“An epidemic of the world economy” is what Russian President Vladimir Putin called offshore jurisdictions that companies use to dodge taxes. American corporations were abusing this practice, and it affected continental Europe more than others, he said according to the state-owned official news and propaganda agency ITAR-TASS, just as the EU has started investigating these companies.
He was right. American companies are masters at this. Using various tricks and loopholes that Congress hand-tailored for them, they shift profits from the US and other countries to tiny low-tax jurisdictions, such as Bermuda, Ireland, or Singapore. A study found that over the past eight years, 14 American tech and pharma icons cut their average tax rate by a quarter and stashed nearly $500 billion into entities registered in low-tax offshore jurisdictions.
This moolah can be invested anywhere, even in the US. Apple accumulated $102 billion in sheltered profits in Irish subsidiaries by using a “complex web” of offshore mailbox companies, according to the Senate report that vivisected Apple’s tax-dodge strategies. One such subsidiary with no employees made $30 billion in profits and didn’t pay a dime in taxes to any government anywhere. That was the cash Apple refused to “repatriate” for its stock buybacks. But Apple didn’t have to repatriate it: the Irish mailbox subsidiaries kept the money in a bank in New York where it was managed by an Apple subsidiary in Reno, Nevada.
But Putin’s real targets weren’t American companies. He was going after Russian companies and oligarchs. There are two ways to get them to de-offshore, he said. One is “fiscal policy and tax optimization” – where Russian laws fell short, he admitted. And the other is to “frighten companies.”
Frighten? Last year in March, when the big banks in Cyprus sank into their deep cesspools of corruption, they took down with them large amounts of “black money” that Russian companies, oligarchs, and just wealthy Russians had stashed in Cypriot mailbox companies. Global Financial Integrity called Cyprus “A Money Laundering Machine For Russian criminals” as it detailed amounts, flows, and mechanics. This “black money” was one of the reasons Germany and other countries insisted that large depositors were “bailed in.” They didn’t want to use taxpayer money to bail out rich Russians and their illicit gains.
Not even Putin wanted to help them.
“The official position of Vladimir Putin has always been anti-offshore,” wrote Valentin Mândrăşescu in Cyprus Crisis: A Triumph For Russian Isolationists. “I can tell that in Moscow there are many people who are jubilating right now. Their wildest dreams have come true.”
How much could be de-offshored, as it’s called, back to Russia? “I think we can talk about tens of billions of rubles,” Finance Minister Anton Siluanov explained.
The numbers are stunning. Currently, 42% of Russia’s foreign trade, “and that’s over 10 trillion rubles,” are passed through offshore companies, explained Valentina Matviyenko, Chairperson of the Federation Council, the upper house of the Russian Parliament. “Many experts say that more than one trillion US dollars were taken to offshore zones over the past 20 years,” she said. “And we cannot put up with this….”
So the Russian Parliament would amend the tax laws this year. It’s on Putin’s priority list. It made it into his speech to the Federal Assembly last December. De-offshorization of the Russian economy should become a key task in 2014, he’d told the lawmakers. So numerous parallel efforts are under way. Finance Minister Siluanov threatened that the tax authorities would try to identify companies that operate in Russia but run their profits through offshore jurisdictions to avoid taxes.
There would be incentives for companies to comply, “some sort of amnesty or rather some transitional period so that all companies could adapt to the new legislation,” Matviyenko offered. “There should be a dialogue with the business community, a call for patriotism, especially to large national companies,” she said. “I do not admit of a situation where our state-owned corporations would carry out operations in offshore jurisdictions through their subsidiaries.”
That’s how bad it is: even state-owned companies – giants in the banking, energy, transportation, and defense industries, and hence much of corporate Russia – are using offshore tactics to avoid paying taxes in Russia (and for whatever other reasons they might have). That, she said, “must be ruled out completely.”
So Putin threatened them with legal methods. “Incomes received in offshore zones should be taxed by our rules, and tax payments should go to the Russian budget,” he said. “We have to think about how to take this money.”
Frightening them would be part of it. He must have watched with a wicked grin when Russian “black money” dissolved into Mediterranean air during the Troika-imposed bank holiday in Cyprus last year. There’d been rumors for months he’d bail Cyprus out with a few billion dollars to protect the wealth of his compatriots. But he didn’t. He let them twist in the wind. He knew what it would do. It would frighten rich Russians about stashing their money offshore.
And his wicket grin must have widened when, exactly a year later, the US and the EU kicked off their sanction spiral following Russia’s annexation of the Crimea. They were targeting these very companies and oligarchs. Putin must have loved seeing his compatriots once again fretting about their offshore money. It would teach them a lesson and incentivize them to leave their money in Mother Russia – where it would be at his disposal.
But the oligarchs had learned a lesson in Cyprus: don’t wait till your money gets confiscated. Read…..Giant Sucking Sound: Russian Money Yanked From US Banks
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.