Representatives from ministries of finance, tax administrations, academic institutions, and the private sector gathered in Paris on 26-28 June 2017 for ITIC’s 13th annual Eurasia Tax Forum. The themes for this year’s Forum were recommended by regional officials and investors, and they included the following:
- Tax Reform: Principles in Practice
- Continuity and Change in International Tax
- Taxation of the Digital Economy
- The State of Play in Energy Investment
- Natural Resources Taxation in Eurasia
- Tax Issues in the Services Sector
Tax Reform: Principles in Practice
The Forum’s opening session featured a keynote address by Hon. Dave Camp (former Chairman of the Committee on Ways and Means in the U.S. House of Representatives), who discussed the role of tax policy in economic growth, household prosperity and social stability. While maintaining revenue neutrality and progressivity, current reforms in the United States are focused on reducing the top income tax rate for individuals/corporations and moving toward a territorial system for taxing domestic multinational corporations (MNCs). Specific measures for requisite base-broadening would also have a significant impact on corporations, pass-through entities, and (particularly high-net-worth) individuals.
He also analyzed the current international tax system where national jurisdictions and businesss are now struggling to adjust, particularly with the OECD/BEPS project, controversial EU “state aid” decisions, and UN system supervisory aspirations for tax. He doubted whether the OECD’s Multilateral Instrument truly represents an international consensus or is capable of practical application.
Speaking from the perspective of an international government organization, Timur Zhaksylykov (Minister of Economic and Financial Policy, Eurasian Economic Commission) delivered an address on “Continuity and Change in International Tax.” His remarks focused on how the EEC coordinates the tax function across the Eurasian Economic Union (EAEU) membership to help develop business and enhance competitiveness. He also discussed the inter-relationship of tax and trade, tax’s important role in stimulating (or hindering) requisite international competitiveness, and parameters for enhancing the domestic tax base through digital technology, which set the stage for the morning’s first panel discussion.
Taxation of the Digital Economy
Sergey Shatalov (former Deputy Minister of Finance, Russian Federation) discussed the concept of the digital economy and its essential features, including:
- Determining the sources and levels of revenues;
- Location of service and consumption;
- Supply chain content;
- Taxpayer identification (e.g., robot or employer); and,
- Type of taxation of the identified taxpayer (e.g., CIT for a technology company and indirect taxation on its operations)
Alexey Sazanov (Head of the Tax and Customs Policy Department, Russian Ministry of Finance) introduced Russia’s approach to new corporate taxation rules. As of 1 January 2017, an external economic actor/supplier must register with the Federal Tax Service (FTS) and pay tax on its e-service; no Permanent Establishment (PE) is required. Guided by various OECD recommendations, the Russian Federation would consider taxing the intellectual property of the foreign service provider as well as the mail service provider, applying a low threshold to their revenues and perhaps instituting such a system through a specific single tax supported by the e-registration of cash transactions.
It was noted that this new “borderless” world poses a serious challenge for tax design since borders were essential for a supplier in choosing/advising a location for VAT purposes. Moreover, the scope and effectiveness of the Exchange of Information (EOI) system could be compromised by the absence of e-commerce transactions for jurisdictions that conduct the EOI.
Dmitry Volvach (Director of Transfer Pricing and International Cooperation, Russian Federal Tax Service) presented a comprehensive exposition of the digital tax administration system and its potential for improving performance. For large taxpayers (including MNCs), a local development of the Netherlands Tax and Customs Administration’s horizontal monitoring system has proved valuable for ensuring correct data provision in tax returns and facilitating audit. The FTS reputation and record for data protection (a matter of federal law) has calmed taxpayer concerns over commercial confidentiality.
Concerning inter-jurisdiction automatic exchange of information, a new government resolution under consideration would address complications arising from ‘asymmetrical’ DTAs, while opt-outs permitted under envisaged BEPS multilateral instruments would enable respect for the RF position — although the BEPS treatment of ‘ultimate beneficiary’ is akin to the RF position already adopted in 2006 by the FTS (and supported at that time by the Supreme Arbitrazh Court).
As to its current agenda, the FTS is examining tax issues related to Uber since the company can be said to derive benefits from the Russian state (its drivers, as individual entrepreneurs, are liable for PIT). The main issue presented by e-commerce concerns the determination of ‘location’ — where are the revenues generated, and how should they be taxed.
This issue of “location” for taxing goods and services received significant attention (e.g., in the case of MNCs without PE but conducting economic activity within the jurisdiction). It was noted that a new element in Russia’s approach is the indirect taxation of services in the location where they were provided. Initial results indicated taxpayer willingness to register, with compulsory taxpayer/inspector interaction held in reserve. Taxpayer confidence in data protection seemed high, while comparative successful international practice and the Convention on Mutual Assistance in Tax Administration were helping with its operation.
Now in the research phase of its approach to the taxation of individuals, the FTS is assessing its interaction with the national legal framework for the treatment of personal data along with practical issues (e.g., ways of taxing the consumption of an individual, the tax period involved, possible tax rates, and filing procedures).
