is now aimed at aggressive tax planning. “In the context of digital economy the international tax system which was formed in the early 20th century doesn’t correspond the pace of social development. Leaders of G8 and G20 understand this. In two-three years certain decisions will be made at the international level, which will significantly influence the development of the international tax system. A special attention should be paid to transnational companies which take many billion dollars to offshore zones.”

Even major taxpayers of Russia use tax optimization schemes. The current tax system enables vertically integrated oil companies to reduce tax duties by selling produced oil at internal prices which are much lower than its real market price.

Participants of the parliamentary session recommended legislators to define the notion of “an offshore zone” in laws and what countries belong to offshore zones, and introduce stricter punishment for illegal withdrawal of capital abroad.