10 July 2009

UK And Luxembourg Sign Exchange Of Information Agreement

By Robert Lee, Tax-News.com, London
Friday, July 10, 2009

A protocol amending the double taxation avoidance agreement between the UK and Luxembourg to facilitate the exchange of information for tax purposes between the two governments was signed in London on July 2.
The Protocol was signed by UK Financial Secretary to the Treasury, Stephen Timms and Luxembourg’s Budget Minister, Luc Frieden and follows the Luxembourg government’s announcement on March 13 that it would implement the Organization of Economic Cooperation and Development’s (OECD) standards on information sharing.
The new Protocol updates the exchange of information article of the existing double tax convention to bring it into line with current OECD standards.
HM Revenue and Customs announced that the text of the Protocol will be presented to Parliament for approval “shortly.”
The Protocol will enter into force once both countries have completed their legislative procedures and will take effect for tax years beginning on or after January 1 of the calendar year following its entry into force.
Under paragraph 1 of the Protocol, the competent authorities of the Contracting States shall exchange such information as is “foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention.”
Paragraph 2 stipulates that any information received under paragraph 1 by a Contracting State “shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) concerned with the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to the taxes referred to in paragraph 1, or the oversight of the above.”
Paragraph 2 concludes: “Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.”

30 june 2009

New European supervision

The European Union summit held in the middle of June in Brussels ended up with the decision to create a single system of financial supervision. Unlike the USA financial reform this project will be more cosmetic and will not lead to crucial changes in the systems of regulation of particular countries. Due to the objections of Great Britain new all-European bodies will be more limited in their functions, than they were supposed to be initially. Apart from a number of administrative topics, the basic disputes were about financial and economic issues in which the British Prime Minister Gordon Brown opposed all the others. Mainly it was about the project of creating a Pan-European system of financial regulation. According to the Euro Commission plan, a new supervising body — the European Council for System Risks (ESRB) should be created in EU in order to monitor the European financial system and reveal the threats for its stability. Besides, it is planned to create the European System for Financial Supervision (ESFS), consisting of three agencies responsible for the bank services markets, insurance and securities. They should not only strengthen the control by national regulators, but also supervise the international companies and international transactions.
London doesn’t want to give these supervising bodies more power over the British financial system than its national regulators have. As a result Gordon Brown has beaten out in Brussels guarantees that no EU country will be obliged to make recapitalization of a bank, raising resources from the tax payers. Besides, Mr. Brown insisted, that chairman of the ECB doesn’t become automatically the head of the ESRB, but the candidate should be chosen by the ECB General Council, with the representative of Great Britain. Continental Europe is not happy with the summit results.«The best variant would be to transfer more functions to the ECB, but the British would share the power with nobody, — Mr. Aurelio Macario, economist of an Italian bank UniCredit thinks. — The USA model system reform is not possible in the EU due to its multi complicated structure. There will be simply an external structure that will deal more with coordination, rather than direct interventions». As Amelia Torres, Press Secretary of the Euro Commissioner on economy and the monetary policy has informed the final project will be presented this autumn, and will come into force in 2010. It is worth mentioning as well that the point that the EU countries will not need new stimulating measures, has disappeared from the final declaration due to the Britain’s pressure. At present the cumulative anti-crisis package of the EU countries consists of 650 billion Euros for 2009-2010.

Preferential taxation interests many, despite strengthening pressure upon the offshore.

