The Ministry of Finance of Russia announced a total revision of tax agreements with other countries and the erosion of the tax base will lead to a total revision of all current agreements with other countries on the avoidance of double taxation, Deputy Finance Minister Alexei Sazanov said in a conversation with Vedomosti. The implementation of the reform will allow the Russian authorities to collect more taxes from foreign companies.
The fiscal initiatives Pillar 1 and Pillar 2 (Two-Pillar Solution) were prepared by the Organization for Economic Co-operation and Development (OECD) and presented the final document on July 1. The agreement reflects the consolidated position of 131 countries, including Russia. One of the main changes in international tax relations will be an increase in the rate of withholding tax on payments abroad of interest, royalties and a number of other similar payments, with the exception of dividends, to nine percent. The new rules are expected to take effect in 2023.
According to the Deputy Minister of Finance, Russia will increase budget revenues after the introduction of these innovations, since agreements on the avoidance of double taxation (DTT) have been concluded with many states, and they exempt the mentioned types of payments from taxes within the country. If Pillar 2 is implemented in the format of a multilateral convention, then, most likely, the rate on all bilateral agreements will increase automatically, Sazanov said. However, it is also possible that Russia will have to revise the terms of each specific agreement separately. According to the Deputy Minister, this alternative will lengthen the process, although the final result as a whole will not change.
Mikhail Filinov, partner of the consulting company PwC, said that the DTT between Russia and the bulk of offshore companies already presupposes a withholding tax at a rate of at least nine percent. With the most popular countries with special conditions for doing business – Cyprus, Malta, Luxembourg, Switzerland – the Russian authorities have already concluded new, more advantageous agreements or are discussing their renegotiation. According to Filinov, this part of the tax reform will mostly affect international businesses, for example IT companies, which receive royalties from Russia for know-how or licenses, and are subject to low taxes in their home jurisdictions.
At the end November, Deputy Minister Sazanov also said that after joining the Two-Pillar Solution, the Ministry of Finance is going to abandon the idea of reducing the income tax to five percent for residents of the so-called “Russian offshores” – special administrative regions (SAR) in Kaliningrad and Vladivostok. These benefits contradict the parameters of the international agreement and can compromise the country, explained Marina Belyakova, partner of the audit and consulting company EY.