Our progress / Hot Topics

Taxation of financial transactions

Back to Media

Minfin Insists on Eurobond Tax

06.03.2013 22:34 / Kommersant

Minfin has drafted a solution to the problem of taxing Eurobonds issued by major Russian corporations, postponed by 2014. The Minsitry proposes taxing bond owners according to their country of origin as disclosed by the Central Depositary. However, borrowers doubt that the tax can actually be withheld from foreign owners and the tax burden will ultimately lie with the issuers themselves. Sberbank and Russian Railways claim that the Minfin initiative will make borrowing more expensive, and according to the Central Bank, it will block foreign capital flow into Russia.

Yesterday Deputy Minister Sergey Shatalov announced that the Eurobond taxation act is being drafted. He says the draft is practically complete: “The entire project could be finished in March”. The problem unexpectedly arose over a year ago, in January 2012, following Sergey Shatalov’s letter announcing the introduction of profit tax on interest paid to Eurobond holders. However, later Minfin backpedalled, and in Summer 2012 the State Duma passed compromise amendments to the Tax Code – Eurobonds issued prior to 1 January 2014 are exempt from tax, taxation of later issues will be decided later.

Yesterday Sergey Shatalov announced the exact decision. Apparently, the recently established Central Depositary will disclose the number of Eurobond holders in each tax jurisdiction. This process will be assisted by major international depositaries Euroclear and Clearstream, who have already been consulted on this issue. According to Sergey Shatalov, no details are required, only the share of beneficiaries in each jurisdiction. This data is required by tax authorities, since Russia’s Double Taxation Avoidance Agreements with different countries stipulate different tax on interest -- 0%, 5%, 10% or 15%. If no jurisdiction data is available, interest will be taxed at a full 20% profit tax rate.

The Minfin draft has already been criticized by corporations. Deputy CEO at Sberbank Bella Zlatkis said that the actual collection of interest tax from foreign bond owners will prove an impossible task for Russian tax authorities and the burden will lie with the issuers, since they act as tax agents. “Neither Euroclear, nor ourselves can identify the owner who must pay the tax”,-said Bella Zlatkis. Consequently, she says, borrowings become more expensive – if the tax rates were effective today, rates for Sberbank’s most common USD loans would soar from 6,1% to 7,6% per annum. Russian Railways Vice President Anatoly Mescheryakov says the cost of borrowing would ultimately be transferred to transit fees: “We forecast a 0,4-0,5 percentage point increase in our fees”.

Taxation of financial transactionsProject Group №3