Offshore Industries and Russia. by T. Bulakh.

First published in Russian in the official journal of the Russian State Duma, October 2009 Translated By J Fry and T Bulakh

T Bulakh Cover story of Official Kremlin Journal - Russian Ferderation- Issue 10, 2010


Cover of Russian Federation Magazine Issue 10 2010
"The Black Hole of Offshore Finances"



The essence of international tax planning is simply to drive the maximum profit at the minimally taxable object. From the standpoint of the capital it is useful and often necessary, although not for the country from which the capital originates. The main tool of this process is putting assets offshore, an institution around since time immemorial. Today, keeping the old economic content, this phenomenon has become qualitatively different. Offshore is beginning to grow uncontrollably. The question is are we dealing with one of the elements of a new world order? The idea of a world tax inspector watching and taxing the richest people of the planet has many supporters. The idea of a global government is on the agenda. It is time to think about who would divide and control these goods, to whom would these new world rulers report, if the nation state and the interests of their peoples are no longer to be taken into account.


Legislation about the taxation of incomes in one state or another is limited by the framework of the national economy. It is difficult for tax authorities to cross jurisdictional borders in contrast to individuals (and their financial accounts), aspiring to reduce their taxation to zero and to reduce political, economic and other risks. In Europe, offshore trust operations in the form of trust management and the formulation of the right of “possession of the figurehead” emerged in the era of the Crusades and developed with colonial conquests. During the robbery of the natives in the overseas territories the British Crown had the right to an 80 percent share of the profits. Therefore, with the Army's tax collectors on the horizon, its citizens would send caravans with goods to the Isle of Man and Jersey under the noble protection of knights, for a small share of the profits of course. The East too understood similar confidential operations having fixed their principles in the Koran and in Russia centuries back, prosperous families during times of persecution transferred property in the management of monasteries.


In the last quarter of a century with the development of globalisation and the increasing frequency of crisis in the world economy, leading to limited growth, the offshore industry is booming. Many Western corporations and individual owners of capital began to conduct business in such a way as to minimize its responsibility and liabilities. Mutual mistrust and insurance against future risks have resulted in the fact that more than one third of all global finance now passes through offshore jurisdictions! It would seem that in an atmosphere of insecurity the most informed are preparing to start life a new, disregarding everything else in their concern for their own financial security. Illustration of this is the behaviour of some key figures in the world of capital markets. In March, U.S. law enforcers arrested the former director of the NASDAQ, Bernard Madoff, organiser of the largest pyramid scam in the history of Wall Street, amounting to $65 billion. Charges against him under 11 articles of the law resulted in a prison sentence of 150 years. Some conspiracy theorists claim that “Madoff” types of financial fraud are really incited by mutual agreement of the arbiters of the fate of the world with a well-defined purpose - to withdraw for the time being the bigger picture from public view.


Allegedly these extraordinary measures are necessary for the protection of private property in times of global crisis and the reconstruction of the modern model of management.
It should also be made aware that, in contrast to the social consciousness of Russians, who in general have a negative opinion of offshore companies, in the West opinion related to this phenomenon is ambiguous. On the one hand, the middle class see them as a means of protecting assets, as a rational response to the unreasonable actions of governments. The fact is the age of the "golden billion" is ending. We have observed for a number of years increasing taxes on labour and reduced taxation on capital. Immigration, environmental degradation and the stagnation in the growth of income, stimulating an increase in social programs which eventually hit the middle class, the main donors to a nation's welfare system. And what do they do? They either vote with their feet and leave, or evade payment of taxes and the threat of property seizure by moving assets offshore.
On the other hand, many governments are not happy with the very existence of offshore companies competing for the right to gain their wealthy residents (and, of course, their money). With each departure from the country of a wealthy taxpayer, the financial burden for the remaining population increases. If the current trend does not change, the middle class will have to pay 70-80 percent tax on their earnings in the next 15-20 years because of the inability of national governments to support their crumbling social security systems and increasing government expenditure.

So the governments of the West have branded tax evasion a sin. Nobody, regardless of the individual, will be exempt from this 'fight against evil'. Using external intelligence, the law enshrines the principles of tax residence, which is much more important than a registered residence and nationality of a passport holder. The U.S. State Department has ordered intelligence and tax authorities to collect information on the investments of U.S. tax residents within that country through foreign banks. Failure to disclose information about the details of such investments through foreign front men is a serious criminal offence. In 2001, the United States introduced a system of exchange of information on financial affairs of its citizens with an overwhelming number of offshore companies and financial centres. In 2007 they established a confiscatory tax on departure (Exit Tax), similar to what had existed in Germany in the 1930's and after in the USSR. In 2008 they authorised partial confiscation of the global assets of wealthy individuals who emigrate from the United States.



