2020 is remembered for numerous and large-scale adjustments to the Russian tax landscape, which has never changed at such a speed. Reasons for revising tax treaties with transit jurisdictions, the prospect of denunciating the DTT with the Netherlands, approaches of the Ministry of Finance to setting up a tax regime for SAR residents, the future of the ‘look-through’ approach, the adjustment of the property tax and the extension of the moratorium on accounting for losses: Alexey Sazanov, State Secretary – Deputy Minister of Finance of the Russian Federation, spoke about these issues in an interview with Mikhail Orlov, Partner, Head of Tax and Legal, KPMG in Russia and the CIS.

The 2020 tax changes are best described by comparison with tectonic shifts. I can't help but ask what they were caused by. Is this the state's reaction to the difficult economic situation caused by the pandemic or the global vision of the tax policy formulated a year ago by the government?

Like other nations, our country faced the coronavirus pandemic. And of course, the resulting economic downturn had to be addressed. Resources were needed to help the economy recover and reach a sustainable pace of development. This required the mobilization of all resources. These were the primary purposes of the measures that we took last year in terms of adjusting tax legislation.

Does this mean that when we overcome the difficulties associated with the pandemic, the tax system will return to the state of 2020? Will the rates for a number of taxes be lowered and benefits returned? Or will these changes be long-term?

I would note that we had a fairly balanced tax policy in 2020, it was not limited exclusively to raising rates. Yes, on the one hand, there were sectors on which we increased the fiscal burden. But at the same time, we reduced the tax burden on those sectors that in the long term will create a basis for the development of the economy, will become its long-term drivers – primarily for the IT sector, small- and medium-sized businesses. If, after overcoming the consequences of the pandemic, additional budget revenues appear and there is a potential to reduce the tax burden, of course, it will be possible to consider directing these resources back to the economy, in particular, through tax incentives.

I would note that we had a fairly balanced tax policy in 2020, it was not limited exclusively to raising rates.

We are an international company, so we are most interested in international taxes, and last year was very rich in changes in this area. Agreements have been reached to renegotiate the DTT with Cyprus, Malta, Luxembourg, but the news of the possible denunciation of the treaty with the Netherlands came as a surprise. How are negotiations with the Dutch side going?

We have followed the same path with colleagues from the Netherlands as with Malta, Luxembourg and Cyprus. They have been offered absolutely the same conditions as those countries that have already agreed to them. But, unfortunately, there is no understanding with the Netherlands on the conditions for adjusting the DTT. They still insist on keeping certain channels for withdrawing income from Russia at low rates. This is unacceptable to us, therefore, due to the lack of progress in the negotiations, we had to begin the procedure of denouncing the treaty. At the moment, the process of interdepartmental approval of the draft law on denunciation is almost finalized, it is now under consideration at the Ministry of Justice. When we receive the opinion of the Ministry of Justice, we will send it for consideration to the Government. I think that we will be ready to submit the draft law to the State Duma in February.

Is denunciation of the treaty inevitable? Is this an already closed issue or do the Dutch still have time to take a more constructive position?

This is not a closed issue, we have no desire to terminate the treaty with the Netherlands at any cost. The point is that we offer all countries the same equal terms, we do not adjust them to each individual jurisdiction. These terms have been agreed at all levels of the government. If one of the countries does not agree to them, one alternative remains – denunciation of the DTT. 

We have no desire to terminate the treaty with the Netherlands at any cost. The point is that we offer all countries the same equal terms.

If the Dutch colleagues change their position, we can stop the denunciation process. But at the moment their position remains unchanged, so we are on the way to terminating the DTT.

What is the situation with Luxembourg, which has not ratified the change in rates under the DTT on time? Are there any plans to apply "repressive measures" to this country for this reason?

Indeed, the previous version of the tax treaty with Luxembourg will remain in effect in 2021. The Russian side managed to ratify the protocol on the DTT amendments, colleagues from Luxembourg have not yet done so. We expect this to happen in the near future, but all the amendments will come into force on 1 January 2022. At the moment we are not discussing any radical measures such as denunciation.

