There is a number of jurisdictions that attract foreign capital flows from both developed countries with sophisticated tax systems and emerging markets where corrupt elites try to relocate financial assets to safe places.
The result is a shift of the tax burden and lost tax revenues for many governments which follow too fiscal approach to business and lack strategic thinking as regards tailoring the tax systems of their countries.
Ukraine is a good example of a country where business historically used tax havens for both dodging taxes and saving their assets from corporate abuse an crime.
In its turn, the government is trying to make the evaders pay as much taxes as possible – however, the methods used are far from being perfect from both tax technique and practical points of view.
For the time being there are some ‘offshore restrictions’ in the domestic tax laws.
These apply mainly to passive income (dividends, interest and royalties if paid to a tax haven are subject to 15% withholding tax without a chance to claim an international treaty relief) and payments for services (in many instances service fees, if paid to a resident of a low tax country, are non-deductible or not fully deductible for income tax purposes).
However, many domestic businesses skillfully use tax havens in export sales shifting their profit margins to zero tax countries.
The Ukrainian tax laws are still too soft in this respect, and the tax office lacks trained staff and resources to combat the tax planning artists using traditional transfer pricing approach.
Probably, the above fact and (reportedly) critical deficit of the Pension Fund have provoked the new initiative of the Government to charge 12% duty on all sales transactions with tax havens.
Moreover, the new blacklist is expected to double the number of ‘offshore zones’. Some potential entries may cause scandals – for example, Malta, the EU member with domestic income tax rate of 35%, and some US states.
At the same time, the first draft does not contain Liechtenstein which has a reputation of a tax black hole in Europe.
The mentioned idea, being advertised as fighting tax evasion, in practice may result in nothing. Using ‘plain vanilla’ tax haven structures is a thing of the past, and there are numbers of ingenious tax planning ideas based on use of those countries which are not, and will never be blacklisted.
Many high tax jurisdictions offer tax advantages for international traders, and their governments must say thanks to Mr.Tihipko as his initiative will likely bring more money to Austria and Cyprus, Switzerland and Luxembourg, Liechtenstein and others – but not to Ukraine.