Russian businessmen should “register officially in tax havens, or pay from the incomes received there under the Russian rates, some experts say. Last month Dmitry Medvedev, Russian President in his budget speech has called to toughen the struggle against tax schemes. It is necessary to fix legislatively mechanisms of counteraction against the use of agreements on avoidance of the double taxation with a view of minimization of taxes with operations with foreign companies when the final beneficiaries are not residents of the country with which the agreement has been made, the president of Russia thinks.
Changes in the legislation are not ready yet — says an official of the department participating in discussion of amendments, but similar provisions require a number of signed agreements, and also some changes in the agreement with Cyprus made on the basis of the Additional Protocol signed in Nicosia in April.
Cyprus is the most popular jurisdiction among Russian businessmen: according to Rosstat, $56,9 billion of foreign investments (21,5 % of total volume) have come from this island in 2008.
Using Double Tax agreements, the companies pursue the aim to reduce the withholding tax on dividends at the rate of 5 % instead of the Russian 15 %, for royalty and interests — 0 % instead of 20 %, says Mr. Maxim Stepanov, head of Midland Consult Group who opened the permanent representative office in Nicosia two years ago. Last amendments will make unprofitable schemes when a foreign company is a “zero-suit” — he explains, but if there is a real activity the company has high chances to defend its privileges in court. Today, the top of Russian Forbes list do their business through the companies registered abroad. According to some Russian electronic sites, Alexey Mordashov controls Severstal through Cypriot Frontdeal Ltd, Victor Rashnikov holds 87 % of shares of Magnitogorsk metal plant through two Cyprus companies— Mintha Holding Ltd and Fulnek Enterprises Ltd. Vladimir Lisin owns 77 % of shares of NLMK through Fletcher Holding Ltd. Victor Vekselberg's major company Renova Holding is registered on the Bahamas. In Oleg Deripaska's business the top part of the holding, judging by the data of registration chambers, occupy two companies from the British Virgin Islands and UC Rusal is registered on Jersey.
Now they are working for including the amendments into the Double Tax agreements with Switzerland, Luxembourg, Austria, the representative of Ministry of Finance of RF said in June. These amendments will be similar to the ones made to the Additional Protocol to the Agreement with Cyprus about avoidance of the double taxation, signed two months ago in the Cypriot capital.
The Russian president’s suggestions correspond to the international practice, such provisions are provided by the model convention of the Organization for Economic Cooperation and Development (пECD), Mr. Trunin, the head of the Department believes. At the same time, the Republic of Cyprus, as well as Russia, by definition of the пECD, are included into «the white list», meanwhile Russia is only going to delete Cyprus from its «black list» in the end of the year. This discrepancy will be eliminated in the nearest future, thanks to the agreed arrangements. Much will depend on the legal practice, on how tough the definitions will be — consulting experts say. For instance, the Dutch tax laws are quite liberal, while in the USA or Germany they are very severe. By the way, Holland is the second country after Cyprus for the amount of investments into the Russian economy, as it has been told during June visit of the Russian President to Amsterdam. At the London summit the leaders of G20 declared readiness to introduce sanctions against offshore centres — according to the OECD estimates the damage to the world financial system made by «tax havens» is in the range of $10,7-11,5 bln. In the beginning of May the US president Barak Obama promised to reduce tax deductions for incomes of foreign daughter companies and to oblige banks to inform the state about offshore activity of the American companies. According to the well-informed sources, offshore issues can be discussed during the summer visit of the American President to Moscow.
At the same time, tax minimization is a prominent aspect in work not only of private, but even of the government structures of some countries. For this reason, the important object of the international financial organizations is to make these type of activity a desired tool to counteract the current requirements.

The commision on the finance and securits of Latvia and the The Central Bank Of Cyprus have agreed to develop cooperation.

The Commission of the Finance & Capital Market of Latvia (FCMC) and the Central Bank of Cyprus have expressed mutual interest in the further development of cooperation in the field of the control over financial credit organizations. Before entering the European Union, these two state organizations signed in 2003 the Memorandum of mutual understanding. Now it was decided to develop cooperation, in particular, in the sphere of bank control. Brought into accordance with today’s requirements the Memorandum of mutual understanding was signed in June by Mr. Aphanasios Orphanidis, the head of the Central Bank of Cyprus and the head of the Finance & Capital Market of Latvia Mrs. Irena Krumane. According to the new document, the general frameworks of bilateral cooperation and information interchange between two financial state structures for the purpose of simplification of the performance of supervising functions and regulation of activity of credit institutions, are being defined under the legislation of each country.

Heads of the EU countries supported allocation of financial help for Latvia.

During the last decade of June heads of the European Union countries have supported the plan of allocation of the financial help to Latvia, according to the EU summit resolution. Latvia had been expecting the decision concerning the allocation by the International Currency Fund and the European Commission of the second tranche, more than one and a half billion dollars, for support of the Latvian program of financial help and counteraction of devaluation of the national currency —the lat. Latvia has especially suffered from the world financial crisis after mistaken high figures of economic growth during last years and artificially increased prices for the real estate. Last year Latvia received from the IMF and EU a credit for 7,5 billion Euros which is paid by several tranches. These funds were allocated for overcoming of consequences of the financial crisis. At the same time, as many believe, the wave of demonstrations which have swept through the country, can lead the present Latvian government into a political crisis by this fall already.