Some experts in asset protection propose to evaluate the right of the individual to manage his property from a religious point of view. whether the avoidance of taxes is really a fight for the freedom to your own financial affairs and if our Lord would approve it? Whether it is moral for a person to leech from fellow citizens , hide money from them offshore and make a fortune manipulating other people difficulties? For example Ivan the Terrible considered it to be immoral. His cruelty that nowadays some try to present as unmotivated but historians see as an expression of his fight against an arbitrariness of usurers belonging to the upper class of old Russia. Because of their greed the Moscow empire lost the majority of its population, the same as today national states bear considerable losses due to tax evasion and greed of key economic players.



However, the comparison falls down. To describe an overflow of Russian capital into lush tax havens due to oppression from the Russian authorities would be incorrect. In fact Mr. Putin has stated that many in the world envy Russia. If this was with regard to the 13 percent income tax it is possible to agree with these words. Nevertheless moving domestic businesses offshore became the trend, even for businesses that weren't even under any significant administrative pressure. It's not that our capitalist are worse than their foreign counterparts. The founder of Marxism gives us an explanation: The greediness of capitalism knows no boundaries. Our domestic capitalists have employed the worst features of wild capitalism throwing all the achievements of civilised capitalism overboard.



According to different sources, Russian corporations are evading between 2/5 up to 4/5 of a taxable income. The greater share goes offshore which partially returns to Russia in the form of investments. As we know any country is controlled by those holding its IOU obligations. These anonymous manipulators are in a very comfortable situation : they are insured against their own economic and political risks and does not bear any responsibility for Russia itself as it was before the crisis, and now the situation has become more confused. Corporations with a controlling state participation are receiving financial help from the Government. And who knows whether their debts to foreign creditors are actually debts to their own anonymous offshore beneficiaries representing these local bureaucrats? It looks like that by robbing the country one more time someone can seriously help their own interests and hang new debts on us. It should be made plain, that the names of these “effective managers ” are known to the American intelligence agencies, though alas, not to us. Such offshore expansion that does not benefit the country in the form of tax payments, modernisation of economy, the creation of new workplaces prevents a healthy society.

The tax departments of developed countries are inventive in their competition for keeping rich tax payers in the tax system. On the contrary, Russia uses the extremely primitive test for tax residency for both physical and juridical bodies, helping mobile members of the Russian elite to easily avoid and evade the payment of taxes in their native country. We do not have a controlled foreign corporation (CFC ) regime ,thanks to it our anonymous beneficiaries hold the capital taken out abroad in a personal offshore purse, not reporting it to the Russian Federation.



Unlike the western countries, the position of the Russian authority in relation to offshore tax planning is ambiguous. it would recognize that it is bad but simultaneously domestic monetarists, namely they whom define the rate of development, argue that surplus money will lead to the rapid growth of inflation here, therefore, it is “rescuing” the economy from overheating. We do not have a wealth tax to tax riches. Hence villas and yachts bought abroad do not bring any money to the budget of the state that is so desperately scrambling for the money to pay beggarly pensions. Because of the absence of a proper tax residency test even a child can manipulate the tax system here. The tax system of the Russian Federation encourages prodigal consumption. It is far more convenient to invest in luxury goods, real estate abroad, etc.. than to invest and create working places at home, in Russia. Bureaucrats are trying to assure us that foreigners will heavily invest in Russia sooner or later. Are they really that stupid?



For a long time the Ministry of Finance has had plans to introduce two new criteria into the legislation for definition of a tax residency: “ a place where actual management of the company takes place ” and “ residency of beneficiaries of the company ”. If not both, then one or another and at the same time any organisation that is registered offshore should pay an addition profit tax in to the budget of Russia. For this purpose it is necessary to subtract the sum already paid offshore (possibly Nil) from the current rate of the tax in Russia. The management of the Ministry of Finance recognizes that acceptance of these measures, being as the base of any normal tax system, demands political will. Possibly, it will be wakened by the deepening of the crisis menacing the present system in Russia. Such reorganization will lead to mobilisation reforms, nationalisation, fight against criminality and corruption. As a matter of fact, conversation goes on about a change of the elite in Russia and a new vector of development






Contact us for a confidential chat about what you would like to achieve.