RUSSIAN ECONOMY IN trends and outlooks Herewith, a “favorable tax regime” means that tax liability of the recipient of payment, in accordance to tax legislation of his country, is less than 2/3 of profit tax rate in France. Therefore, in each case, when a French company transfers pay ments to a “tax haven”, it has to bear extra burden of proof of the legitimacy and adequate amount of such payment. If the legitimacy is not proved, the company is not liable for any tax deduction.
There are similar regulations in Belgium, i.e. Belgium companies have also to provide a proof of legitimacy of payments, transferred to the companies residents of “tax havens” to have the right to reduce taxable income for the amount of such expenditures.
Combating capital outflow to «tax havens» is supported by international com munity to a certain extent as a way of counteraction to harmful competition on the part of those “tax havens”. However, it should not result in total exclusion of poten tial deduction of justified expenses from the tax base.
At the same time, to avoid those restricting rules, a taxpayer can transfer payment through an alternative country, which is not enclosed in the list of favor able tax regimes as per the taxpayer’s country legislation, and in case there are no special provisions in this legislation on interest rates, paid to the residents of «tax havens».
Though such provisions are not included in legislations of many countries, there is a high probability, that even in those countries, where those provisions are not foreseen by law, tax authorities pay special attention to payments, made to companies residents of tax havens, at least in the course of audits. But if the fact is disclosed, that the payee and recipients are interrelated persons, there is no doubt that an investigation for transfer pricing will be made.
In general one can regard an additional burden of proof, related with pay ments, made to the companies, registered in tax haves, as a discriminating ap proach. Actually, it is true. It is extremely important in this case to have a thoroughly elaborated definition of “unreliable” country and what is needed to dismiss the “doubts in its compliance”. Otherwise, the law might have negative side effects, like hindering export import business flows.
Tax competition between the countries for attraction of taxpayers precludes application of progressive tax rates and prevents the governments to achieve of the target of income distribution, but it assists criminal “money laundering”.
The trends of the recent years demonstrate, that special attention is paid in the Russian Federation to domestic and external tax relations, and therefore, re forms of the Russian legislation are required for simplification and harmonization of legal basis with regard to international standards.
OECD and EU work with the countries, pursuing harmful tax policy, is aimed at efficient exchange of information between tax authorities, combating tax evasion and manipulation with tax regimes, introduction of amendments to tax legislations for harmonization approaches to tax bases assessment and other elements of taxation.
Annexs Evaluation of the current state of the Russian Federation tax system in terms of consistency with the tax systems of the basic partner countries would be infea sible without an integrated definition of the position Russia takes among other in ternational jurisdictions. Solution of the problems, related to both, harmful tax competition and distinctions in regulation of the tax system (special judicial institu tions, effective legal instruments, etc.) depends on the plans of Russia in terms of integration in the framework of international tax regulations.
As mentioned above, today the world community in general, and partner countries of the RF in particular have reached substantial results in harmonization of the tax system for the aim of simplified and effective tax administration in the conditions of global economic integration.
Russian Federation is neither OECD, nor EU member, but still, it is actively leading negotiations on entering WTO. In this regard it should be mentioned, that the majority of Russian leading international economic partners are the members of OECD, WTO, and many of them belong to EU community. One of the major pur poses of cooperation within the UE, specified in the EU Treaty, is the policy of tax harmonization. In its framework the EU country members take an obligation to co operate in the information exchange on relevant issues. For a number of years EU undertakes and implements decisions and programs on coordination of actions in terms of harmonization of tax systems of country members. It should be noted, that the decisions of EU in regard to its country members may be of both, obliga tory and advisory nature. Accordingly country members take orderly, universal and scheduled actions.
OECD, in its turn, sets the targets of coordination of common economic and trade policies, tax policy of country members, coordination of their policy in terms of assistance to developing countries, support to the worldwide economic ex change on the basis of multilateral parity. OECD decisions, which have consultative and advisory nature, are adopted upon an approval of all members. Therefore, the country participants can either accept or reject OECD recommendations. As a re sult of their decision, other country members (which agree or disagree with the decision) would either provide or restrain from provision of a favorable regime in regard to that country. Mutual understanding is a key point in the international co operation, including tax issues.
WTO agreements set forth, in particular, parity in trade, which should be en sured by mutual favorable regimes, on the one hand, in regard to export, import and transit operations, relevant customs duties and fees, and on the other hand, a national regime, equally applicable to domestic and external goods in terms of do mestic taxes and levies and regulations of national trade, including taxation. Terms of agreements, signed by any country within WTO, are obligatory to the country in accordance with the agreement provisions. The majority of Russian international economic partners have settled those issues and currently joined WTO. Liabilities of the Russian Federation within WTO are also related with harmonization of tax provisions in any form.
RUSSIAN ECONOMY IN trends and outlooks Therefore, a conclusion can be made, that the majority of the RF economic country partners are associated with each other by multiple international agree ments, among them – agreements, addressed at combating harmful tax competi tion on the part of any country, harmonization of national tax systems, as well as mutual information exchange between relevant tax authorities. In view of the above, it is evident, that firstly, Russia needs to join the process of international informa tion exchange on tax issues as soon as possible, and secondly, Russia should take an appropriate position and a vote right in elaboration and adoption of decisions (including tax issues) in global international organizations.
