Recently offshore zones have become one of the main matter of discussion in the world economy.
In fact, it is all right, when business entities use offshore companies, as they are not officially prohibited at the legislative level.

However, apart from accessibility to international financial markets, the use of offshore jurisdictions by Ukrainian companies often relates to the laundering of income obtained not quite legally, to tax evasion and respectively capital outflow from the national economy. For today, Ukraine remains one of the world’s “leaders” in terms of volume of hidden capital outflow overseas, taking the 9th place in the world. In particular, according to estimates of the international organization TaxJusticeNetwork more than 167 billion dollars has been derived to the offshore zones for almost 25 years of independence of Ukraine. At the same time, because of the imperfection of tax legislation about 200 billion hrn, which were withdrawn to states with preferential tax treatment, turned out to be in the shadow in 2015. However, in spite of the losses incurred by the national economy because of the offshore zones, the legislation lacks effective mechanisms to react upon this occurrence. Therefore, the issue of legal regulation of capital outflow prevention from Ukraine and improvement of the taxation system of economic transactions of residents with offshore jurisdictions is now becoming ever more relevant.

In spite of quite long existence of offshore zones, there is still no frame of mind regarding the understanding of this concept and consolidating all its specific features. Ukrainian legislation does not contain a definition of this concept, there is only the list of offshore zones, approved by the Cabinet of Ministers of Ukraine. No consistent approach to this issue have been developed so far, both by foreign countries and the international community as a whole.

However, analysing foreign experience of legislative regulation, opinions of scientists and positions of international organizations, we can distinguish the following main characteristics of offshore jurisdictions:

1) preferential tax treatment;
2) liberal currency and credit legislation that protects interests of investors and, accordingly, ultimate beneficiaries;
3) the system of double currency control (residents are subject to currency control and non-residents are not);
4) guarantee of compliance with financial and banking secrecy;
5) no currency restrictions;
6) ease of access to foreign banking system;
7) modern means of communication (Internet communication) and a well-equipped network of electronic access, including to Bank resources;
8) liberal legal system;
9) implementation of the individual needs satisfaction of investors;
10) flexible requirements on documentation and financial reporting.

Based on the above characteristics, it is possible to define the concept of “offshore area” as a country or part of its territory, which characteristic is the creation of favourable financial and monetary and tax regulations, high level of banking and commercial secrecy guarantee, loyalty to government regulation and acceptable legal framework for business entities.
The most common methods of hidden withdrawal of capital to offshore areas include:
— price manipulation in foreign economic operations;
— registration of ownership of intangible assets in other countries;
— international leasing;
— agent agreements;
— loan agreements;
— internet trading, etc.
Following this line of reasoning, it is possible to suggest two ways of resistance to tax evasion and capital outflow abroad: radical and moderate. In the framework of the implementation of the first one, it is necessary to forbid interaction of the residents with offshore jurisdictions.
However, the prospects for implementation of this way are minimal, given the lack of political decisions and personal interest of those who must make such decision.

The second way is to develop and implement legal and economic mechanisms that would prevent the use of offshore jurisdictions for criminal purposes.
The key problem of the tax legislation, which creates favourable conditions for disinvestment, is the lack of regulation norms of controlled foreign companies. So, the domestic business entities create subsidiaries in offshore jurisdictions for the purpose of evasion of taxes and the withdrawal of their capital abroad. Profit from the activities of such enterprises are not taxed in Ukraine. But, in fact, residents are using these funds as personal income, although technically, they were not assessed in the form of dividends, were not included in the composition of their income and were not taken into account during imposition of taxes.

On this basis, it is necessary to include the profit from the activities of controlled foreign corporations to the income of individuals and legal entities that control them. At that, calculation of profit should be accomplished in accordance with domestic tax legislation and included to income in volume, that is proportionate to the ownership ratio of corporate rights of a resident of Ukraine.

Another option in the framework of realization of the second way of countercheck is implementation of fixed tax for residents, who interact with the offshore jurisdictions. Tax payers are the business entities registered in tax authorities as those who carry out operations with non-residents with offshore status. The tax assessment base will be the total amount of turnover of a business entity. The tax period will be one calendar year, with 5% tax rate. If a business entity without status of fixed tax payer implement a transaction with a non-resident with offshore status, such operation will be considered invalid, and the enterprise will be liable to a fine at a rate of 30% of the transaction amount.

Summing up the above, it is noteworthy that the real countermeasure for the processes of tax avoidance, money laundering and capital outflows abroad can only be a complex system of legal and economic mechanisms aimed at creating of tax barriers to operations with offshore jurisdictions.

Following mechanisms need to be introduced in the national legal system by amending tax legislation: to include the profit from the activities of controlled foreign corporations to the income of individuals and legal entities that control them, and to introduce a fixed tax system for residents, who interact with offshore jurisdictions.

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Anastasia Sboeva

Senior lawyer, Patriot Law Firm

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