Cyprus FinanceMunustry: the island economy has not suffered from crisis.

The economy of Cyprus copes rather well with the consequences of the world financial crisis and financial recession, despite inevitable delay of rates of its growth under the influence of external factors, the Minister of Finance of Republic of Cyprus Mr. Charilaos Stavrakis declared in the middle of June. Speaking at the meeting of the participants of the Economic and Financial Committee Mr. Stavrakis said: « Our financial sector remains strong and liquid, with solid and adequate positions of the capital and high profitableness ». The Cypriot economy showed 1 % growth as predicted earlier in 2008, along with almost total absence of unemployment and high stability of prices. At the same time, population incomes this year will be inevitably affected by the negative decrease of economic development of the island, the minister said.. He expects a budget deficit this year at a level of 2-2,5 %, however he believes that fundamental bases of the Cypriot economy are strong enough that was once again confirmed by the decision of the European investors about Cypriot euro bonds, the demand on which has exceeded the offer by 450 %. At the same time, for first four months of current year incomes of the budget of Cyprus were considerably reduced. The sharpest decrease was in the gains from taxes to the capital gain— it declined approximately five times. First of all, such dynamics is connected with the crisis of the real estate market. On a whole, tax revenues in the budget of Cyprus reduced to 10 percent compared to the similar period of last year. Considerable growth of income tax helped partially to compensate the losses. Receipts from the profit tax of corporations have considerably risen. Following the results of the year the government of Cyprus gives more optimistic forecasts than the Ministry of Finance, and predicts budget deficiency at a level from 0,6 to 0,8 percent from the gross domestic product. Last year the budget of Cyprus has been executed with proficiency in 1 percent of the GDP.

Tax authorities still have no means to frighten russian residents of the offshore zones.

Definitely, amendments to agreements on the double taxation will affect the interests of the Russian residents of offshore zones, but tax authorities still don’t have efficient means to prevent Russian businessmen from using offshore centres only for tax privileges. According to the experts of consulting who are making comments on the suggestion of the president of Russian Federation Mr. Dmitry Medvedev to fix in the legislation mechanisms that will not allow the companies to use the agreement on avoidance of the double taxation for minimization of the taxes, similar amendments are already introduced to the agreement with Cyprus. It is about the new article 29 Restriction of advantages where it is explicitly said that if the sole purpose of registration of the company in an offshore zone is acquisition of tax privileges then it should be tax liable where its final beneficiary resides, — experts explain. — For instance, if the sole purpose of the Russian businessman who has registered a Cyprus company, is minimization of taxes it will be assessed not under the preference rate, but under Russian 20 % rate . However, to force this businessman to pay taxes under the Russian rates, two conditions are necessary to be present, experts underline. The first one — to prove that the Russian resident is the final beneficiary, the second — that the company is engaged not in real activity, and works simply as a mail box”. Everybody knows that there are a lot of such companies. But the main problem is that it’s very difficult to prove that an offshore company has Russian roots because still Russian tax authorities haven’t elaborated efficient mechanisms for that. Experts also remind that at present Russia has no tax agreements with the offshore states. There are agreements on avoidance of the double taxation with such countries as Switzerland, Luxembourg, Austria, and Cyprus. However to receive the information from the Seychelles or the British Virgin Islands that a Russian company is registered there is practically impossible, — they mark. — Besides, Russia does not form part of the пECD, while its membership gives a chance to have a look in the offshore paradise .

Deposits guarantee fund will get credits for paying out the deposits from the National bank of Ukraine.

