Chamber of Commerce proposes amendments to bill on additional tax payments by subsidiaries of foreign holding companies
The Russian Chamber of Commerce and Industry (CCI) has proposed revising the approach to calculating special taxation for Russian members of multinational enterprise (MNE) groups. This is reported by Forbes, citing the Chamber's opinion on a draft law put forward by the Ministry of Finance.
In late May, the Ministry of Finance presented a bill that would allow the effective tax rate on the profits of Russian subsidiaries of foreign MNE groups to be raised to 15%, provided the parent company is registered in a country that applies the OECD's international rules on the taxation of MNEs. These rules, known as the GloBE Rules, are a key element of Pillar 2, one of the two pillars of the OECD's ongoing tax reform.
The Pillar 2 mechanism, which aims to combat offshore tax avoidance schemes, provides for the introduction of a minimum income tax rate of 15% for multinational holding companies. MNE groups with annual turnover of more than €750 million would have to calculate the effective tax rate in each jurisdiction where they operate and, if it is less than 15%, pay the difference to the treasury of the country where the parent company is registered.
The Russian bill is partly similar to the Pillar 2 rules, but does not constitute the official implementation of those rules into Russian law. The Ministry of Finance previously said that doing this now is not a good idea because it is quite unlikely that the OECD will recognise them as "qualified," which means that multinational companies based in Russia could face double taxation.
In its draft law, the Ministry of Finance proposed levying the underpaid tax (if, for example, due to tax rebates, the effective tax burden on profits is less than 15%) on each individual Russian subsidiary of a foreign holding company. The Chamber of Commerce and Industry believes that this approach "does not really meet the bill's stated objectives and leads to an excessive increase in the tax burden, as it does not provide for an 'equalisation' of the effective rate through the consolidation of financial results," Forbes reports, quoting Roman Frolov, a member of the working group on international taxation of the CCI Expert Council on Tax Legislation Improvement.
The CCI believes that Russia should apply the same approach to calculations as abroad, i.e. cumulatively, across all subsidiaries.
If one subsidiary in Russia is subject to a standard income tax rate of 25% and another is subject to 0% (due to tax rebates), the effective rate for the jurisdiction will be 12.5% (assuming the profits of the two companies are the same), Forbes quotes as an example. In this case, the MNE group in Russia will pay an additional 2.5%. And if the calculation is made for each subsidiary, as the current version of the bill proposes, the group will pay an additional 15% on the profits of the company that enjoys the zero rate.
The CCI's proposal to revise the draft law is reasonable, according to experts surveyed by Forbes. "It is in line with the spirit and letter of the Pillar 2 rules, which provide for a consolidated approach," says Ekaterina Avdeeva, chair of the coordination council of the Business Protection Centre. She believes the approach is in line with international practice, simplifies the adaptation of Russian companies to global rules, and prevents excessive tax burdens by allowing groups to take into account their losses and profits as a whole.
The CCI also proposes that the wording of the draft law of the Ministry of Finance should be revised "to unequivocally emphasise that the new rules will not apply to multinational groups with parent companies in Russia."