The Ministry of Finance has announced that only treaties with "transit" jurisdictions are subject to change. Do I understand correctly that such changes are not planned with regard to other treaties, for example, with Germany, France, the US?

Yes, that's right. We have chosen the jurisdictions with which we will amend tax treaties based on the fact that capital indirectly related to Russian companies or entrepreneurs returns to Russia through these countries. If we are talking about foreign investments, the capital was originally in the country from which it was sent to Russia, was earned there, then we did not intend to renegotiate such treaties. Germany, Italy, China or other large economies are strategic investors for us, this is new capital that comes to Russia, and we will not renegotiate treaties with these countries. This applies to any foreign investment, except, as I said, transit countries. 

Germany, Italy, China or other large economies are strategic investors for us, this is new capital that comes to Russia, and we will not renegotiate treaties with these countries.

The issue of the future of the ‘look-through’ approach is equally acute. Last year, amendments to the Tax Code of the Russian Federation were discussed for a long time, which would allow the application of the much-speculated ‘look-through’ approach and DTT with the country whose resident is the beneficial owner of income. However, the Ministry of Finance initiated amendments that exclude the possibility to modify, make the ‘look-through’ approach more accessible and simple. Why? Do you perceive it as something harmful to the tax system?

I do not consider the ‘look-through’ approach as something harmful to the tax system. But, of course, businesses need to simplify their ownership structure. If you look at it from the long-term perspective, then everything is simple: if you want to apply the tax treaty - invest from those jurisdictions where the beneficial owner of income is located. It is at least strange to create chains of companies, like a puff pastry pie, and at the same time try to qualify for benefits, for reduced rates provided for by treaties.

On the other hand, we understand that this is a historically established system and it cannot be promptly changed in a year or two. Therefore, in the medium term, at the intermediate stage, until the ownership structure is simplified, we are ready to consider the ‘look-through’ approach as an opportunity for good faith businesses to invest in Russia. We are ready to have discussions with the business and the expert community about further adjustment of those tools that, over a period of time, will allow investing in Russia and applying reduced rates in accordance with the treaties.

I do not consider the ‘look-through’ approach as something harmful to the tax system. But, of course, businesses need to simplify their ownership structure.

The government has repeatedly stated that it is necessary to analyze the effectiveness of the tax benefits application and reconsider approaches to supporting a number of sectors. However, over the past five years, the range of benefits has not changed much. At the same time, preferential regimes appear where taxation is present as an incentive factor. Are taxes a tool for the Ministry of Finance to support the economy? 

Of course, tax incentives are one of the support measures. And here, in each specific case, in each specific sector, it is necessary to properly select the support tools that the state has. It can be budget or tax support, regulatory easing. Each case is unique. If the situation requires, of course, the Ministry of Finance is ready to discuss it.

One of the preferential regimes I have mentioned is SAR. As far as I understand, the Ministry of Finance does not plan to change the legislation for a large number of companies to use this tool so that income paid from international companies abroad is exempt from taxes or taxed at reduced rates?

In today's conditions, when we are fighting the pandemic and need to mobilize all resources for economic recovery, we cannot allow the profits earned in Russia from active operations to be withdrawn abroad without paying taxes.

In today's conditions, when we are fighting the pandemic, we cannot allow the profits earned in Russia from active operations to be withdrawn abroad without paying taxes.

The purpose of adjusting the tax regime in SAR is to attract holding structures that are now in transit jurisdictions to Russia so that they invest from our country. This is not encouraging the creation of new companies in SAR, but, in fact, deoffshorization of the economy – the return of business that was registered in foreign jurisdictions due to the existing system of tax treaties.

We are reducing the rate on the payment of income from Russia for SAR residents, but, of course, we cannot completely exempt them from taxation. The 10% rate that we propose can be called balancing. On the one hand, this is not entirely an exemption, and on the other hand, it is not 15% provided for as part of amending treaties with transit jurisdictions. We have studied global experience, and I can tell you that in relation to developed economies this is an adequate, attractive rate.

