Up till now there have been disputes in the world community as to what the difference between tax evasion and tax efficiency is. In the near future, due to global reform trends in international tax legislation, such disputes will fall into oblivion as the era of offshore companies as tools for corporate business structuring also comes to its logical end
In the light of recent trends in reforming international corporate and tax legislation, the rules of the game in the global business market are changing dramatically. And Ukraine is of no exception. It can be said without prejudice that the era of offshore companies and banking secrecy is slowly but steadily approaching its logical end. Experts are making numerous assessments of this issue, trying to predict the course of events in the future and defining the prospects.
Change of rules
The world knows of successful attempts to eliminate gaps in international corporate and tax legislation. Thus, according to the decision adopted by G-20 leaders, the Organization for Economic Cooperation and Development (OECD) developed a system document — the BEPS plan (Base Erosion and Profit Shifting Action Plan), consisting of 15 points. The plan is primarily aimed at combating tax evaders who work through artificial transfer of profits to low-tax jurisdictions.
Generally speaking, instead of pointing fingers, the G-20 took a different approach — it changed the rules of the game. In the future, these rules will be the same for all countries and, as a result, it will be expensive and unprofitable for businesses to minimize taxes and cover up the ultimate beneficiaries.
Ukraine has already, at this stage, committed itself to implement the minimum package, four points of the plan out of 15, videlicet: 1) combating "harmful" tax practices and preferential conditions; 2) improving current treaties on avoidance of double taxation by incorporating general rules for the avoidance of treaty abuse; 3) improving current national legal regulations regarding transfer pricing documentation (TPD) and future information exchange; 4) improving current treaties on avoidance of double taxation by increasing the efficiency of dispute resolution mechanisms.
Ukraine signing the Multilateral Instrument (MLI), which will make it possible to amend 77 treaties on avoidance of double taxation to which the country is a party, was one of the steps towards the implementation of the BEPS plan. Such steps will significantly reduce the transfer of Ukrainian capital to jurisdictions with a low level of taxation in order to minimize tax liabilities, which, in turn, should lead to an increase in revenues to the state budget.
Why have businesses been using low tax jurisdictions? The main benefits of using a foreign element in corporate structuring were as follows: optimization/minimization of the tax burden; covering up the ultimate beneficiary; concealment of real incomes; defrayal of own expenses; reinvestment of profits for business development in other jurisdictions, including within the own group of companies; raising of investment attractiveness of a business group for a foreign investor; distribution of companies by functional feature (operating companies, trading companies, companies that own assets); attracting the investment resources of foreign financial institutions; protection of Ukrainian assets from third-party invasions and raider attacks.
As a rule, a foreign element performs either one or several of the listed functions at the same time. When choosing a jurisdiction, as a rule, its presence on the EU’s "black" or "gray" lists (non-cooperative tax jurisdictions) was analyzed; efficient passive and other incomes tax rates; special rates for passive income; availability of participation exemption rules; availability of TP rules; availability of CFC rules; availability of the Convention for the Avoidance of Double Taxation with Ukraine; operating costs (registration, office rent, the cost of maintaining staff, requirement for a mandatory audit); specific requirements for carrying out activities (licenses, concessions, acquisition of real estate, land, obtaining a loan).
But times change and business needs to make urgent decisions as to what to do with foreign affiliated companies, since the acquisition of corporate rights in them was carried out with violations.
Earlier, before starting to invest abroad, it was necessary to obtain individual licenses from the National Bank. However, only a few Ukrainian businessmen fulfilled such requirements.
If a company passed into ownership via corporate rights donation agreements, then the grantee of such agreements shall pay tax of the amount of donation, but then again, far from all met the requirements of tax legislation.
Starting in 2019, from the moment the new legislation on currency regulation comes into force, individual licenses for investing abroad will be abolished.
Time will show whether the business sector is ready for such rapid and drastic change of rules at global level, however, generally speaking, there is little time left.
Within the given scenario, part of the Ukrainian business sector has shown its willingness to become a "white", transparent business and is considering alternative options for international corporate business structuring and tax planning with the use of certain European jurisdictions.
Poland is one such jurisdiction, which provides a number of advantages for Ukrainian business. In particular, a business and, in the first instance, exporters, by registering a company in this country, receive the following:
— the ability to get closer to their customers;
— the ability to diversify risks existing in Ukraine (currency, inflation and others risks);
— access to cheap financial resources, leasing programs, government grants, structural programs of Poland and the EU;
— the ability to have a transparent foreign company for corporate business structuring and protection of assets in Ukraine;
— the opportunity to work in special economic zones and industrial and technical parks;
— state export credits (KUKE, BGK).
Ukrainian companies initially consider a foreign element in order to promote their own product on new markets, as well as to optimize tax payments; the use of such a legal form as a limited partnership can significantly reduce the tax burden when receiving income in Poland.
In addition, there is a pilot project to create a unified business service center (BSC) in Poland called Ukrainian Business Hub.
The main idea of the project is to bring together companies that provide a wide range of outsourcing services in different areas in the same room.
For example, the BSC can provide you with such services as company registration, assignment of a virtual address for a company, legal services, accounting services, and tax consultant services. A business can receive support from the Ukrainian Business Association in Poland.
As the saying goes, there is always an alternative. It all depends on who is looking for and what that somebody is looking for, and most significantly for what purpose.