Extra taxes to prevent Russian companies from shifting profits abroad

Extra taxes to prevent Russian companies from shifting profits abroad
Photo: Moscow-Live

Russian businesses that take their profits abroad to save on taxes should be prepared for unpleasant surprises, as the Kremlin aims to prevent capital outflow and keep as much money as possible inside the country.

Russia’s Prime Minister Mikhail Mishustin proposed imposing extra taxes or other penalties to tackle corporate “greed”, says Reuters. The senior official was referring to Russian companies shifting their profits abroad. “If a company is aggressively withdrawing dividends, interest and royalties from the Russian Federation, then appropriate progressive tax rates on profit, or some other approaches, should be applied,” he said on 12 May adding that such “greed” should be paid for with additional taxes and earnings to benefit the budget of the country where these firms operated.

Nonetheless, such revenue-raising measures should be balanced to avoid discouraging business, noted the prime minister. “We need to strike a balance and not kill the desire in business to create new products and export,” he explained.

On 11 May, Russia’s State Duma voted to scrap a tax agreement with the Netherlands. The change means that certain Russian companies, which are registered in the Western European country, will have to pay much more taxes. Presenting a government report to the lower house of parliament, Mishustin said that the government was ready to take such steps to keep more revenues in Russia’s regions and ensure companies helped create infrastructure for social development.

According to Prime Minister Mikhail Mishustin, revenue-raising measures should be balanced to avoid discouraging business. Photo: duma.gov.ru

When the proposal gets further approval from the Federation Council and President Putin, the Netherlands will join Cyprus and Malta. Taxation treaties with these countries were amended after Putin’s recent call for increased taxation. Last year, he said that a tax should be levied on interest and dividend payments leaving Russia. In 2020, net capital outflow from Russia more than doubled and reached $48,4 billion due to COVID-19 and a pandemic-induced fall in oil prices. The country’s current account fell by almost 50% to $33,9 billion.

According to Chief Economist of ING Russia Dmitry Dolgin, foreign dividend outflows account for around $30-50 billion per year, although part of this amount is repatriated. “The fight against capital flight has been going on for a long time,” he said pointing out that in the past, the Central Bank had revoked licences for banks for a similar purpose. “One final task remains: increasing the investment attractiveness of the Russian economy for at least domestic capital,” he added.

By Anna Litvina