Private persons deposits guarantee fund (PPDGF) can obtain credits for payments of deposits to the investors of the bankrupt banks from National bank of Ukraine, the Ukrainian representation of Midland Consult in Kiev informs . Decree №308 About granting by Natsbank of PPDGF credits which has come into force on June, 27th of this year, obliged NBU to finance the fund in three cases: if the total sum of payments of the fund exceeds 80 % of its reserves; if the fund has lost all financial possibilities, by monetizing all its assets; if the fund has made an application to the Ministry of Finance about crediting limit in the tenfold size of receipts from the participants for the first half of the year to be included in the budget project next year. The PPDGF has acquired the right to take credits from Cabinet of ministers, NBU, banks and foreign creditors in 2002. But till the middle of 2008 there really existed only a scheme of the fund crediting by the Cabinet of Ministers. In the autumn the Supreme Rada has allowed NBU to finance the fund directly under a discount rate (now — 11 % annual).
The national bank is wiling to give to the fund credits on the security of its future incomes (at a rate of 80 % of the sum of maintenance), state bonds (100 %) and the Cabinet of Ministers guarantees (100 %). The loan can be homogeneous or mixed, and the PPDGF has the right to pay out the credit to the NBU ahead of schedule. The decree does not specify the maximum terms of crediting. In case the fund fails to fulfill the credit conditions the NBU will write off the reserves from the fund account.
By 1st of this June, the PPDGF owned 4,579 billion grivnas. Nobody will give the credit to the fund without emergency, it will occur, only if banks start bankrupting in abundance. According to our forecasts, till the end of 2009 the fund will manage with all the problems itself, — the head of administrative council of the fund Mr Vasily Pasichnik told. The PPDGF doesn’t’ know whether the fund membership conditions of banks and the sums of their regular deductions will change now.
Let's remind that earlier the Natsbank submitted to the government application for recapitalization of 7 banks (Bank Nadra, Rodovid Bank, bank Finance and credit, Ukrprombank, Ukrgazbank, Imeksbank and bank Kiev). Later proprietors of Imeksbank stopped negotiations with the government on its participation in the recapitalization.
It is worth mentioning that earlier the NBU imposed temporal administration in 15 problem Ukrainian financial establishments: Ukrprombank, Zakhidkombank, Transbank, banks National credit, National standard, Kiev, Nadra, European, Dnestr, ARMA, Big Energia, Bank of regional development, Odessa-bank, Rodovid Bank, and also bank Prichernomorye against which the regulator initiated liquidation procedure on May, 25th.

Experts think Ukrainian economy has not passed yet the bottom point of crisis.

The analysis of statistics and fundamental factors does not give the grounds to assert that the crisis bottom is passed, also the Ukrainian economy enters into a growth stage. The Ukrainian experts speak about it in their reports, underlining that previous statements claiming the crisis bottom is already passed and the economy starts growing based on May statistics of industrial production are incorrect, as they do not consider other indicators and fundamental factors. A brief analysis of annual statistics shows that falling of the Ukrainian economy proceeds, though, certainly it was essentially slowed down compared to the last year end & beginning of this year when decrease accelerated ten percent every month. Positive changes in the food industry, shown by monthly indicators, are mainly seasonal fluctuations. Before speaking about positive tendencies in metallurgy, it is necessary to observe the growth during several months. Unfortunately, certain growth noted in May looks more like a positive correction, than a beginning of the long-term tendency and could be a consequence of replenishment of warehouse stocks, — experts note. At the same time they can’t see any fundamental factors which will promote economy growth. In particular, experts have paid attention to decrease in global demand of metals and products of the Ukrainian chemical & machinery plants. They named another fundamental factor — improvement of the financial system of the country and renewal of crediting of real sector. We can’t see any signs of this factor either, — they say. Experts named two possible dates of the Ukrainian economy’s release from the crisis. If we assume the most favorable, V-shaped exit of global economy from the crisis even if the international markets will revive by the autumn of 2009 the economy of Ukraine will hardly feel positive tendencies before the end of 2009 — beginning of 2010. Presidential election will act as the additional factor which will interfere with liquidity growth in bank sector as the western parent structures will carefully make decisions on crediting their Ukrainian subsidiaries, and investors will be afraid to come to the market into politically unstable times. But if after short-term recovery new falling of global economy follows, i.e. crisis will go under the W-like scheme, growth of the Ukrainian economy will be delayed till better times when the global economy will turn to growth stage that will not occur before second quarter of 2010, — the Ukrainian experts-analysts predict.