Forward to the Future
"Companies that want to operate successfully in the international market in the future are required to restructure their operations today, taking into account international tax policy", says Sergiy Oberkovych, Senior Partner with GOLAW
— In your opinion, why has international tax planning become a global trend nowadays?
— It's very simple, big changes are coming, and the initiatives that were launched in the year 2000 and actively developed in recent years, have been introduced in practice, and will be implemented in the near future. Most governments around the world have made the decision to develop mechanisms to broaden the tax base outside of their countries due to the financial crisis. This trend can be traced through the adoption of international agreements by countries and reforming of national legislation, the main objective of which is fighting against any aggressive tax planning schemes, control over the income of residents found throughout the world and application of the maximum tax rate.
— Who can such initiatives affect?
— We are talking here about individuals as well as about business. The structures located in low-tax jurisdictions as well as customers using tax avoidance methods or a significant reduction in the tax rate without creating a real presence («substance») in the country of residence. Both are under threat.
— What instruments will countries use to toughen the requirements?
— There are numeroussuch instruments. First of all, it is worth mentioning the BEPS plan, a unique initiative of the Organization for Economic Cooperation and Development (OECD) and G20 to unify best global practices to fight against the blur of the tax base and gain withdrawal from taxation. The project started in 2013 and in October 2015 the latest developments of the working group, which will be implemented in different ways, have been obtained, including: changes in the national legislation of countries, modification of the OECD Model Convention and, of course, an unprecedented multilateral instrument for making global changes to existing agreements related to avoidance of double taxation.
You should not forget about the initiative of the European Commission, which in early 2015 put forward changes to the Directive of the EU Parent-Subsidiary companies. According to the changes, the benefits of the Directive may not be applied if one or another instrument / agreement is used by companies to avoid tax only and is not a "true" one. That is, it has no commercial and economic grounds.
— Do countries cooperate in fighting tax avoidance?
— Clearly, this kind of investigation will have results only if there is mutual cooperation between countries. Despite the desire of some classic offshore jurisdictions, and even several European countries to keep their tax benefits unchanged, pressure from the international community pressure as well as that of the "Group of Twenty" is sufficiently strong.
A very good example of such international teamwork is considered to be the signing of the Multilateral Agreement on automatic information exchange in October 2014. The document provides for the exchange of information related to the accounts of individuals and legal entities between financial institutions and the tax authorities. The first exchanges between such countries as the British Virgin Islands, Cyprus, Liechtenstein, Luxembourg, the United Kingdom, the Cayman Islands, as well as most European countries will take place in September 2017.
As the world's legislator, the United States has introduced FATCA, a law according to which all foreign financial institutions have to report on the accounts of US taxpayers or on the companies in which they have a substantial share, to the US tax authorities.
Certainly, a qualitative effect from the initiatives can only be achieved if all the countries apply the regulations and use a common approach.
— Will such an international approach to reform affect service providers (consultants) themselves?
— As part of the BEPS plan at the international level, it is proposed to introduce a rule of mandatory disclosure of aggressive tax planning schemes. In other words, the advisers will have to submit regular reports on the proposed models of tax planning, in the course of which the tax rate will be significantly reduced. Similar ideas have also been developed by the European Commission, according to which an automatic exchange will concern tax advice provided over the last 10 years, provided that they continue to operate.
— In your view, which international initiatives will have the greatest impact on Ukrainian customers?
— The new rules relating to preparation of documents on transfer pricing, the fight against abusive use of tax conventions, artificial avoidance of permanent representation status, this is what immediately comes to my mind. Indirectly, any change in international law or national laws of a country may be important, as foreign companies owned by Ukrainian residents are governed by the laws of their country of incorporation.
— Does Ukraine take any steps to fight tax avoidance?
— Internationally, Ukraine expresses no particular desire to participate in the development of such projects. Despite the fact that Ukraine is not a member of the EU or OECD, there are many ways and opportunities for the Ukrainian government and authorities of the state tax services to take part. Do not forget that in 2014 Ukraine and the OECD signed a Memorandum of understanding on enhanced cooperation.
Despite this, at national level, our country has introduced quite a unique project of its kind related to disclosure of beneficial owners of legal entities in public registers. European countries decided in recent years not to take such a radical step. The implementation of the Law in practice has caused serious difficulties with a variety of clients, even within international corporations. The most offensive is that the liability for non-compliance with the requirement of disclosure has been rested upon the managers of Ukrainian companies, although the international approach provides for the liability for the beneficiary himself. And no-one negates the possibility of Ukrainian fiscal authorities receiving information on the beneficiaries of foreign companies within the exchange of tax information upon request under the Convention for the avoidance of double taxation.
Regulations regarding controlled foreign companies as well as tax regulations for indirect sale of real estate have not been introduced yet. Although it is worth noting that, for example, the draft of the revised Convention for the avoidance of double taxation with Cyprus provides for the right for Ukraine to levy taxes upon the income of a resident of Cyprus obtained from alienation of shares or other corporate rights if more than 50% of the value of the corporate rights are directly or indirectly related to real estate located on the territory of Ukraine.
— Taking into consideration international trends, what advice would you give to customers?
— Customersshould choose: to either ignore reality or to live in accordance with the rules. Of course, the harmonization of their structures and strict compliance with all the requirements can be a rather costly process, but such decisions should certainly be taken to feel confidence about the future.