Can one expect an adjustment of the corporate property tax? I mean a return to taxation of a single item at a reduced rate.

I think that with the design that has been discussed with the business community for the past year, we will not be able to reach an agreement this year. The Ministry of Finance does not object to the creation of a single tax base so that there is no need to break down property into movable and immovable with all the ensuing difficulties. But the rate level proposed by the business community and the one that would suit the regions are too different. And I do not see an opportunity to bring the positions of the parties on this issue closer in a matter of one year. Perhaps during the discussion there will appear a consensus, some other design that will help to solve the problem with the corporate property tax. We'll work at it.

Another very sensitive issue for the business community is the restrictions on the right to take losses into account when assessing the profits tax. Does the government plan to take the initiative to extend the moratorium on loss accounting expiring in 2021 for the next few years?

Regions, of course, come up with such an initiative. The business community, accordingly, writes letters about its objections. Since the Ministry of Finance is on guard of revenues, including regional budgets, we, of course, will support the initiatives of the RF constituent entities to extend this regulation for at least three years. But the final decision will be with the government. I wouldn’t predict it now.

The 10% rate that we propose can be called balancing.

Another very sensitive issue for the business community is the restrictions on the right to take losses into account when assessing the profits tax. Does the government plan to take the initiative to extend the moratorium on loss accounting expiring in 2021 for the next few years?

Regions, of course, come up with such an initiative. The business community, accordingly, writes letters about its objections. Since the Ministry of Finance is on guard of revenues, including regional budgets, we, of course, will support the initiatives of the RF constituent entities to extend this regulation for at least three years. But the final decision will be with the government. I wouldn’t predict it now.

Last year, the range of TAI participants was expanded. Is it planned to expand it in 2021?

No, it isn’t. I think the next decision on TAI expansion is not possible until 2024.

What about the return of MET benefits?

We do not plan to return targeted benefits, including MET benefits. We are ready to discuss the transfer of individual fields to the TAI regime from 2024, when, I hope, the OPEC + deal will expire, there will be no restrictions on production and it will be possible to use Russia's resource potential to the maximum. Then we will be ready to return to the discussion, but within the framework of the TAI regime.

Do I understand correctly that MET, as a disappearing tax, will be gradually replaced by TAI, but with some new parameters?

It's not really disappearing. It's just that we had such an abundance of benefits under MET that experts and the business community rightly pointed out that the tax turned into a patchwork quilt. TAI allows us to arrange preferential tax regimes for various oil fields, and we will move in this direction.

The next decision on TAI expansion is not possible until 2024. We do not plan to return targeted benefits, including MET benefits.

A few years ago, the so-called "Google tax" was adopted, when foreign technology companies began to pay the Russian VAT. At the same time, many jurisdictions are discussing the issue of taxing the profits of these companies with a separate tax. Is it planned to introduce such a tax in Russia?

You rightly noted that large foreign digital companies earn profit from the provision of services in Russia, which, in principle, is not taxed in our country now, because they often do not have representative offices here. Therefore, we will strive to change the situation and tax this profit. This is a global trend, discussions are now underway within the OECD about creating a supranational tax, which would then be distributed among various countries. But so far there is no tangible progress in this direction, so individual countries, such as Italy, Spain, UK and France, independently introduce a digital tax in their territories. We will study the global experience. For example, in the UK, the first full year of the digital tax application will end on 31 March this year. Let's look at its results and think about the expediency of its introduction in Russia. So far there is no final decision on this matter.

Alexey, do you have an understanding of what can change in the tax system? What taxes might the government focus on? What, in general, should the business community be afraid of? 

You shouldn’t be afraid of us. We proceed from the premise that taxation should be fair. If profit from active operations is earned in Russia, then it should be taxed in Russia. Therefore, companies that honestly perform their obligations – pay the established profits tax rates, do not use aggressive tax optimization schemes – have nothing to fear. And I am sure that good faith taxpayers definitely shouldn’t expect an increase in the fiscal burden.

If profit from active operations is earned in Russia, then it should be taxed in Russia.

The Russian version of the interview is available here.