5 Steps to the Business Deoffshorization

There are five first steps for the national economy deoffshorization:

1. Introduction of the system of rules against the tax optimization (General Anti-Avoidance Rules). This is a complex, intended to identify transactions that have no real business purpose. That is, they are made only for tax optimization.

The thing is that the formality of our tax system makes it impossible to contest transactions based on their nature. There are two doctrines of the tax law in the world – "the essence over the form" and the reverse one, which has negative connotations – "form over the essence". Developed countries rely solely on the essence. Ukraine remains the state of the form. This situation arose due to the Soviet basis of the legal system of Ukraine and is typical for all post-Soviet countries. Here it is important the papers motion and not the flow of goods and services.

In the end, if all the paperwork is in order, usually the company can transfer funds from the Ukraine more easily independently of the rest of indicators. Therefore, for example, there are cases when a foreign company transfers abroad to a parent company millions of dollars for the service, which they do not really need, and that they could not explain to the tax administration of a developed country. In Ukraine the tax authorities do not have enough motivation and legislative opportunities to seek the truth.

For the full use of the essence over the form doctrine and business goal, which was formally been copied into our legislation, it is necessary to introduce the whole mechanism GAAR, rather than a formal declaration of its details in the legislation.

2. Improving the regulation of transfer pricing. The main optimizing of taxes in Ukraine occurs through the purchase of goods and services from non-residents for the purpose of for withdrawal of funds. In the world practice developed the transfer pricing rules to control the trafficking. The main purpose of these rules is to control price of certain categories of transactions. At a time when the GAAR rules allow you appeal against the transaction in principle, transfer pricing rules allow you to adjust the cost of operations.

The transfer pricing rules are used for trade between related parties, i.e. when companies that participating in the operation are conditional members of a one group, for example, they have common owners. The transfer pricing rules apply in Ukraine to the direct trade with offshore jurisdictions.

The problem is that the transfer pricing rules in Ukraine work for real only in the cases of filling the special documentation. The thing is that Ukraine borrowed the transfer pricing from the Organization for Economic Cooperation and Development. Our tax and law systems, again, can’t work for the most of rules that are inherent for the international practice and we don’t get a working mechanism by simply copying them.

Besides, for applying the rules detailed methodologies are needed, thus the transfer pricing envisages analysis of the stock quotes, comparison of the operations of different companies, analysis of specialized price databases. Abroad the transfer pricing legislation is accompanied with the detailed methodologies to hundreds of pages. And in Ukraine such rules are adopted in a very simplified form. This situation leads to uncertainty and it frightens off capital.

Organization for Economic Cooperation and Development has developed a project the BEPS (Base Erosion and Profit Shifting). This is a complex of measures to counteract the blurring of the tax base and output profits. In part, plan BEPS is related to the filing of documentation on transfer pricing, which consists of three levels:

  • Local file – only relates to the disclosure of information about the control operation that carried out in the particular area.
  • Master file – relates the providing of the general information about the group including the analysis of operations, describe of pricing, informing about the intangible assets and the provision of the financial statements of group.
  • Country-by-country report – it is a report on each country where the company operates. It contains information on assets, personnel and functions of each company in the group.

In fact, our special documentations of transfer pricing yet meets only the Local file part, which allows for Ukrainian business that uses offshores to not disclose the full essence of its operations worldwide.

However, without the introduction of GAAR rules that were described above, even in the case of using the Master file and Country-by-country report, the results of this analytics can be used only in the limited form.

3. Insecurity of business. In the Ukrainian realities often the offshorization is bounded even not with the unwilling to optimize taxes, but with the desire to protect business by transfer it under the protection of foreign jurisdiction. Because in Ukraine you can optimize taxes without using foreign offshores, but it is not possible to protect business here. Therefore one of the main conditions for the deoffshorization is a real reform of the judgmental and law enforcement system.

Yet, unfortunately, reforms in these spheres are antipodes of western standards, and even if changes in the other spheres will happen, without these two important tools changes in business in Ukraine will not happen.

4. To provide a more efficient exchange of information. Yet Ukraine hasn’t applies effectively an opportunity of information exchange with tax bodies of other countries. Formally, our country has joined to the program of information exchange within the OECD in 2013, but in practice process happens manual and in the very limited mode.

But in the world dominate other trends. A very big impact had an approved law FATCA (Foreign Account Tax Compliance Act) in USA in 2010, according which other countries should send regular reports to the US tax service about all reports of the American citizens in these countries. For refusing to perform this law all income will be taxed with US tax on repatriation of profits of 30%.

The FATCA rules motivated OECD for development in 2014 the Common Reporting Standard (CRS) which provides an annual automatic information exchange between countries. Also was signed a convention on the partnership of the competent bodies for the automatic information exchange on CRS standards – Multilateral Competent Authority Agreement – MCAA Convention.

Ukraine is a member of another international convention on mutual assistance in tax matters – The Multilateral Convention on Mutual Administrative Assistance in Tax Matters, MCMAATM, which gives the right to accede to MSAA Convention or implement the CRS standard by amending the bilateral agreements on avoidance of double taxation.

Joining the MSAA Convention will create conditions in which information about citizens’ assets and open accounts in the other countries annually will be directed automatically between the participating countries.

5. The reform of corporate and currency legislation. Offshores let you use a privilege of free circulation of capital, while in Ukraine the state in Ukraine refers to the foreign economic activity with the same skepticism as the Soviet Union treated the trips of citizens abroad. It is very difficult to pay for many purposes necessary for business from Ukraine, particularly it is necessary to stock up a plenty of papers with seals that is not in the world practice. So, for the business in Ukraine, desire to get out of the currency regulation is a natural intention.

Another negative side of the hard currency editing is desire of international companies to not pursue the funds in Ukraine in principle. Many companies that have representative offices in our country prefer to make payments for transactions related to Ukraine in other jurisdictions, because to pursue funds into Ukraine means for them to start their "own peril".

Disadvantages of corporate law do not give business the opportunity to regulate relations under Ukrainian jurisdiction with the same efficiency as it can be done abroad. In particular, this concerns the institutes of trusts, freedom of operations, tools for the implementation of operations. And if the company opens abroad, even in the prestigious jurisdictions such as the United Kingdom, the next natural step is to create a "superstructure" as a company offshore.