We often hear things about offshores. Most recently the matter of offshores has become even sharper after the Panama documents scandal. Diana Kluskina, deputy head of Finance Ministry’s Corporate Tax and International Tax Matters Office, explains what offshore means and what mechanisms are there to reduce their negative influence over economy.
Speaking of offshores, it is important to mention different meanings behind the term. From a business and financial standpoint, companies can relocate part of their business to some other country by creating a subsidiary or selling the company to a foreign buyer. It can be said that regardless of the country involved, a situation in which revenue is diverted outside of a country’s borders can be considered an offshore situation.
From the perspective of taxation, the work offshore is usually tied to so-called tax havens. In the case of the aforementioned example, businessmen can choose to register their company or subsidiary in a foreign country to pay taxes. Most often businessmen choose countries with low taxes. Nevertheless, low tax level is not the only criterion when it comes to offshores. If businessmen wish to hide their true income or its origin, a country’s policy on information exchange also plays a major role.
Offshores and special taxation regime
As noted by the ministry’s representative, Latvia’s legislation provides for special tax avoidance combating measures. The Law on Corporate Income Tax provides multiple legislative measures to withhold tax or increase taxable income if payments are provided to individuals who are located in countries listed in Cabinet of Ministers’ requirements on low tax or non-tax countries. This law provides for withholding corporate income tax in accordance with 15% rate from all payments and dividends. It also establishes tax withholding from interest payments, payments for intellectual property and emergency dividends from which taxes are to be withheld in accordance to a 30% tax rate.
Similar tax withholding with application of 23% rate is provided by the Law on Personal Income Tax. This measure is applied if PIT payer carries out business transactions with offshores. For purposes of preventing tax avoidance, the special tax regime also applies to received dividends. Taxable income is increased based on the dividend amount received from dividend payer who is a resident of the country listed as a country with low or no taxes in the Cabinet of Ministers’ requirements. In addition, if the dividend recipient is a private person and has a major say in business activities, the tax, at the rate of 23%, has to be paid even if revenue is not divided into dividends.
List of offshores
For purposes of applying taxes in Latvia a special list of offshores has been formed. It is based on the so-called OECD blacklist, says Diana Kluskina. In accordance with this list, the main criteria describing tax haven include low taxation or lack of taxes, malicious tax practice and lack of transparency and information exchange. There are 65 countries on the list compiled by the Cabinet of Ministers. To avoid often amending of those rules, a specific point is added that states how a jurisdiction with which tax information exchange has been established ceases being considered a low and no-tax jurisdiction (even though it remains on the list).