July 17, 2015

Starting from July 2015 and until the end of the year, Russian citizens can subject their foreign assets to an amnesty. This right is granted by a recently adopted capital amnesty law. Considering that Russia is now implementing a policy aimed at deoffshorization of the economy, the law appears reasonable and necessary. However, in order to understand the essence of this law which is structured and worded rather intricately, we need to shed light on a number of questions.

The essence

What is the purpose of the amnesty? As follows from the Explanatory Note to the draft law, the amnesty will protect people from any restrictions that may be imposed on their capital. It will motivate actual owners to legalize the rights and titles to their property. It will motivate people to properly fulfill their obligations on making compulsory payments. And, finally, it will protect those who have declared their property against potential liability.

What can be the subject of the amnesty? Individual citizens, stateless persons and foreigners can declare their foreign real estate, vehicles, shares in companies, bank accounts and the money therein, as well as foreign companies under their indirect control where they are a beneficiary. Cash money is not subject to the amnesty.

How and where do you file a declaration and what do you write in it? An individual can, on a one-time basis, file a declaration, indicating his property (in Russian, i.e. all documents need to be translated). There is no need to indicate the source for acquisition of this property, but there is the option of indicating any additional details. That is, you can, for example, indicate all the previous owners of your property.

The essence of this process is that a person announces all his assets on which the state has no information, in exchange for the state maintaining this information and never using it against him. Sounds simple, but, as they say, there are the details.

Three layers of restrictions

It is stated that a declaration filed by an individual comprises a tax secret. It is passed over to the tax authority for centralized storage, and no one except the declarant has access to it. It is logical to assume that the information indicated in the declaration will not be needed until the state on its own discovers that you have property in respect to which you didn’t fulfill all your obligations, i.e. didn’t pay taxes or customs duties or that you used the property in violation of the law. That is when you are entitled to produce the declaration to the relevant authority, proving that you have declared everything and, accordingly, it all falls under the amnesty.

One of the main ideas of the amnesty is that you are released from liability tied to the acquisition and possession of the declared property. However, it should be noted that the list of violations subject to the amnesty is limited. Mainly, these are violations tied to evasion of taxes and customs duties and failure to fulfill various other tax, foreign currency and customs obligations.

It is absolutely justified that, for example, corruption or money laundering are not on this list, since an amnesty should not be a means for legalizing dirty money. This is a sore spot of any such amnesty and that is why while working on the law the Russian authorities, in order not to violate international anti-money laundering rules, held special consultations, and the relevant crimes were naturally not included into the law.

Another restriction is that the amnesty is only possible if as of the date the declaration is filed there are no criminal or administrative cases initiated against you or your property, and there is no ongoing tax inspection. For example, you filed a declaration on July 15, but it turns out that by that time you were “a suspect” and a relevant inspection was under way. In such a case, even if your declaration is accepted, your information does not become confidential and you do not fall under the amnesty.

And there is more. A declaration needs not only to be sent, but also to be accepted by the tax authority. After receiving it, the tax authority checks it as to compliance with the rules and afterwards either accepts or rejects it. If your declaration is rejected, the amnesty does not apply to you. And no one will give any guarantees that by the time you send a new declaration no one will initiate an inspection (based in fact on the information the tax authority saw in the rejected declaration).

Chances of success

Step by step, we have come to the issues that largely define the success or failure of any economic amnesty. How much do the people trust the state? Can we be sure that the declared tax secret is truly a secret for any and all government authorities and for all time? Can we be sure that in a couple of years the declaration won’t be declassified and it won’t in fact become your confession to a crime or that it won’t be used during investigation of cases that don’t fall under the amnesty? If you know the answers to these questions, it will be easy for you to make your choice.

Our subjective motives are no less important when deciding whether to file a declaration. The essence of the amnesty, as we already said, is that a person is released from liability. That is, a person filing a declaration admits that all is not quite transparent in his case. Because why does he need the amnesty if he didn’t violate anything? On the other hand, we still remember the phrase “a crime can be found to fit any person.” Who can be sure that the state doesn’t have any claims against him?

Every person should find the answer for himself independently, based on the circumstances that only he knows as to how the property was acquired and used. It is one thing if you bought an apartment on the Bulgarian seashore, but it is a very different thing if you are the end owner of a company with various types of activity in different jurisdictions. Can you be sure that all transactions have been made strictly in line with the law? You should also keep in mind the global tendency of deoffshorization and development of systems for automated international exchange of tax and other information, which Russia is also joining. What is concealed today can easily be discovered and strike tomorrow.

You can try to find the answer in international experience which is often a guiding line for us. Economic amnesty of various formats is a rather popular instrument that governments often use in the course of economic reforms. Many examples of such measures can be found in different parts of the world, from Australia to Argentina.

Of course, they are not all quite successful, though there are successes too. For example, a couple consecutive amnesties in Ireland in 1993 and 1999 are generally viewed as rather effective, including from the viewpoint of money that was returned into the economy.

The 1993 amnesty was interesting because of the full anonymity – the tax inspectors had no information about who declared what, but in case of a subsequent inspection, any complaints would be annulled by providing a certificate confirming that there are no violations. The 1999 amnesty was marked by the forthcoming expansion of powers of the tax authorities, giving a person one last chance to voluntarily disclose what had been undeclared; otherwise, it would almost surely be discovered in the course of an inspection. However, both amnesties were accompanied by an excellent information campaign, which significantly affected their result. Such informational support of the amnesty can hardly be noticed in Russia.

The effectiveness of the amnesty depends on many various factors, a substantial part of which is altogether outside the legal field. Very soon we will see whether Russian citizens have trust in the government and whether the government will keep its promises.

The article of Irina Onikienko, Partner at Capital Legal Services (link)

Irina Onikienko   Partner   St. Petersburg    ionikienko@cls.ru   Tel.: +7 (812) 346 79 90