How Much Money Will Leave the Country through the Currency Visa-Free Regime?

Опубликовано: 22.11.2019

On December 1, the MLI Convention will come into force in our country. How will this affect business and capital flow?

Oleksii KUSHCH

In 2017, the National Bank of Ukraine issued 400 individual licenses for investment abroad to individuals according to a simplified procedure, which involves the submission of all necessary documents to the servicing bank (primarily regarding the investment object), sending information electronically from a servicing bank to the NBU and directly obtaining an “electronic license”. The procedure takes several working days. After obtaining a license, an individual can make investments abroad in the amount of up to $ 50 thousand (or the equivalent of this amount in another currency). You can carry out the necessary transactions, open bank accounts abroad, place deposits in them, buy real estate, securities and other financial instruments on the international stock market, become a member of foreign companies and trusts. According to the regulator, the total amount of funds withdrawn abroad on the basis of individual licenses received amounted to $ 9 million in 2017.

In 2018, while maintaining the threshold investment amount, the amount of funds withdrawn was already $ 25 million. In absolute terms, this is not so much, but we see an increase in investments in foreign assets by almost three times.

РHowever, foreign exchange visa-free travel must still be confirmed at the level of implementation of BEPS standards (Base Erosion and Profit Shifting). If we do not do this as a country, the foreign exchange window may close from the outside and not open from the inside. This will be done by foreign banks and international organizations.

At the 70th Congress of the International Tax Association in Madrid, the results of the implementation of BEPS – 15 rules for combating tax evasion – were summed up (a plan to counter the erosion of the tax base and the withdrawal of profits from taxation). These measures are being implemented in the EU and countries belonging to the Organization for Economic Cooperation and Development (OECD).

Tax control and financial monitoring should replace outdated and already ineffective instruments of foreign exchange control, which have a counterproductive effect on the country’s investment regime and are easily circumvented by systemic taxpayers.

On the map of the implementation of BEPS standards, Ukraine is still on the list of 26 “orange” countries that do not properly apply these standards.

In July 2018, our country signed the Multilateral Convention on Measures to Prevent the Erosion of the Tax Base and the Withdrawal of Profits from Taxation (it is abbreviated as MLI). The Convention should become one of the 15 steps for Ukraine towards the implementation of the entire package of international agreements within the framework of the BEPS procedure. More than 80 countries have already joined it.

The MLI Convention provides for the coordination of international tax legislation, in particular, the cancellation of a system of tax incentives. In addition, the very concept of “residency” of companies is changing and the mechanism of tax disputes is being improved. For example, in the countries – participants of the agreement, the concept of a “business purpose” is introduced.

How does it work? For example, Ukraine and Cyprus applied to their residents the norms of the agreement on the avoidance of double taxation. A Cypriot resident in Ukraine or a Ukrainian resident in Cyprus could choose a tax regime favorable to him. As a rule, it was a Cypriot one, since there the corporate tax, depending on the type of operations, ranges from zero to 5%, in contrast to 18% in Ukraine. Wherein this company had no relation to Cyprus as a place of business, earning all the money in Ukraine.

If we adhere to the norms of MLI, then when a company actually operates in a country with which an international agreement on the avoidance of double taxation has been signed, it has the right to pay tax at the place of its accrual, taking into account the benefits. And if the binding to the country is formal and, in fact, the declared operations are just a fictitious scheme to cover the withdrawal of capital, then there are no rights to a preferential tax regime.

Each country must determine a list of states with which it will sign an additional agreement under MLI BEPS. If the counteragent refuses, the norms of the convention do not come into effect.

Ukraine has already announced its intention to amend 77 international tax treaties. At the same time, countries such as Malta, the Netherlands, Austria, Switzerland, Germany, Spain and Norway have not yet added Ukraine to the list of countries for the implementation of the Convention.

These measures should equalize the balance of capital flows in favor of countries with a higher level of taxation, that is, the effect of tax incentives for investment inflows is significantly reduced. For Ukraine, such a visa-free currency regime is another challenge. As the visa-free regime with the EU has shown, this open window of opportunity also has a downside in the form of mass labor migration. New international conventions should help developed countries collect high taxes and have the potential to minimize capital flight from emerging markets to offshore zones, but only for those who have time to carry out the necessary reforms to structurally change the profile of the economy. Those who do not make it in time will face the toxic consequences of “open windows” in the form of attenuation of entrepreneurial activity.

Volodymyr Harkusha

Managing Partner of K.A.C. Group

So, from the conditional December 1 (in fact, the process will drag on for some time), Ukrainian business, especially in its export-import part, will start working in accordance with the MLI rules.

In fact, MLI plays the role of a coordinated mechanism for introducing changes to existing agreements on the avoidance of double taxation without the need for multilateral negotiations. That is, changes to the existing agreements are made on condition that both parties to such an agreement either joined the MLI Convention or included such an agreement in the list of agreements to which its effect applies, and submitted a corresponding application to the OECD Depository.

What provisions of the MLI Convention can influence Ukrainian business? First of all, these are:

– securing the so-called main purpose test through Art. 7;

– consolidation of Art. 9 of the principle of taxation of income from the alienation of shares or interests in property rights, the value of which comes primarily from real estate;

– consolidation of rules through Art. 12 according to which, if a person systematically performs actions that lead to the establishment of contacts on behalf of the company or plays a major role, the company is considered to have a permanent establishment;

– change in Art. 13 regarding activities that are deemed to be such that do not entail the establishment of a permanent establishment. Now a procedure is being introduced for mutual coordination of such controversial issues between the competent authorities of the parties to the tax agreement.

The main emphasis in the MLI Convention in the context of its implementation in Ukrainian legislation is the main purpose test. It means that the condition for obtaining a tax benefit in accordance with the agreement on the elimination of double taxation, to which the Convention applies, is the need to confirm that obtaining such a benefit is not the main purpose of the operation or agreement. This, to put it mildly, significantly corrects the schemes of using affiliated non-resident companies for self-lending in order to increase the internal cost base and legal withdrawal of foreign currency in the form of interest on the loan. What can we say about the use of patents, trademarks, etc. for the same purpose?

Thus, a Ukrainian company that has business ties with a foreign company needs to take four steps:

1) Find out if the jurisdiction of the foreign company is a party to MLI;

2) If yes, find out if is it included in the list of agreements on the elimination of double taxation, to which MLI applies, transferred by Ukraine to the OECD depository;

3) If yes, find out if Ukraine in a similar list of MLI for the OECD jurisdiction of a foreign company, which acts as a Ukrainian counteragent.

4) If again yes, the next obvious step should be a comprehensive analysis of the business structure in the Ukrainian and foreign part of it, its economic and financial plans, and their adjustment to comply with the provisions of MLI, BEPS and AML.

In general, the swiftness of domestic tax innovations in the mainstream of the international struggle against tax competition causes some bewilderment. By and large, they are rather dubious from the point of view of practical benefits for domestic business. What advantages do they provide? Access to cheap foreign loans? No. Attracting foreign investors? Quite the opposite. Unless the IMF likes us for free.

Будьте в курсе свежих новостей и событий!



Позвонить Отправить Email