Due to time consuming procedure of entering an international organization, it would be reasonable for Russia to conclude intergovernmental bilateral agree ments on information exchange on tax issues.
It would be also preferable to revise agreements on avoidance of double taxa tion, which are signed by Russian Federation with a number of other countries.
Those agreements play a significant role as in combating harmful tax competition, as in information exchange and cooperation in regard to incompliant taxpayers.
Thus, for example, the agreements should foresee adequate measures in limitation of benefits to entities non residents of the country parties of the agreement, as well as information exchange in regard to performance of national tax legislation. In the majority of agreements, signed by the Russian Federation and still valid agree ments of former USSR, such provisions were not included and their effect is much lower than it could be. Amendments should be made to those agreements on avoidance of double taxation, which have no provisions on limitation of benefits. A positive example of an agreement on avoidance of double taxation is the agree ment between Russia and USA, which stipulates: an entity, who lays a claim for the benefits, foreseen in the agreement, can not obtain them only due to an evident residence or confirmed source of income. The entity has to prove a real interrela tion with the country, where the benefits are claimed.
As was mentioned above, Russian Federation does not have the lists of coun tries with “poor tax reputation” and “tax havens”. The lists of offshore countries, published by the RF CB (in the framework of cooperation with FMCML), can not be used for tax administration purposes36. Practically all countries have developed cri teria of formation of those lists, and many of them apply the standards of OECD and EU. Russia is not a member of OECD, but this fact can not prevent it from applica tion of OECD criteria and indicators for formation of the lists of «tax havens»” coun tries. Such lists can provide an explicit impact on effectiveness and quality of tax administration.
In other words, if a taxpayer contacts tax administration of a relevant country, it will at least have no impact over his right for expenses deduction; there are legal provisions in many countries in terms of transactions and their tax consequences with such countries. Moreover, the Russian list includes pure offshore countries, but in Europe such lists include the countries, not participating in informa tion exchange, as well as those, where tax rates and assessed tax base are much lower than the standard one.
Annexs Naturally, a deeper reformation for bringing the Russian tax system in line with the worldwide practice in general, and with tax systems of basic economic partners of Russia in particular, should involve a wider range of areas to be reformed. All those areas are outlined in legislations the RF basic economic partners. Insufficient participation of Russia in the international cooperation on tax issues restricts its ac cess to benefits, available to tax authorities of other countries for combating tax evasion and large taxpayers’ manipulation with discrepancies of tax regimes in dif ferent jurisdictions.
Annex 3. The Problems and Prospects of Applying Performance Based Budgeting (PBB) in Russia Performance based budgeting, as an instrument for improving performance quality, had been successfully applied in the USA, UK, Australia and other devel oped countries for many decades. Nevertheless, in Russia, although the need for implementing the components of target program methodology in the practice of budget planning has been repeatedly emphasized in basic national programming documents37, the first of which appeared as early as 2000, the first real steps to ward implementing the principle of cost effective spending of government funds were taken by the Government of the Russian Federation only four years later.
Then, Decree of 22 May 2004, No. 249, “On measures designed to improve the cost effectiveness of budget expenditure” was adopted, which became the initial point in regulating the procedure for implementing performance based budgeting (PBB) in the practice of medium term financial planning at the federal level.
Thus, as the goal of the new budgeting model has been declared to establish a distinct interdependence between the government financial resources being spent and the results obtained. In other words, the reforming of the budgeting process in the Russian Federation is oriented toward a transition from the financing of budget funded institutions and bodies of authority proper to the financing of the services being provided by them to the population. In the final analysis, according to the authors of reform, this must result in improved quality of budget funded ser vices, coupled with more economical spending of budget resources.
International experience has shown that the application of PBB can, indeed, ensure improved efficiency and transparency of the management of government finances, when budget funding is allocated not by items of expenditure, but by stra tegic goals and tactical aims, orientates toward the achievement of certain specific final results. In this connection, budgeting decisions are already based not on the specific amounts to be spent on each item of the economic classification (salaries, utilities, capital repairs, etc.,) or the execution of each specific government func tion (public education, public health care, law enforcement, land development), but See materials of Budget Letters of the RF President in years 2000, 2003, 2005, 2006, and the pro grams for the socio economic development of the Russian Federation in the medium term (2003– 2005 and 2006–2008).
RUSSIAN ECONOMY IN trends and outlooks on a whole entity of budget programs oriented to the achievement of practical re sults.
The active implementation of PBB as one of the directions of reforming the budgeting process in Russia began in 2004, alongside the onset of the formation of the normative legal base designed to regulate this procedure. The Government Commission for improving the performance of budget expenditure was created, while the subjects of budget planning began to prepare their first reports on the re sults and main directions of their activity in the medium term (hereinafter – report).
In this connection, certain measures were applied, in order to create incentives for the federal bodies of executive authority to improve the quality of their financial management. Thus, in 2005 and 2006, by order of the Government of the Russian Federation, to all the participants in the experiment aimed at implementing the methods of performance – oriented budget planning the RF Ministry of Finance was allocating every year 180 mln roubles to meet the costs of research, the up keep and operation of their central apparatuses, including to the remuneration of their staff – 53.8 and 96.1 mln roubles, respectively. These funds were distributed between the federal bodies of executive authority participating in the experiment depending on the degree to which they were applying the performance based methods of budget planning during the reporting year, as well as the measures im plemented by them in order to improve the quality of budget management at the intradepartmental level.
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