Putin Tells Russian Business Using Offshores to Pay Tax at Home

Russian companies using offshore ownership structures to avoid paying domestic taxes will be cut off from state financial support because they are costing the budget revenue, President Vladimir Putin said.

“Earnings by companies registered in offshore jurisdictions that ultimately belong to Russians should be subject to our tax rules,” Putin said in his annual state-of-the-nation speech in Moscow today. Such companies “won’t get state support, including loans from Vnesheconombank and state guarantees. They’ll also be banned from participating in state contracts and contracts for state-run entities.”

Putin said he made the proposals because there was little progress since his call in the same speech a year ago to bring capital back to Russia and conduct more business domestically. The more than $50 billion purchase of TNK-BP by OAO Rosneft was conducted outside of Russia, even as the buyer was a state-run company and the sellers included Russian citizens, he said.

A deteriorating economic outlook is complicating plans for Putin’s government to balance public finances. The economy of the world’s biggest energy exporter, which is expanding at the slowest pace since a 2009 contraction, faces a period of entrenched deficits through at least 2016, the Finance Ministry projects, with this year’s fiscal gap estimated at 0.7 percent of economic output.

State development lender Vnesheconombank, revamped in 2007 to promote investment and finance long-term infrastructure projects, managed the government’s bailout program at the height of the financial crisis in 2008-2009, helping rescue troubled companies and banks and buying domestic securities to support financial markets.

Capital Outflows

“According to expert estimates, $111 billion in Russian goods passed through offshore and quasi-offshore companies, which is a fifth of our total exports last year,” Putin said. “Half of Russia’s $50 billion in investments in other countries are also into offshore companies. Behind those figures are outflows of capital that should be working in Russia and amount to direct losses for the budget.”

Rosneft carries out some deals in offshore jurisdictions at the request of its partners, Chief Executive Officer Igor Sechin said after the speech, RIA Novosti reported.

Net capital outflows will probably reach $55 billion this year, after an estimated $48.1 billion left the country in the first nine months, the central bank said in a report last month. That compares with outflows of $81.4 billion in 2011 and $54.6 billion last year.

$38 Billion

Questionable transactions involving tax avoidance, theft of budget funds, bribes and kickbacks, money laundering, terrorism financing and drug-related operations accounted for $38 billion of Russia’s net private capital outflow in 2012, then-central bank Chairman Sergey Ignatiev said in June.

The Finance Ministry is working on plans to tax offshore companies with opaque ownership structures at higher rates, Finance Minister Anton Siluanov told reporters in Moscow on Dec. 6. The government may also restrict access to state aid, including access to public contracts, he said. The changes may take effect as soon as the second half of next year, according to Siluanov.

Russia is also considering adding Cyprus and Luxembourg to a blacklist of offshore countries that are subject to a special tax regime, Vedomosti reported last month, citing Ilya Trunin, head of the Russian Finance Ministry’s tax department.

To contact the reporters on this story: Scott Rose in Moscow at rrose10@bloomberg.net; Olga Tanas in Moscow at otanas@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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