To begin the discussion, Nurmatbek Mambataliev (Head of the Tax Policy Division, Eurasian Economic Commission), elaborated on the EEC’s plans to develop effective tax policy and administration for e-trade to combat concealment and under-declaration of revenues and the shadow economy, reduce tax barriers, and create a competitive environment for e-trade between the EAEU countries.
He noted that member states are at significantly different stages in their regulation of e-commerce: Russia and Belarus have detailed arrangements; Kazakhstan and Kyrgyzstan are now introducing them; and Armenia is at the first stage of consideration.
The EEC is considering establishing a supranational mechanism for levying VAT, where services would be provided by foreign entities to individuals in the EAEU countries. This arrangement would involve stipulating a common list of services, place of their delivery, order of VAT payment, and zero VAT rate confirmation. An important administration element is the enhancement of electronic interaction with banks, particularly with respect to e-money and e-wallets.
The existing regulatory framework would need to change as a result of this coordinated approach, particularly indirect taxation (these changes would be reflected in amendment of the Union Treaty, specifically Section 17 “Taxes and Taxation” and Annex 18).
During his keynote address on “The State of Play in Energy Investment,” Laszlo Varro (Chief Economist, International Energy Agency) presented an essential practical background to taxation policy and analyzed numerous key developments worldwide, including:
- Investment flows are signaling a reorientation of the global energy system.
- A direct relationship exists between low fossil fuel prices and energy efficiency.
- Unprecedented investment cuts are occurring in upstream oil and gas.
- Infrastructure costs are favoring coal power over gas in major Asian markets.
- A fall in LNG investment is imminent.
- Investment in renewables is greatly enhanced and operating costs are falling.
- Nuclear power is growing in Russia and China, but not the OECD.
- New electricity infrastructure investment is noticeably lacking.
In respect of the LNG investment scenario, some discussants noted the (negative) impact of the industry regulatory environment on possible new projects and suggested that the differing investment parameters for the resource-rich and the resource-poor countries should be taken into account. Others questioned the overall negative assessment of the long-term demand for fossil fuels, noting that assessment of oil demand would continue even though gas is not necessarily competing with coal and renewables.
Natural Resources Taxation in Eurasia
Azamat Amrin (Head of Tax and Customs Policy Department, Kazakh Ministry of National Economy) focused on the five major areas currently under discussion by a public-private working group in Kazakhstan:
- Alternative tax on subsoil use
- Cancellation of the commercial discovery bonus
- Self-application of reduced rates of Mineral Extraction Tax (MET)
- Stimulation of deep deposits
- Rental payments for solid minerals
He noted that the alternative tax could simplify complex compliance by replacing special taxes with a single payment, and could include a progressive rate scale tied to the price of oil. He described plans to cancel discovery bonuses and reduce “punishment for success” in favor of promoting exploration, and he noted that plans for the self-application of reduced MET rates would become a direct norm in the Tax Code (allowing for calculation of profitability based on actual expenses).
He also outlined lower MET coefficients for deep deposits and discussed new provisions for payments related to solid minerals, including utilizing a progressive rate at the exploration stage followed by a uniform rate at the production stage (which may reduce exploration time).
In discussing the mining sector’s significance for the Mongolian economy, Bayaraa Dashtseren (Director, Mineral Resources and International Taxation Division, Mongolia Taxation Administration) analyzed the applicable sector-specific and commodity-specific tax and royalty regime. His analysis encompassed key issues identifying taxpayer and taxable object, determining taxable value and market price, and setting tax and royalty rates. He summarized a number of challenges to achieving an optimal regime (e.g., pressure from foreign investors versus pressure from civil society — internal and international). In this regard, greater transparency for beneficial ownership would help achieve a demonstrably fairer regime.
Alpa Shah (Tax Policy Economist, Fiscal Affairs Department, International Monetary Fund) outlined her views on “EI Regimes in the Current Environment,” and discussed the impact of the low oil price environment on fiscal regimes seeking to raise enough revenue while providing adequate incentives to invest. Despite governments’ urgent need for domestic revenue mobilization, investment in the mining and petroleum industries is currently challenging. These tradeoffs are now more acute than ever, requiring coherent tax policy design and implementation.
She remarked that the IMF usually advises countries to develop a sufficiently flexible and robust fiscal regime in order to adapt to changing profitability and circumstances, rather than having to (1) introduce additional tax mechanisms later on in a high price environment, or (2) reduce tax terms in a low price/profit environment.
In a progressive regime, lower revenues in a low price/profit environment pose revenue management challenges for governments (e.g., a reminder to save more when prices are high). In principle, with sufficient progressivity in the fiscal regime, there is no need for taxpayers to seek concessions or renegotiate.
In terms of tax administration, Ms. Shah noted that, in the current environment, countries are likely to experience a large amount of leakage, hence the importance of building up institutions and capacity to administer regimes and strengthen the ability to collect the revenue that is due. However, the challenge lies in protecting the tax base while fostering a win-win investment climate. This requires having a sound strategy for administration, an effective legal regime that limits incentives for transfer pricing, disciplined administration of documentation and information, and sound dispute resolution mechanisms.
