The meaning and significance of the demonstrative flogging of the Dutch offshore

МОСКВА, 14 мая 2021, Институт РУССТРАТ.

There has long been a saying in the US – “What is profitable for Ford is profitable for America”. Unfortunately, not all Russian companies doing business in Russia and receiving the main operating profit here followed this correct socially and state-based logic. They earned money here, on the backs of Russian citizens, and the money (profit) was withdrawn to the West.

Now the Russian state has ordered to put an end to this vicious practice – if money is earned in Russia, then it should remain here and be invested in the development of citizens, national businesses and the country.

The de-offshorisation of the economy is not just about money, more precisely, money here plays only a secondary role, because the primary issue is the nationalisation of the elites. It is precisely the lack of acceptance of one’s clear connection with one’s country, one’s state, one’s Motherland that ultimately leads to a miscalculation of options for the “type” of “tax minimisation”.

Moreover, this rule is completely universal, although at first it was invented by an unnamed Western analyst as a tool of “soft power” to destroy the systems that opposed America.

They say that the right world by definition should be open, which means that everyone has the legal right to live there and in the way that one personally considers best for oneself. Including paying less taxes. The main thing is that it should be legal, i.e., is, on the basis of official inter-governmental agreements. This is what the mechanism of offshore well-being was based on.

Then, however, it turned out that it destroys not only America’s opponents, but also the US itself. Already in 2016, American corporations accumulated so much money offshore that taxes on them blocked at least five annual US budgets, but even the radical Trump could not persuade the owners of corporations to pay these taxes at US rates.

For example, Amazon did not pay a cent on the $11.2 billion in accumulated offshore profits for 2018. By the way, in 2017, Amazon did not pay taxes either. However, this is a slightly different story. Now we are talking about Russia, and about its geopolitical confrontation with the West.

Russia’s denunciation of the tax agreement with the Netherlands means that Gazprom International, Svyaznoy N. V., X5 Retail Group, and Yandex will be required to pay more taxes in Russia. The rate for dividends will increase from 5% to 15%, for interest and royalties – from 0% to 20%. For the sake of understanding: the Russian business transferred 339 billion rubles of dividends and interest to the Netherlands in 2019, paying 18 billion rubles of taxes from them. And in just 20 years – more than 8 trillion rubles! And here we are saying that there is not enough money in the Pension Fund.

As Elena Panina, a member of the International Affairs Committee and director of the RUSSTRAT Institute, noted in her report to the State Duma, “in the current economic conditions, maintaining bilateral Russian-Dutch cooperation in the tax sphere without making appropriate changes is contrary to Russia’s interests. The project is aimed at blocking the channels for the withdrawal of financial resources of Russian origin from the territory of the Russian Federation.

From 2017 to 2019, the volume of payments from Russia to the Netherlands exceeded 1.2 trillion rubles. At reduced rates, taxes were paid for 33.1 billion rubles. At a rate of 15%, the budget of the Russian Federation could receive 180 billion rubles.”

Under the new conditions, this amount will now have to pay at least 60 billion a year, i.e., 3.3 times more. And these are pensions for our, not Dutch, pensioners, salaries for our teachers, missiles and tanks for our military, grants for our scientists, increased scholarships for our gifted students, improvements to our, not Dutch, cities and roads, and so on.

More precisely, this amount will have to be paid only in Russia, plus local taxes in the Netherlands. Thus unobtrusively forcing the corporate management to seriously think about the rationality of continuing to use the offshore scheme, and the feasibility of returning the head offices back to Russia. And also about the absolute need to support the Russian government and the Russian state in its fight against an external enemy.

In theory, they may try to move to Cyprus or Malta, which have signed new “double taxation avoidance” terms with Russia. But do not forget that this will not cancel the inevitability of taxation at the rate of 15%, but it will add technical problems in everyday business activities, since permission from the regulator for such a relocation still needs to be obtained. So someone will be able to do some castling, but most Russian businesses will eventually return home, which is certainly good in the current conditions of aggravation of the foreign policy confrontation between Russia and the West.

But the most interesting question here is why Malta and Cyprus (as well as Luxembourg and 34 other countries) agreed to the Russian terms, and the Netherlands went on the principle. The answer lies in the combination of two closely related factors.

The first is the relatively small share of “Russian” money in the total offshore capital of the Netherlands. This is not Cyprus, where $24.6 billion of annual GDP accounts for 190.8 billion of offshore capital from Russia. Then a similar balance in the Netherlands looks like 44.57 billion. capital and 900 billion of annual GDP. This is too little to agree to set a dangerous precedent.

Any offshore company is not just an island in the ocean created by the whim of geology. What makes it a tax haven is the presence of many official agreements with a significant number of other states, signed up for roughly the same rules and rates. At one time, these countries considered such agreements profitable for themselves, counting on the influx of investment from offshore.

Now the situation has changed. Most of the signatories wish to renegotiate the terms. So giving in to Russian demands may be the last stone to stave off a global landslide.

And it is “American money”, invested in the Russian economy through the Netherlands to the sum of about $49.25 billion, that helps the Dutch authorities to keep a defence against Moscow. With a very serious return: from $7.5 to 8 billion in 2017, $6.5 billion in 2019 and about $5 billion in 2019. I.e., with an average annual return of about 13%, while they paid from 0 to 5% to the Russian budget. I.e., practically nothing.

A profitable enough business to fight it out for. Moreover, 2/3 of this capital is very mobile. Now, after the fall of the “Dutch citadel”, they will quickly change the location, leaving the Dutch government to independently rake in losses.

However, this does not bother us much. To preserve assets in Russia, these fugitives can only come to offshore companies that will play by Russian rules. I.e., they still have to pay taxes to us. On the other hand, the example of the Netherlands will serve as a good lesson for Hong Kong, Singapore and Switzerland, negotiations with which are still ongoing.

Thus, this year Russia intends to finally restore order in the offshore issue, covering 90% of the cash flow going there. Then it will be possible to refine the rest. Do not forget that we have concluded agreements on the avoidance of double taxation with more than eight dozen countries. Most of them were signed at the peak of liberal sentiments (Germany – 1997, Switzerland – 1998, Italy – 1999, France – 2000, Austria – 2003, Singapore – 2010), so, of course, they need to be radically revised.

But first – a demonstrative flogging. As there are too many self-imagining fools, and people from across the ocean who are too greedy and impudent. Protecting national interests is sacred.

Институт международных политических и экономических стратегий Русстрат

(@russtrat)