The manner in which new base protection procedures are introduced is extremely important in a more fragile economic environment — government efforts should signal to investors that these are rationally thought-out plans and not knee-jerk reactions to revenue mobilization needs. It is important to signal investor certainty and avoid singling out particular investors.
Ms. Shah noted that transparency remains a priority, both with respect to the release of data on revenue collected and disclosure of fiscal terms and contracts. Such practices play a key role in managing expectations (all the more important in a low price environment). The IMF applies a broad definition of fiscal transparency, which sees the importance of publishing government information for public accountability purposes and ensuring that governments have the best possible information for their own policymaking.
She concluded that, while the current price environment poses a number of challenges, it could also serve as an opportunity. A silver lining may be that countries have time and incentives to get policies and institutions in place to reap maximum benefits from their resources, both now and in the future.
Alexey Sazanov reviewed the recent history of oil price movements, noting that producers in Russia are benefiting from favorable adjustments to their tax burden, thus offsetting the impact of high extraction costs and lower prices. Authorities approved a new EPT (effective 1 January 2018) that would replace current differential incentive schemes with one common favorable rate concentrating on future MET and removing export tax. In determining the tax burden, there would also be a greater focus on oil prices, with the aim of enabling the taxpayer to achieve at least a 20% IRR.
Giorgi Tabuashvili (Director General, Georgia Revenue Service, and First Deputy Minister of Finance of Georgia) discussed Georgia’s path to tax reform and the favorable ranking it enjoyed in the World Bank’s Doing Business Report. He recalled that Georgia’s main energy source and investment object is hydro-power, which produces a differentiation in its energy sector fiscal regime from those countries with extractive industries. In the case of electricity, no VAT or excises are applied, nor is VAT applied to natural gas imports. Incentives for investment in renewables are also being reduced.
To begin the discussion segment, Ms. Shah reviewed the essence of the 2016 IMF “Blue Book” entitled International Taxation for the Extractive Industries, which analyzes numerous related issues including: regulating transfers of interest, including their CGT implications; DTA “manipulation;” and taxing cross-border infrastructure and operations.
As for Russian tax policy, it was confirmed that the Petroleum Fiscal System’s design had factored in the IRR at 20% and fiscal stability was envisaged; but as a matter of design, not of law. However, Kazakhstan’s stability would likely give way to adjustment in the new Tax Code revision of 2018 — where a new “Tax on Financial Result” is expected, based on a sliding scale dependent on oil prices but with no specific mention of any target IRR, except for deposits deeper than 6,000 meters (25%).
Tax Issues in the Services Sector
Ori Alaverdyan (Head of Revenue Policy and Administration Methodology Department, Armenia Ministry of Finance) discussed several aspects of the importance of the financial services sector in Armenia’s economy. Tax treatment of financial services, particularly the role of VAT exemptions (including those proposed in the new Tax Code), is a cause of tension in public policy formulation between those favoring an enhanced investment climate and the proponents of “tax justice.”
Alexey Sazanov noted that VAT is applied to bank services in Russia. He recalled that tax control is being extended in the next three years via an online cash register system. However, debate continues over the proposition to replace VAT with RST, a tax that is difficult to administer and easily avoided. Nonetheless, VAT at 18% encourages avoidance, which negatively affects legitimate business along the supply chain.
There are apparently no plans to tax the insurance sector in the Eurasian region. Moreover, in Russia, PIT exemptions and exceptions amount to a tax ‘break’ for certain types of insurance.
Rauf Namazov (Deputy Director of the International Cooperation and Tax Monitoring Department, Azeri Ministry of Taxes) addressed Azerbaijan’s history as a major energy economy and noted the new economic directions required by the President’s Vision 2020 (2016) and the 2017 economic strategy “Road Maps.” Production Sharing Agreement tax protocols and customs procedures, as well as the Tax and Customs Codes themselves, were referenced and attention was drawn to Petroleum Fiscal System design, including VAT (zero rate) system operations and consequent tax-free transportation of energy carriers. The issue of a pipeline tax is now under review, along with other policies such as tax treatment for Special Economic Zones.
Wayne Barford (former Assistant Commissioner, Australian Taxation Office) highlighted the challenges of tax policy for the services sector, specifically referencing recent developments in Australia, where a super profits tax (to be reviewed after two years) was introduced on the Big Five banks whose performance and substantial revenues benefited from the unique government guarantee of deposits. It remains to be seen whether such an approach would have a (negative) impact on the overall investment climate.
Participants agreed that the Eurasia Tax Forum is a valuable platform for a wide-ranging exchange of comparative 'best international practice' on global as well as regional priorities. These discussions encourage a more coherent and consistent approach to policy development and more effective tax administration. The impact of modern technology was an important and consistent thread throughout the Forum. Participants analyzed digital issues as a primary driver of their tax agendas in an overall context where tax influences competitiveness and therefore investment attraction and retention.
Douglas Townsend, based in London, is Senior Advisor for the International Tax and Investment Center (ITIC).